Once containers are loaded on board, who is liable for the cargo? Understanding the difference between FOB Shipping Point and FOB Destination is crucial for both vendors and buyers.
In the old days of international trade, goods were mostly transported by sea. They were loaded onto sailing boats by hand, passing over the rail on board. Freight was then on board, and the term FOB (Freight On Board) emerged.
But there was a gray area: Who owned the load while traveling? The seller or the buyer?
Clearly, the seller paid for all expenses until the goods were loaded. But who was responsible for potential damage or loss on board?
How could the seller secure their payment? And how could the buyer ensure they’d get the goods they ordered?
The Emergence Of FOB Origin & Destination Agreements
A legal framework was needed to clarify ownership and liability during transit.
So, in the mid-19th century, things started clearing up. A court decision declared that the seller could reserve the transfer of the property of the load so that they could secure payment and not to prevent the transfer of possession.
FOB Today
Today, the shipping term FOB is interpreted either as ‘Freight On Board’ or ‘Free On Board’ and has evolved to adapt to the complexities of global trade, facilitating smooth transactions for all parties involved.
Under Incoterms 2020, established by the International Chamber of Commerce (ICC), the FOB scheme is applied only on sea freight, and it is always paired with a designated port of loading, for example: FOB Shanghai, FOB Long Beach, etc.
Under these regulations, the vendor is still responsible for costs and risks up to the moment freight is safely loaded at the port of origin (FOB Shipping Point), but the FOB destination is open-ended to suit the needs of every shipment and facilitate agreements and transactions.
The beauty lies in its flexibility: while sellers must cover costs and risks until the goods are safely onboard, the destination remains ‘open-ended’ for smoother transitions tailored to the needs of every shipment.
Let’s take a closer look at FOB origin vs FOB destination.
What Is FOB Shipping Point?
FOB shipping point (or FOB origin) is a shipping term that means the buyer assumes ownership and liability of the goods as soon as they are loaded on the boat at the seller’s shipping dock.
What Is FOB Destination?
FOB destination is a logistics term that applies only to sea freight, where the vendor has the legal title and responsibility of goods until they reach the buyer’s specified location. In this scheme, the seller pays for the transportation and all extra freight costs until goods reach the buyer.
FOB Destination Vs. FOB Shipping Point: Key Differences Explained
Here’s what to consider when choosing between FOB destination and origin:
Shipping Costs
Decide who’s going to take over all transportation and landed costs from the shipping location to the final destination.
Risk (Damage & Loss)
When shipping with FOB origin, freight loss or damage during transit falls on the buyer once goods leave the seller’s location. Conversely, in FOB destination, sellers assume the entire cargo liability until the other party receives the goods.
Shipping Arrangements
In FOB origin, buyers handle all transportation arrangements from the seller’s location, while in FOB destination, it’s the shippers that arrange movement and handling up to the buyer’s appointed location.
Freight Insurance
Who’s going to pay for freight insurance is also dictated by the FOB origin and destination schemes. The party that takes responsibility of goods from the point of origin must also arrange and pay for cargo insurance.
Customs & Import Duties
In international cargo shipping, FOB origin arrangements have the buyer dealing with import/export fees and charges, while in FOB destination, it’s the seller that deals with that all.
Unit Price
As goods travel through oceans to reach their destination, charges add up, increasing the cost per unit. So, deciding who owns the load defines the price the buyer pays to the seller.
When Typically Used
FOB shipping point is commonly used when the buyer manages shipping arrangements.
In contrast, FOB destination is preferred when the seller provides a more comprehensive service.
FOB Origin & Destination Examples
If you run a small/medium business, understanding the implications of Free On Board shipping and destination safeguards profitability.
Here are a couple of examples:
With FOB origin, a small business that imports goods from Hong Kong, let’s say porcelain lanterns, must pay for any damage caused during shipping and handling.
On the other hand, when using FOB destination, an electronics retailer importing from China must ensure that all items arrive in perfect condition before they reach the buyer.
FOB Shipping And Destination: Which One Is More Common?
As supply chain professionals discuss, there are no standards. It all depends on the market, the customer, and the supplier. However, some admit that FOB Shipping is considered as a more standard practice.
Certain vendors and merchants tend to use FOB origin for smaller value products and sign destination contracts for more intricate shipments, such as machinery.
Other suppliers, on the other hand, may prefer FOB destination for low-value items – where shipping a second bunch is cheap and easy in case there’s any damage.
But for high-value products that are hard to replace, suppliers may avoid shipping risks and sign FOB Origin agreements.
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FAQs – Who Pays FOB Shipping Point?
When shipping with FOB (Free On Board or Freight On Board) arrangements, the buyer pays all shipping costs and additional charges as soon as the cargo is loaded on the boat. The buyer also assumes all liability and insurance costs.
Who Pays FOB Destination?
When shipping under an FOB Destination scheme, the seller pays for all transportation, handling, insurance, and customs fees and retains full cargo liability until the goods arrive at their end location designated by the buyer.
Who Retains Risk In FOB Shipping Point?
In FOB Shipping Point, the buyer undertakes risk as soon as goods are loaded on the shipping vessel.