Free On Board (FOB) is a shipment term. We use this term to indicate whether the seller or the buyer is liable for damaged or destroyed goods in transit. We will discuss “FOB origin” and “FOB destination”. The most common international trade terms are Incoterms, which publishes International Chamber of Commerce (ICC).
“FOB origin” means the buyer pays the shipping cost from the factory or warehouse and will be ownership of the goods as soon as it leaves its point of origin. “FOB destination” means the seller retains the risk of loss until the goods reach to the buyer location.
Contracts involving international transportation often contain abbreviated trade terms that describes matters such as the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer, and who pays the costs of freight and insurance.
How Free On Board Works
Assume, A is a clothing manufacturer that sells jeans to B using FOB origin term. If A ships jeans to B using the term FOB origin, B is liable for any loss while the goods are in transit. On the other hand, if the goods are shipped by FOB destination, A retains the risk of shipment loss.