What does FOB mean in shipping?
May 21, 2019
If you’ve ever shipped anything, you’ve likely seen the acronym FOB in your shipping documents. Though, how many people know what it means? It turns out, not a lot. Even those in the shipping industry with knowledge of freight shipping terminology often are confused as to the true meaning.
To help shippers better understand FOB, we've broken it down below:
What does FOB mean in shipping?
FOB stands for “free on board” or “freight on board” and is a designation that is used to indicate when liability and ownership of goods is transferred from a seller to a buyer.
Free on Board:
Free on board indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping. When used with an identified physical location, the designation determines which party has responsibility for the payment of the freight charges and at what point title for the shipment passes from the seller to the buyer.
In international shipping, for example, “FOB [name of originating port]” means that the seller (consignor) is responsible for transportation of the goods to the port of shipment and the cost of loading. The buyer (consignee) pays the costs of ocean freight, insurance, unloading, and transportation from the arrival port to the final destination. The seller passes the risk to the buyer when the goods are loaded at the originating port.
Freight on Board:
Freight on board is another term that is often used in place of free on board. However, it’s worth noting, this is not an official term.
How is “FOB” used in shipping documents?
The term “FOB” is used in four different ways when it comes to freight shipping. These include:
- FOB [place of origin], Freight Collect
- FOB [place of origin], Freight Prepaid
- FOB [place of destination], Freight Collect
- FOB [place of destination], Freight Prepaid
To understand each designation, we must first understand the difference between place of origin and place of destination and freight collect vs. freight prepaid. The first part of the designation determines where the buyer assumes title of the goods and the risk of damage from the seller (either at the moment the carrier picks the goods up for delivery or at the time of actual delivery). The second part indicates responsibility for freight charges. “Prepaid” means the seller has paid the freight; “collect” indicates the buyer is responsible for payment.
Place of Origin vs. Place of Destination:
Place of origin means the buyer assumes ownership of the shipment the moment the carrier picks up and signs the bill of lading while place of destination means the seller retains ownership and control of the goods until they are delivered. By denoting who “owns” the shipment, there is no ambiguity in responsibility of shipment.
Freight Collect vs. Freight Prepaid:
Freight collect means the person receiving the shipment is responsible for all freight charges. They also assume all risks and are responsible for filing claims in the case of loss or damage.
Freight prepaid is the opposite. The shipper accepts responsibility for all freight charges and risks.
Why does FOB matter?
FOB is important for a number of reasons, but most importantly, shippers and carriers need to understand FOB designations in damage situations. Some receiving docks will refuse delivery of obviously damaged goods, rather than accept with a damage notation for future claim against the carrier. However, a shipment designated FOB Origin technically belongs to the buyer/consignee at the time that it is shipped. So, the consignee would be refusing delivery of goods it legally owns and bears the risk for. The seller has no legal reason to accept those goods back and the return shipment could possibly result in additional damages.
Let us help.
If all of this seems too confusing to follow, see how Freightquote by C.H. Robinson can help handle the placement of your shipment for transport. The legal issues raised in FOB designations are nothing new to us here at Freightquote. By utilizing our easy-to-use self-service tools, you can efficiently manage your shipping strategy, should any issues arise.
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