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The author states that there is often confusion because the parties involved in the contracts misunderstand incoterms FOB, sales contracts, carriage contracts, and letters of credit.

Han urges companies to use caution and to clarify which type of FOB they are entering into so that the risks and liabilities are clear.

Corporate Finance. Business Essentials. Corporate Insurance. Investopedia uses cookies to provide you with a great user experience.

By using Investopedia, you accept our. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Free On Board is a term used to indicate who is liable for goods damaged or destroyed during shipping.

The terms of FOB affect the buyer's inventory cost; adding liability for shipped goods increases inventory costs and reduces net income.

FOB contracts have become more sophisticated in response to the increasing complexities of international shipping.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

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The buyer pays the cost of marine freight transport, insurance , unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods are loaded on board at the port of shipment.

For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver , and the cost of loading the goods on to the cargo ship this includes inland haulage, customs clearance, origin documentation charges, demurrage if any, origin port handling charges, in this case Vancouver.

The buyer pays for all costs beyond that point, including unloading. Responsibility for the goods is with the seller until the goods are loaded on board the ship.

Once the cargo is on board, the buyer assumes the risk. The use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for the use of the term in , [2] the ship's rail was still relevant, as goods were often passed over the rail by hand.

In , in the case of Pyrene Co. Scindia Steam Navigation Co. Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship's rail.

In the modern era of containerization , the term "ship's rail" is somewhat archaic for trade purposes, as with a sealed shipping container there is no way of establishing when damage occurred after the container has been sealed.

The standards have noted this. Incoterms stated,. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.

The phrase passing the ship's rail is no longer in use, having been dropped from the FOB Incoterm in the revision. Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard.

Incoterms apply to both international trade and domestic trade , as of the revision. In North America, FOB is written into a sales agreement to determine where the liability responsibility for the goods transfers from the seller to the buyer.

FOB stands for "Free On Board" or so there is no line item payment by the buyer for the cost of getting the goods onto the transport.

With "FOB destination", the sale is complete at the buyer's doorstep and the seller is responsible for freight costs and liability during transport.

The two terms have a specific meaning in commercial law and cannot be altered. But the FOB terms do not need to be used, and often are not.

The last distinction is important for determining liability or risk of loss for goods lost or damaged in transit from the seller to the buyer.

Domestic shipments within the United States or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterms standards.

A related but separate term "CAP" "customer-arranged pickup" is used to denote that the buyer will arrange a carrier of their choice to pick the goods up at the seller's premises, and the liability for any damage or loss belongs to the buyer.

Although FOB has long been stated as "Freight On Board" in sales contract terminology, this should be avoided as it does not precisely conform to the meaning of the acronym as specified in the UCC.

Sometimes FOB is used in sales to retain commission by the outside sales representative. It is unclear where this originated.

In the past, the FOB point determined when title transferred for goods. For example, at year- and period-end goods in transit under "FOB destination" North American usage appear on the seller's balance sheet but not in the buyer's balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port.

It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss.

Corporate Finance. Business Essentials. Corporate Insurance. Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our.

Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Free On Board is a term used to indicate who is liable for goods damaged or destroyed during shipping.

The terms of FOB affect the buyer's inventory cost; adding liability for shipped goods increases inventory costs and reduces net income.

FOB contracts have become more sophisticated in response to the increasing complexities of international shipping. Compare Accounts.

The offers that appear in this table are from partnerships from which Investopedia receives compensation.

Related Terms Incoterms Definition International commercial terms—Incoterms for short—clarify the rules and terms buyers and sellers use in international and domestic trade contracts.

Learn About the Free Carrier — FCA Delivery Option Free carrier is a trade term requiring the seller to deliver goods to a named airport, shipping terminal, or warehouse specified by the buyer.

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