Freight Terms - Are they important?

Introduction

Freight terms are one of the most overlooked "Risk Shifting" tools used by business owners, attorneys and consumers alike. What do I mean when I say "Freight Terms"? You may have heard or seen the following acronyms before:

• FOB - Free On Board
• FOB Origin
• FOB Destination
• FAS - Free Along Side

These terms, while often used, carry vastly different implications for the shipper and the receiver of a freight shipment. These terms, most often found on the BOL or Bill of Lading, determine who is to bear the risk of loss for the goods as they are passing through the various freight channels on the way to the receiving party. Many people assume that whomever covers the cost of shipping also bears the risk of loss. That is not entirely true.

Risk of Loss

Before getting into some of the specific terms, it is important to understand what "Risk of Loss" means. In the context of this blog, Risk of Loss is associated with either the buyer or seller of goods that are then shipped from the sellers location, to the buyers location. The party bearing the Risk of Loss runs the risk that the goods could be lost or damaged in the shipping process. If those goods were damaged, it would be to the detriment of the party bearing the Risk of Loss. The party bearing that risk has the opportunity to properly insure against the risk by either purchasing a blanket insurance policy from a large insurance company, or by insuring the individual shipment with the freight forwarding company. In this case, the party bearing the Risk of Loss has shifted that burden to an insurance company, usually for a fee.

In summary, you can think of "Risk of Loss" as synonmous with "Insurable Interest".

FOB - Free On Board

This term is most often used in sales contracts. It is also the root of two other terms we will be discussing (FOB Origin & FOB Destination). As you will see FOB can be modified to suit the needs of the parties to a contract. Effectively, FOB alone means that the title to the goods, and thus the risk of loss, passes to the buyer at the time the goods are received at the final destination. Unless modified, it also indicates that the seller will bear all of the costs associated with shipping the products to the buyer.

For example. Seller (S) and Buyer (B) enter into a contract to sell/purchase 100 widgets valued at $10 ea. Under the terms of the contract, the widgets are to be purchased FOB without any modification. This means that S has, 1) to pay all shipping costs, 2) bear the Risk of Loss in the event the widgets are damaged during shipment or at any point before delivery.

FOB Origin/Destination

As mentioned above, FOB can be modified by appending additional language to it. The most common are FOB Origin and FOB Destination, however, it can technically be anywhere in between. As you would expect, FOB Origin means that S is responsible for all costs and risk associated with getting the widgets ready for shipping and delivering them to the point of origin (usually their loading dock, or on board the vessel carrying the freight). FOB destination on the other hand implies that the Risk of Loss does not pass to B until the products reach a specific destination point.

One thing to keep in mind is that "Origin" and "Destination" can either be specific within the term used on the shipping documents (e.g. FOB Chicago, or FOB Hong Kong), or they can be specified within the contract for purchase and listed generically on the shipping documents.

FAS - Free Along Side

While not as common as FOB, FAS is typically used for ocean freight. FAS indicates that S will bear all costs and risks up to the point that it delivers the freight "along side" or next to the ship. In other words, S is not responsible for any risk or costs associated with actually loading the cargo on the ship, or the cargo's travels over the ocean to Buyer.

Conclusion/Take Away

If you have skimmed everything up to this point, there is one thing to remember. Contracts will generally control. If you are negotiating the terms of a purchase, don't rely on the terms you see on the freight documents for security. Be sure to closely examine the terms of your contract for purchase. In some cases, this may be the stream of documents provided at the time of a standard order (PO, Order Confirmation, Invoice, etc.). These documents may contain limiting language that modifies the plain language meaning of the terms discussed above, and thus open you or your company up to increased costs or risks that were not originally planned for.