The FOB point in a sales contract is the exact spot where ownership of the goods, and the risk of anything bad happening to them, moves from the seller to the buyer. FOB stands for Free On Board, and the two versions you’ll see are FOB Origin (also called FOB Shipping Point), where the handoff happens at the seller’s loading dock, and FOB Destination, where it happens at yours. Everything that follows from the term, who insures the shipment, who sues the carrier if a crate is crushed, when the goods appear on each company’s books, flows from that single location.
FOB Origin: You Own It the Moment It Leaves
Under FOB Origin, you take ownership the second the seller hands the goods to the carrier at the seller’s facility. UCC Section 2-319 limits the seller’s obligation to shipping the goods properly and getting them into the carrier’s hands at the seller’s expense.1Cornell Law School. Uniform Commercial Code 2-319 – FOB and FAS Terms After that, the goods are yours.
Practically, that means you carry the financial exposure if the shipment is destroyed, stolen, or delayed in transit. You’re the one who needs cargo insurance for the journey, and you’re the one who files a claim against the carrier if something goes wrong. The trade-off is control: FOB Origin usually gives you the right to pick the carrier and route, which matters if you’ve negotiated favorable freight rates or need a particular delivery window.
FOB Destination: The Seller Carries the Risk Until You Receive It
FOB Destination reverses the arrangement. The seller holds title and risk of loss for the entire trip and pays to get the goods to your location.1Cornell Law School. Uniform Commercial Code 2-319 – FOB and FAS Terms Title passes when the carrier delivers the shipment and you accept it. A truck jackknifes on the interstate and your order is destroyed? That’s the seller’s problem.
You’re protected from losses you can’t see or control. The seller deals with carriers, delays, and in-transit disputes. You don’t book the goods as inventory until delivery is verified and the shipment matches your purchase order.
Freight Prepaid vs. Freight Collect
A plain “FOB Origin” or “FOB Destination” tells you who owns the goods in transit. Contracts usually add a second modifier that says who actually pays the carrier, and the two concepts are independent. This is where most disputes start.
- FOB Origin, Freight Collect. You own the goods in transit and pay the carrier on delivery. The cleanest FOB Origin setup.
- FOB Origin, Freight Prepaid. You own the goods in transit, but the seller pays the freight charges upfront and absorbs the cost.
- FOB Origin, Freight Prepaid and Add. The seller pays the carrier for convenience, then bills the freight back to you on the invoice.
- FOB Destination, Freight Prepaid. The seller owns the goods in transit and pays the carrier. The most common FOB Destination setup.
- FOB Destination, Freight Collect. The seller still owns the goods and bears the risk, but you pay the carrier on arrival.
Watch the last one closely. Under FOB Destination, Freight Collect, you pay the shipping bill, but if the cargo is lost the seller is still liable because the seller retains title until delivery. Tangling freight payment with risk of loss is a common and expensive mistake.
What Happens If the Contract Says Nothing
Plenty of purchase orders don’t name an FOB point at all, and the default rule under the UCC catches people off guard. When a contract requires the seller to ship goods but doesn’t require delivery at a specific destination, UCC Section 2-509 treats it as a shipment contract: risk of loss passes to the buyer when the seller properly delivers the goods to the carrier.2Cornell Law School. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach Silence defaults to something very close to FOB Origin.
If the contract does require delivery at a particular destination, risk stays with the seller until the goods are tendered there and you can take delivery.2Cornell Law School. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach The practical takeaway: write the FOB term into the contract. Leaving the allocation of thousands of dollars in risk to a statute most businesspeople have never read is poor practice.
Why the FOB Point Changes Your Accounting
The FOB point also dictates the exact moment the buyer records inventory and the seller recognizes revenue. Under FOB Origin, the buyer adds the goods to the balance sheet the instant the carrier picks them up, even though they haven’t arrived. The entry includes the cost of the goods plus freight, insurance, and related fees.
Under FOB Destination, the buyer records nothing until the goods arrive and are accepted, and the seller keeps the goods on its own books until that moment. The difference bites hardest at period-end. A shipment that leaves on December 30 and arrives January 5 belongs on the buyer’s year-end balance sheet if it’s FOB Origin, and on the seller’s if it’s FOB Destination.
Revenue recognition tracks the same transfer. The seller books the sale when the customer obtains control, which lines up with the FOB point. Pairing an FOB term with the wrong revenue timing distorts the financials and invites audit problems.
Inspection Before You Accept
Regardless of which FOB term you use, UCC Section 2-513 gives you the right to inspect goods at any reasonable time and in any reasonable manner before payment or acceptance. If the goods don’t conform to the contract, you can reject them. You pay for the inspection, but if the goods turn out to be nonconforming and you reject them, you can recover those inspection costs from the seller.3Cornell Law School. Uniform Commercial Code 2-513 – Buyers Right to Inspection of Goods Under FOB Destination the inspection happens on arrival at your facility; under FOB Origin it still happens after arrival, but you’ve already been bearing the transit risk.
FOB in International Contracts Is a Different Animal
The FOB rules above come from UCC Section 2-319, which applies to any mode of transportation inside the United States: truck, rail, or vessel.1Cornell Law School. Uniform Commercial Code 2-319 – FOB and FAS Terms The UCC is a set of model rules adopted as state law in 49 states, Louisiana being the exception. Nothing requires you to use UCC terms, but when you do, courts apply these definitions.
Cross-border transactions typically use Incoterms, a set of 11 standardized trade rules published by the International Chamber of Commerce.4International Trade Administration. Know Your Incoterms Under Incoterms 2020, FOB applies only to sea and inland waterway transport: the seller delivers the goods loaded onto the vessel at the named port of shipment, and risk transfers at that point. International FOB does not cover trucks or air freight, and the ICC itself recommends FCA (Free Carrier) rather than FOB for containerized ocean shipments, because containers are usually dropped at a terminal days before loading and FOB’s risk-transfer point doesn’t match that reality.5ICC Academy. Incoterms 2020 – FAS or FOB
Some U.S. companies now use Incoterms for domestic shipments too, and nothing in the UCC bars that. What matters is that both parties agree on which set of rules governs the contract. Mixing UCC and Incoterms language in the same agreement, or assuming your trading partner uses the same definitions you do, is where the expensive misunderstandings happen.