What is FOB?
FOB stands for Free on Board. FOB is a term which indicates if a buyer and seller is responsible for the damage caused on the goods at the time of shipping. FOB is a crucial term in trading as it helps in determining who pays for shipping, insurance, and other logistics-related expenses. The term is used to allocate the responsibilities between buyers and sellers in a trade agreement.
Key Terms of FOB
- FOB Origin: Under FOB Origin, the responsibility on the seller ends as soon as the goods are loaded into the transport vehicle from the seller’s place of business. The purchaser bears all the cost for transportation, risk of loss, insurance etc from the point of origin.
- For example: If a manufacturer in Mumbai sells machinery under FOB Origin terms, once the machinery is loaded onto a truck at the Mumbai facility, the buyer in Delhi takes over all transportation costs, risk, and responsibility.
- FOB destination: Under FOB Destination, the responsibility is retained with the seller only till the time until the goods are delivered at the buyer’s location. The seller covers the costs of shipping and insurance up to the buyer’s location, and is responsible for any risk of loss or damage during transit.
- If the same Mumbai manufacturer sells machinery under FOB Destination terms, they are responsible for all costs and risks until the machinery arrives at the buyer’s facility in Delhi.
Implications of FOB
- Cost: The FOB terms clearly clarify who is responsible for paying costs related to transport, insurance, risk of loss or damage etc.
- Risk Transfer: Risk of loss or damage shifts from the seller to the buyer at different points depending on whether FOB Origin or FOB Destination is used. Under FOB Origin, the risk transfers as soon as goods are shipped, whereas under FOB Destination, it transfers only when the goods arrive at the specified destination.
- Customs and Duties: FOB also indicates who from the buyer and seller is going to pay for the custom and duties. Under FOB Origin, the buyer pays customs and duties. Under FOB Destination, the seller is responsible for the clearance of customs and duties.
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