Definition: Free on board (FOB) is the geographical location where ownership of a shipment transfers from the seller to the buyer. In other words, this is where the buyer legally takes possession of the goods as well as the liability and responsibility of the goods. FOB shipping terms can be stated in two different ways: shipping point or destination.
What Does FOB (Free on Board) Mean?
FOB shipping point transfers the goods to the buyer at the point the goods are loaded into the truck or the shipping point. Also, shipping point usually implies that the buyer pays for the freight charges to ship the goods. This means that as soon as the seller loads the goods onto the freight truck, they are legally owned by the buyer. If anything happens to the goods in transit, the buyer is responsible for them—not the seller.
FOB destination, on the other hand, transfers the ownership of the goods at the delivery point with the seller traditionally paying for the shipping expenses. Since the ownership of the goods doesn’t transfer to the buyer until the goods arrive at the delivery point, the risk of loss during transit is on the seller.
Let’s take a look at an example.
Jeff’s pickup company purchases $10,000 of wiring parts from Ann’s Wiring, Inc. Jeff pays the shipping costs and the parts are shipped FOB Ann’s Wiring, Inc. (also known as FOB shipping point). On the way to Jeff’s factory, the trucker gets into an accident and the parts are ruined. Jeff tries to sue Ann, but he can’t because the title of the goods already passed to him. The parts were Jeff’s as soon as they were loaded on the truck.
Now let’s look at the same scenario only with FOB destination. Jeff could sue Ann for new parts because the title of the goods during transit would still belong to Ann. It was her responsibility to deliver them safely to Jeff.