FOB: You Keep Using That Word. I Do Not Think It Means What You Think It Means
Our own Ketan Ganase recently wrote about Predictability Through Incoterms. One important precondition to achieving that predictability is making sure that you are using terms correctly. This is especially true for “FOB,” a term that can mean different things in different contexts.
The traditional American definition of FOB is found in Section 2-319(1) of the Uniform Commercial Code:
Unless otherwise agreed the term F.O.B. (which means “free on board”) at a named place, even though used only in connection with the stated price, is a delivery term under which
(a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or
(b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503);
(c) when under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this Article on the form of bill of lading (Section 2-323).
This broad definition will apply if you are selling goods under a contract governed by US state law, and have not agreed or referred to another definition for FOB, such as the definition under INCOTERMS.
However, many contracts refer to INCOTERMS for the definition of FOB, and this is where things can get confusing. The INCOTERMS 2010 definition of FOB is much more limited than the UCC. Under INCOTERMS, FOB is only supposed to be used when shipping by sea or inland waterway (NOT when shipping by land or air), and is supposed to refer to the port of the shipment (NOT the destination). In addition, the seller has the obligation to load the goods onto a ship at the specified port, whether or not the term specifically refers to a vessel.
For cases where that particular sense of FOB does not work, INCOTERMS 2010 offers a few alternative terms. One of these is FCA (Free Carrier). FCA requires the seller to transport the goods to the named location, and risk of loss transfers once the vehicle arrives at the location ready for unloading. FCA can also be used with the seller’s location, in which case risk of loss transfers once the goods are loaded onto a vehicle at that location. The other useful alternatives to remember are DAP (Delivered at Place), under which seller delivers to the named location and buyer is responsible for unloading, and DAT (Delivered at Terminal), under which seller delivers to the named location and seller is responsible for unloading. Unlike FOB, all of these terms can be used with any mode of transportation.
The Uniform Law Commission proposed deleting the UCC definition of FOB in 2003, but so far, no states have adopted their proposal, and the statutory definition of FOB remains effective in most US jurisdictions. So it pays to be careful about defining and using the FOB term correctly. Citing INCOTERMS 2010, and then using the correct set of INCOTERMS for the risk allocation you want, is generally a good practice to avoid doubt.