A Free on Board (FOB) contract is a contractual term in the sale of goods under which the seller bears the cost of delivering goods via a specific route determined by the buyer. Once the goods are on board, property and risk passes to the buyer.
There are two key types of FOB terms: FOB Destination and FOB Origin. FOB Destination is more popular, and an example is outlined below:
For example, say you (Company A) are purchasing Product X from Company B. Company B manufactures Product X in Perth and you sell Product X in Sydney. If your contract says ‘FOB, Adelaide Warehouse’, it means that Company B will pay the costs and bear the risk to get Product X from their base in Perth, to the warehouse in Adelaide. Once Product X is in the Adelaide warehouse, it becomes yours, meaning you assume the cost and risk for its safe transit to your base in Sydney.
Contrastingly, in an FOB Origin contract, Company A would become the owner (assuming cost and risk) at the time and place the product originates (Perth).
FOB terms are important as they reflect when the risk of loss shifts from seller to buyer. They are most important in international transactions, and in transactions involving delicate or vulnerable items.