What does "freight on board (FOB)" signify in a sales contract?

The term "freight on board (FOB)" is a crucial concept in sales contracts, particularly in determining the responsibilities of the buyer and seller in relation to shipping and risk of loss. The correct interpretation signifies the point at which ownership of the goods and the associated risk of loss transfer from the seller to the buyer.

In an FOB contract, if the agreement specifies "FOB shipping point," the buyer assumes responsibility for the goods once they are loaded onto the shipping vessel or carrier at the seller's location. Conversely, if it states "FOB destination," the seller retains responsibility until the goods reach the buyer's location. This distinction is vital as it directly affects liability for damage or loss during transportation.

Understanding this aspect of FOB is essential in commercial transactions because it clarifies when the buyer takes possession in a legal sense, influencing both financial responsibility for shipping costs and accountability for loss or damage during transit. This foundation helps both parties manage expectations and obligations concerning goods in transport.