FOB | Full Form, Types, Examples and Usage

What is FOB?

FOB can be defined as the point at which ownership and responsibility for goods shift from the seller to the buyer. It indicates the specific location where the seller fulfils their obligation to deliver the goods to a designated mode of transportation, typically a vessel, airplane, or truck. Once the goods are loaded onto the specified transport, any risks, costs, and liabilities associated with the shipment transfer to the buyer. FOB terms are crucial in international trade contracts as they help determine who is responsible for various aspects of the shipping process and can have significant implications for the overall cost and logistics of the transaction.

Full Form of FOB

FOB stands for Freight on Board. FOB is a term used to define the seller’s responsibility towards delivering the products to the buyer. FOB helps in determining the logistics and overall cost of the transactions.

History of FOB (Freight on Board)

The history of “Freight On Board” (FOB) as a concept in international trade can be traced back many centuries, and it has evolved to become a widely accepted and standardised term.

1. Early Maritime Trade: The origins of FOB can be traced back to the early days of maritime trade, which predates written records. Merchants and traders have been shipping goods across seas and oceans for thousands of years. In these early days, trade was often conducted through simple agreements between buyers and sellers.

2. Development of Trade Practices (Medieval Period): As international trade expanded during the medieval period, so did the need for standardised trade practices. Merchants and traders developed common customs and traditions to facilitate commerce. These practices were often passed down orally and through experience.

3. Emergence of Formal Contracts: In the 17^th and 18^th centuries, as global trade continued to grow, formal written contracts became more common. These contracts began to outline the responsibilities of both buyers and sellers in greater detail, including the conditions under which goods would change hands.

4. Legal and Commercial Developments (19^th Century): The 19^th century saw significant advancements in trade law and international commerce. Nations started to develop legal systems that recognised the rights and obligations of traders. International trade agreements and treaties began to address issues related to shipping and trade.

5. Formalisation of FOB in Shipping Contracts (Late 19^th and Early 20^th Centuries): The term FOB was formalised in the late 19^th and early 20^th centuries. It was developed to specify at what point in the shipping process the seller’s responsibility for the goods ended and the buyer’s responsibility began. FOB terms provided clarity in international trade contracts, especially in maritime trade, where the transfer of goods from land to ship was a crucial moment.

6. Standardisation and Global Acceptance (20^th Century): In the 20^th century, FOB terms became widely accepted and standardised in international trade contracts. This standardisation was essential for the smooth operation of global commerce, as it eliminated ambiguity and ensured that both parties clearly understood their roles and responsibilities in the shipping process.

7. Continued Relevance (21^st Century): FOB terms remain a cornerstone of international trade to this day. While modern trade involves more complex logistics and transportation methods, the fundamental concept of FOB, indicating when ownership and responsibility for goods transfer, remains crucial in trade agreements.

Types of FOB (Freight on Board)

1. FOB Origin (or FOB Shipping Point)

In FOB Origin terms, the seller fulfills their obligation when the goods are loaded onto the transportation vessel at their location, typically a factory or warehouse. FOB Origin terms are often used when the buyer has more control over the logistics and transportation arrangements and is comfortable assuming the risks and costs associated with transporting the goods. Key characteristics of FOB Origin-

• The buyer assumes responsibility for transportation costs, risks, and insurance once the goods are loaded onto the transport.
• The buyer has control over the choice of shipping method, carrier, and insurance coverage.
• Any potential damages or losses during transit are the buyer’s responsibility.

2. FOB Destination (or FOB Destination Point)

In FOB Destination terms, the seller is responsible for transportation costs, risks, and insurance until the goods reach the buyer’s specified destination. FOB Destination terms are often used when the buyer wants the seller to handle the logistics, transportation, and insurance, making the transaction more convenient for the buyer. Key characteristics of FOB Destination-

• The seller selects the transportation method, carrier, and insurance coverage and includes these costs in the sale price.
• The seller retains responsibility for the goods until they are delivered to the buyer’s designated location.
• Any potential damages or losses during transit are the seller’s responsibility.

3. FOB Stowed

FOB Stowed adds a specific condition to the FOB agreement, relating to the responsibility of the seller for stowing or loading the goods onto the transportation vessel. When “FOB Stowed” is specified in a contract, it means that not only is the seller responsible for delivering the goods to the port but also for properly stowing or loading the goods onto the vessel in a way that ensures their safe transportation. This includes securing the cargo and ensuring it is prepared for the voyage. Key characteristics of FOB Stowed-

• The primary objective of FOB Stowed is to minimise the risk of damage or loss to the goods during loading and transit.
• Since the seller is taking on the responsibility of proper stowing, they may incur additional costs associated with securing the cargo.
• Under FOB Stowed terms, the seller is accountable for the entire loading process, ensuring that the goods are safely placed on board the vessel.
• FOB Stowed is often used in situations where the goods are delicate, perishable, or of high value.

Examples of FOBs in Usage

1. Example of FOB Shanghai Port (FOB Origin)

• A U.S. electronics retailer, ABC Electronics, orders a shipment of smartphones from a manufacturer in Shanghai, China.
• The contract specifies “FOB Shanghai Port.”
• In this case, the seller (the manufacturer) is responsible for delivering the smartphones to the Shanghai Port and loading them onto the cargo ship.
• Once the smartphones are loaded onto the ship, ownership and responsibility for the goods transfer to ABC Electronics.
• ABC Electronics assumes responsibility for transportation costs, insurance, and any risks associated with the shipment from Shanghai to the United States.

2. Example of FOB Los Angeles Warehouse (FOB Destination)

• A European fashion retailer, Fashion Trends Ltd., purchases a shipment of clothing from a Los Angeles-based supplier in the United States.
• The contract specifies “FOB Los Angeles Warehouse.”
• In this case, the seller (the supplier) is responsible for not only delivering the clothing to Fashion Trends Ltd.’s warehouse in Los Angeles but also for covering the transportation and insurance costs to get the goods there.
• Ownership and responsibility for the clothing do not transfer until the goods arrive at Fashion Trends Ltd.’s warehouse in Los Angeles.
• The supplier arranges and pays for the entire logistics chain, including shipping and insurance.

3. Example of FOB Stowed

• A seafood exporter in Norway, Nordic Seafoods AS, ships a large quantity of frozen salmon to a distributor in Japan.
• The contract specifies “FOB Stowed.”
• In this case, Nordic Seafoods AS, the seller, not only delivers the salmon to the port but also takes extra care in properly stowing and securing the frozen salmon in the shipping containers to ensure it remains frozen during transit.
• The distributor in Japan assumes ownership and responsibility once the salmon is loaded and stowed on the vessel.
• If there are any issues during transit related to the condition of the salmon, Nordic Seafoods AS is responsible for addressing them.

FOB (Freight On Board) vs CIF (Cost, Insurance and Freight)

Basis	FOB (Freight On Board)	CIF (Cost, Insurance, and Freight)
Definition	FOB specifies when ownership and risk transfer from the seller to the buyer during shipping.	CIF covers the cost of goods, insurance, and freight until the goods reach the destination port.
Responsibility for Shipping	Seller’s responsibility ends when goods are loaded onto the transportation vessel.	The seller is responsible for arranging and paying for shipping, insurance, and freight to the destination port.
Shipping Costs	Buyer assumes responsibility for transportation costs from the point of loading onward.	Seller includes shipping, insurance, and freight costs in the sale price.
Risk and Insurance	Buyer assumes the risk and must arrange insurance coverage for the shipment.	The seller is responsible for obtaining and paying for insurance coverage during transit.
Choice of Carrier	Buyer has control over the choice of carrier and shipping method.	The seller selects the carrier and shipping method, and the buyer has limited control.
Control Over Logistics	Buyer manages the logistics, including selecting carriers and handling transportation arrangements.	Seller handles logistics until goods reach the destination port; limited control for the buyer.
Damages and Losses	Buyer is responsible for addressing any damages or losses that occur during transit.	The seller is responsible for addressing damages or losses until the goods arrive at the destination port.
Common Usage	Often used when the buyer wants more control over logistics and is comfortable managing transportation.	Commonly used when the seller has expertise in logistics and can secure better shipping rates or terms.