On an invoice, FOB stands for “Free On Board,” and it marks the exact point in shipping where ownership and risk pass from the seller to you. That single detail decides who absorbs the loss if a shipment is damaged or stolen in transit, who files the freight claim, and when each side records the transaction on its books. The two versions you’ll see are FOB Shipping Point (also called FOB Origin), where risk passes to you the moment goods leave the seller’s dock, and FOB Destination, where the seller carries the risk until the goods reach you.1Cornell Law School – Legal Information Institute. UCC 2-319 FOB and FAS Terms
The named place after “FOB” on the invoice is the whole point of the term. It tells you where the handoff happens, and everything else — insurance, claims, accounting — follows from that location.
FOB Shipping Point: Risk Passes to You at the Seller’s Dock
When your invoice reads FOB Shipping Point, the seller has met its delivery obligation the moment the goods are loaded onto the carrier at the seller’s location. Under UCC 2-319(1)(a), the seller bears the expense and risk of putting the goods into the carrier’s possession at that place, and no further.1Cornell Law School – Legal Information Institute. UCC 2-319 FOB and FAS Terms From that moment on, the goods belong to you.
Risk of loss works the same way. UCC 2-509(1)(a) provides that when the contract does not require delivery to a particular destination, risk passes to the buyer as soon as the goods are properly delivered to the carrier.2Cornell Law School – Legal Information Institute. UCC 2-509 Risk of Loss in the Absence of Breach If the truck carrying your order is in an accident two states away, you still owe the seller the full purchase price. Your remedy runs against the carrier or your own cargo insurance, not the seller.
This is where buyers get caught out. You might assume the seller is on the hook until the shipment reaches your door. FOB Shipping Point flips that assumption. If you buy high-value goods on these terms, transit insurance is not optional.
FOB Destination: The Seller Carries the Risk Until Delivery
FOB Destination keeps the seller responsible for the entire journey. Under UCC 2-319(1)(b), the seller must transport the goods to the buyer’s location at the seller’s expense and risk and tender delivery there.1Cornell Law School – Legal Information Institute. UCC 2-319 FOB and FAS Terms Until the goods arrive at your receiving dock, the seller owns them and bears the risk of anything that happens in between.3Maersk. Free on Board (FOB) Incoterms Explained
UCC 2-509(1)(b) reinforces this: when the contract requires delivery at a particular destination, risk passes to the buyer only when the goods are properly tendered at that destination while still in the carrier’s possession.2Cornell Law School – Legal Information Institute. UCC 2-509 Risk of Loss in the Absence of Breach If a shipment is lost, damaged, or stolen before it reaches you, the seller either replaces the goods or refunds you. The seller files the carrier claim because the goods were still in the seller’s inventory.
FOB Destination is the more protective arrangement for buyers. You don’t take on risk for goods you haven’t seen, and you don’t record inventory until delivery is confirmed. Sellers typically price that risk into the unit cost, so you may pay a little more than you would on an FOB Shipping Point deal.
Freight Modifiers: Who Actually Pays the Carrier
FOB tells you who bears the risk. A separate set of modifiers on the invoice tells you who pays the carrier. Those are two independent questions, and that is where most freight-billing confusion starts.
- Freight Prepaid. The seller pays the carrier when the shipment goes out. The cost is usually baked into the price.
- Freight Collect. You pay the carrier directly when the shipment arrives.
- Freight Prepaid and Added. The seller pays the carrier upfront, then bills you for the actual freight as a separate line on the invoice.4University of North Florida. Shipping Definitions
The combination that trips people up most is FOB Shipping Point, Freight Prepaid. You own the goods and carry the transit risk from the moment they leave the seller’s dock, yet the seller has already paid the carrier for you. You carry the risk; the seller covered the shipping bill. The arrangement is perfectly logical once you see the split, and the source of ugly disputes when you don’t.
The reverse, FOB Destination, Freight Collect, is less common but equally important. The seller owns the goods and carries the risk, yet you pay the carrier at delivery. If the goods arrive damaged, the seller is still responsible for replacement even though you paid the freight. Read these modifiers before you sign a purchase order so you know what to expect at the dock.
What to Do If the Goods Arrive Damaged
Knowing your FOB term matters most when something goes wrong. Your next step depends on which version appears on the invoice.
- Under FOB Shipping Point. You own the goods from the moment they left the seller’s facility, so transit damage is your problem. Document everything at delivery: photograph the damage, note it on the carrier’s delivery receipt before signing, and file a freight claim with the carrier. Under federal law (the Carmack Amendment), interstate carriers are generally liable for damage to goods they transport, but you need to file promptly. Carriers can limit the window to nine months from delivery.
- Under FOB Destination. The seller still owns the goods, so the loss is the seller’s. Notify the seller immediately, document the damage the same way, and ask for a replacement or refund. The seller handles the carrier claim.
In both cases, never sign a delivery receipt marked “received in good condition” if the packaging shows visible damage. That signature can sink a freight claim later. If you can’t inspect the contents on the spot, write “subject to inspection” on the receipt. That one line preserves your ability to file a claim when you open the box and find a problem.
Your Right to Inspect Before Accepting
Whichever FOB term applies, the UCC gives you a right to inspect before you pay or accept. Under UCC 2-513, you can inspect at any reasonable place and time and in any reasonable manner.5Cornell Law School – Legal Information Institute. UCC 2-513 Buyers Right to Inspection of Goods When the seller ships to you, inspection happens after arrival.
You pay for the inspection, but if the goods don’t conform to what you ordered and you reject them, you can recover those inspection costs from the seller.5Cornell Law School – Legal Information Institute. UCC 2-513 Buyers Right to Inspection of Goods One exception to flag: if the contract requires cash on delivery (C.O.D.), you generally must pay before inspecting. That makes C.O.D. terms riskier, and worth negotiating out for expensive or custom-made goods.
Timing matters. If you accept goods without a timely inspection and defects turn up later, your legal position weakens. The moment to push back is at delivery, not weeks later during a warehouse count.
A Note on International Shipments
If you’re buying or selling across borders, the UCC doesn’t govern. International contracts use Incoterms, published by the International Chamber of Commerce.6International Chamber of Commerce. Incoterms Rules The current edition, Incoterms 2020, includes 11 rules allocating cost, risk, and obligation between seller and buyer.7International Trade Administration. Know Your Incoterms
The important boundary: under Incoterms 2020, FOB applies only to sea and inland waterway transport. It is strictly a port-to-port term.8ICC Academy. Incoterms 2020 FAS or FOB For international shipments moving by truck, rail, air, or any combination of modes, the correct Incoterms term is FCA (Free Carrier), not FOB.9ICC Academy. Incoterms 2020 FCA or FOB Same three letters as the domestic version, different legal framework. Make sure your contract states which set of rules governs.
Why FOB Terms Affect When a Sale Is Recorded
FOB terms don’t only decide who files a freight claim. They control when a seller books revenue and when a buyer books inventory. Under FOB Shipping Point, delivery is complete at the carrier, so the seller can recognize revenue at shipment and the buyer records inventory in transit even before it arrives. Under FOB Destination, the seller cannot recognize revenue until the goods reach the buyer’s location.10U.S. Securities and Exchange Commission. Codification of Staff Accounting Bulletins – Topic 13 Revenue Recognition
This matters most at the end of a reporting period. A December 31 shipment under FOB Shipping Point is a current-quarter sale for the seller and current-year inventory for the buyer, even if the truck doesn’t arrive until January. Getting the term wrong distorts the financial statements on both sides. The current revenue standard, ASC 606, asks when “control” of the goods passes, and FOB terms remain a strong indicator of that moment.