An agreement between a manufacturer to sell and ship goods to a merchant located across the country or around the world can involve many issues, such as price, quantity and terms of payment. Their agreement would include the method of transportation to be used to ship the goods and might mention that the goods are shipped "fob." So, what is a fob?
Free on board or fob is a delivery term used by buyers and sellers. Its purpose is to identify which of the parties to the transaction assumes the costs and the risks associated with shipment of the merchandise. When preparing to answer the question of what is a fob, there are three key things buyers and sellers must know and understand about the use of the term.
The cost and risks associated with "fob place of shipment"
The law interprets fob place of shipment to require the seller to deliver the goods by putting them into the possession of the ship, plane, vehicle, railroad or other carrier. The seller bears the cost of putting the merchandise into the hands of the carrier and assumes the risk of loss or damage up to that point. Once the carrier takes possession, the seller is no longer responsible for either the cost of shipment or the risk or damage or loss.
Changing a single word can alter the answer to the question: What is a fob?
If a seller agrees to fob destination, the risk of loss and the costs associated with the shipment are very different than they are with fob place of shipment terms. Fob destination obligates the seller to pay the cost and assume the risk of getting the merchandise to a particular destination. The place of destination might be the buyer's place of business or some other location, but wherever it might be, the seller is not relieved of the expense or the risk until the goods are delivered.
Getting creative with fob terms changes the rights and responsibilities of the parties
Sometimes, particularly with shipments going long distances, the buyer designates a particular vessel, vehicle or railroad car to which the seller must deliver the merchandise. Fob vessel means the seller shall deliver the goods, and bear the cost and risk of doing so, until they are loaded onto the ship or other mode of transportation.
As an example of how fob vessel would work, the contract or bill of lading agreed upon by the buyer and seller would include the name of the particular ship chosen by the buyer to transport the merchandise. The buyer is responsible for the shipping costs charged by the owners of the vessel, but the seller is the one bearing the expense of getting the merchandise to and onto the ship.
Risk of loss passes from the seller to either the buyer or to the company that owns the vessel. This would depend upon the buyer's agreement with the shipping company.
"What is a fob?" can have different meanings depending upon how it is being used by the parties in a particular transaction. You should be careful when drafting contracts or entering into agreements in which free on board delivery terms are used without first consulting with an attorney.