What is FOB? What does it mean in the Shipping Industry? | Citizenshipper

For Shippers · Freight Shipping · 16 May

What is FOB ? What does it mean in shipping Industry ? | Citizenshipper

What is FOB ? What does it mean in shipping Industry ? | Citizenshipper

FOB is a term in the shipping industry, which is a short version for Free On Board. Historically it described the transfer of title and liability from buyer to seller and was used just for goods transported by sea. Since then, the term has expanded, and FOB includes all transportation types, and it’s important to note that its details can vary by legal jurisdiction or country. 

This article will provide you with an introduction to the main aspects of FOB and will give a solid base for further research into the very complex field of FOB.

What Is FOB?

The term indicates when and at which exact physical location in the transport the ownership of goods gets transferred from the seller to the buyer. This switch of ownership is connected to whether the seller or buyer is paying the shipping expenses, whether the seller or buying is liable for the shipped goods, and therefore responsible for damages or the loss of shipped items. 

The costs associated with FOB terms include the transportation of goods to the port, loading, transport, insurance, unloading, and transporting the goods to the final destination.

The FOB terms of each shipping are written down in the bill of lading – the transport document or the receipt of a freight shipment, which holds all of the critical information for the shipper and the carrier.

For example, in international shipping, “FOB [name of the port of origin]” would indicate that the seller is liable for shipping goods until the loading at the originating port. These terms include paying for the costs of loading and the transportation of goods to the port. At the moment of loading, the responsibility switches to the buyer, which pays sea freight, unloading, shipping to the final destination, and the insurance for this whole process.

If you encounter the words Freight On Board, it means the same. While Free On Board is the official term, Freight On Board is also unofficially often used for the same process. 

Summed up: FOB is highly relevant to define who is responsible for the shipment’s loss or damage if anything happens and is paying for the shipping and insurance costs. Any seller-buyer transaction should have very clearly spelled out FOB terms, so everyone knows at each step of the journey which holds liability and pays the freight costs.

What Different Kind of FOBs in Shipping Documents Mean

There are four different main types of FOB, which are a combination of two main distinctions: 

1. Place of Origin vs. Place of Destination

This distinction defines where the seller transfers ownership and, therefore, responsibility and liability of a product to the buyer.

Place of origin means that the ownership of a good is with the purchaser as soon as the product gets picked up from the seller by the carrier, who signs the Bill of Lading

Place of the destination means that the seller has the ownership of goods until they’re delivered to their final destination.

2. Freight Collect vs. Freight Prepaid

This part is indicating who is responsible for the payment of the freight charges.

  • Freight Collect means that the buyer is liable for the charges and therefore responsible for filing claims in case of loss or damage.
  • Freight Prepaid means that the seller is liable for the freight charges and therefore takes the in case of loss or damage.

These two aspects combined result in four different FOB types: 

1. FOB [place of origin], Freight Collect

The buyer has ownership and control over the shipment as soon as it’s picked up and is therefore responsible for the freight charges.

2. FOB [place of origin], Freight Prepaid

The buyer has the ownership and the liability of goods when they get picked up, but the seller pays the shipping cost.

3. FOB [place of destination], Freight Collect

The seller has ownership over the shipment until it arrives with the purchaser, but the buyer pays the shipping cost.

4. FOB [place of destination], Freight Prepaid

The seller has ownership and liability for the shipment until it arrives at its destination and pays the shipping cost.

Why Is This So Important?

A 2018 study by Ki-Moon Han called “A Study on misguided use of FOB and Related Contracts” shows that there are increasing misunderstandings by the involved parties, especially in international and more sophisticated contracts, the implications of the arrangements. With this rise in confusion, Han demands a higher clarification by companies about the details of their FOB terms, so ensure that all involved parties are informed about the risks and liabilities they enter with each product purchase.

To conclude, the purchaser and seller should have a good understanding of FOB to ensure a safe transfer of products while being aware of who at which point of the shipping holds which liability for possible loss and damage. The FOB terms have a significant impact on necessary risk management and the price of a product since buyer and seller have to include the impact these terms have on shipping costs, inventory and insurance into their financial calculations. It’s also essential to clarify who is responsible for filing a claim if anything happens to the goods. 

If you have more questions about FOB, the marketplace-based company CitizenShipper can help and guide you through the FOB terms. If you’re interested in shipping with one of our professional carriers, visit our homepage and post your shipment today or contact us with any questions.

Updated September 17, 2021

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