In running your own business, it is important that you are familiar with commercial laws and terms that can affect your business development, operations, and transactions, just like the process of shipping the products and goods to the buyer. We always hope for a smooth and seamless transportation of packages from the point of origin, while in transit, and until they reach the destination. When things go wrong within the shipping process, who would be liable or responsible for the product's costs and other associated fees? In this case, we would like to introduce two different contracts or agreements between the seller and the buyer upon the shipping process. One of them is the free on board shipping point or FOB shipping point, while the other is called free on board destination.
Based on the Investopedia article, these are two of several International Commercial Terms or Incoterms that are published by the International Chamber of Commerce (ICC). But, how does the free on board shipping point or FOB shipping point and free on board (FOB) destination differ from each other?
Here at Strikingly we deal with several users who run their online stores through their ecommerce website. This is why we think it is an important matter to talk about the legal aspect of commercial agreements in terms of the shipping process. Now that almost everything is being shipped due to the pandemic restrictions, we want to know the answers to the following questions. Who takes ownership and has full responsibility once the packages are shipped? Who can file a claim to the insurance carrier when the products are lost or damaged while in transit? These are major concerns that involve both the seller and the buyer. Whether you are a consumer who loves to order stuff online or a business owner who sells and ships your products, you need to pay attention to these details. The answer to who is responsible when an item or product is damaged or lost upon shipping depends on what type of agreement or contract both parties have signed. Read further to fully understand what FOB shipping point means.
First, the acronym FOB is a shipping term that stands for ‘free on board’. Free on board is a trade term that is used to determine or indicate whether the seller or the buyer is accountable for any damaged, lost, or destroyed package within the shipment process.
To properly define FOB shipping point or free on board shipping point, it indicates that the buyer takes responsibility for loss or damage of the package once it gets shipped. The seller then marks it as a complete sale from its FOB warehouse when the package is delivered to the shipper. For any loss or damage of the package while in the shipping process, with FOB shipping point, it is the buyer who can file a claim to the insurance carrier and not the seller anymore. It is understood that the buyer is liable for the package the moment it leaves the FOB location (seller’s location) and gets shipped to the FOB address (buyer’s address).
What is the difference between FOB Shipping Point and FOB Destination?
On the other hand, another International commercial term used in the shipping process is the FOB shipping destination. The distinction of Free on board destination or FOB destination from FOB shipping point is that the seller remains liable for any loss or damage of the package until it gets delivered to the buyer. Obviously, it is in the buyer’s best interest to have the shipping terms be stated as FOB destination (buyer’s address) because the seller is still responsible for the package until it safely arrives at the FOB location (buyer’s address). The buyer marks it an increase in stock once the package is delivered in good condition and gets to the warehouse.
A straightforward definition of FOB shipping point is that it releases the seller from any obligation to the package once it gets shipped. It simply means that for a seller who has an overseas buyer, it is in its best interest to have the buyer be responsible for any loss or damage of the package when it gets shipped. Conversely, a buyer who is shopping from an online store with an address located out of the country would want to have an FOB destination rather than FOB shipping point. The question about who will be held accountable for the shipment, between the buyer and the seller, is certainly an important matter to discuss. It is ideal to have a transparent agreement between both parties so that it would end up to a smooth transaction on both sides. A misunderstanding about what kind of agreement the seller and the buyer has, whether FOB destination or FOB shipping point, can lead to unpleasant experiences and legal problems.
Simplified Examples to Differentiate FOB Shipping Point from FOB Destination
We want to clearly present to you the difference between FOB destination and FOB shipping point. Here are some examples about how it works and how it impacts the seller and the buyer.
• FOB Shipping Point Example
Let us assume, Company A that is located in the Philippines buys Personal Protective Equipment from a supplier based in Taiwan, and the company signs an FOB shipping point agreement. If the assigned carrier damages the package during delivery, Company A assumes full responsibility and cannot demand reimbursement or replacement from the supplier. Company A can file an insurance claim because the company takes ownership of the package the moment it gets shipped. Because the FOB shipping point agreement transfers the title of the shipment of products when they are placed in the shipping point, the legal title of the products is transferred to the buyer which is Company A.
• FOB Destination
For instance, Company B in the Philippines buys medical equipment from Taiwan and signs an FOB destination agreement. The FOB address would be indicated as FOB Philippines. Let us say that the medical equipment didn’t arrive at the Company B’s specified address because of any reason. The supplier from Taiwan will be liable to process reimbursement or replacement for the undelivered medical equipment.
In this case, the seller legally owns the products and is responsible until it gets delivered to the buyer’s address. The title of ownership is transferred at the buyer’s specified address, loading dock, office address, etc. Once the products are delivered to the FOB address stated as the buyer’s address, it will be counted as a complete sale on the seller’s inventory while an increase on the buyer’s warehouse stock.
Did you know that Strikingly has unique shipping features for ecommerce business? Just like our users, you can build your ecommerce website with us and set specific shipping rules on your online store. On the screenshot image below, you will notice the shipping options that you can set prior to selling your products online. For example, on the shipping rule you can set it to flat rate per item, by order weight, or even store pickup. Truly, you can manage your shipping preferences for your products online.
Image taken from Strikingly website editor
You are definitely giving your customers a clearly indicated information on how you charge for shipping and on how they can get the items shipped. Transparency is one of the best marketing strategies that work for most ecommerce businesses. If your customers are fully aware of the shipping process, there will be no misunderstanding between sellers and buyers. Also, the best thing about the shipping feature with Strikingly is that you have the option to grant free shipping for every order of at least a certain amount before taxes.
The ecommerce business is truly making a great impact in the world economy. For an ecommerce business owner like you, it is a must to know and get full understanding of the International commercial laws, especially if your business is catering to overseas customers. The International Chambers of Commerce or ICC has published two shipping terms that set standard rules and regulations to protect both the seller and the buyer's rights in getting into business transactions and agreements. FOB shipping point agreement and FOB destination are just two of the International commercial terms that every seller or buyer must be aware of. Ideally, as a business owner, you need to know the FOB shipping meaning that we discussed above. For buyers, understanding what is FOB point and its impact can help them determine their legal rights and responsibility if the shipment gets damaged or lost while being shipped. Business operations should be protected with agreements between both parties involved so that if any circumstances might occur during the delivery process, you both know who would be held accountable and do what is necessary.
Image taken from Strikingly website
Strikingly loves the idea of keeping our users well-informed about how they run their business online. While ecommerce business is one of the best opportunities for people who are passionate about serving the world with the best products and services, it is with greater importance to get into honorable agreements. Having said that, we take great honor to serve you with the best web services and tools you need to start your ecommerce business now.