In this installment of PARCEL Counsel, we will look at the relationships between a seller (consignor) and a buyer (consignee). While the exact nature of the contractual arrangements between buyers and sellers is as varied as there are buyers and sellers, the basic document is typically a purchase order or a sales order. For domestic sales, this will almost always include a F.O.B. (Free on Board) term of sale derived from the Uniform Commercial Code (UCC).
Preliminarily, it should be noted that for international sales, the parties typically use a term of sale based upon the Incoterms promulgated by the International Chambers of Commerce. While the Incoterms include a F.O.B. term, it is very different than the UCC F.O.B. term. The Incoterm F.O.B. term of sale will not be discussed here; however, it is very important that the reader not confuse the two terms.
The terms “F.O.B. Origin” and “F.O.B. Destination” — either standing alone or with additional modifying words — will determine (unless otherwise agreed to in a separate writing or contract) the responsibility for (1) the shipment of the goods, (2) payment of freight charges, (3) risk of loss, and (4) passage of title.
A seller has a general obligation to deliver the product to the buyer. The F.O.B. term indicates the geographic location to which delivery must be made in order to satisfy this general obligation. In actual practice, a specific geographic location would be used instead of the words “Origin” or “Destination.”
Let’s assume that we have a transaction pending between a seller in Seattle, Washington and a buyer in Butte, Montana. If the parties desire the transaction to be “F.O.B. Origin” they would then say “F.O.B. Seattle.”
When the term of sale is “F.O.B. Origin,” the seller’s obligation to deliver the product ends when the seller places them “into the possession of the carrier.” This is known as a “shipment contract.”
Conversely, if the term of sale is “F.O.B. Destination,” it is known as a “destination contract.” The seller has the obligation to deliver the goods to a specified point, e.g., Butte.
So, what responsibilities would a seller have today with respect to the shipping arrangements when the term of sale is F.O.B. Origin? If the seller and buyer have an agreement whereby the buyer has agreed to undertake the obligation of making the arrangements for the transportation, colloquially known as a “customer pick-up (CPU)” or “customer arranged freight,” the seller would be relieved of any responsibilities except for the duty to properly package the goods so as to withstand the rigors of the contemplated transportation.
Thus, the primary difference between an “F.O.B. Origin” term of sale or an “F.O.B. Destination” term of sale is that the price of the goods sold in an “F.O.B. Destination” contract is a “delivered price” where the cost of transportation is “built in” to the price. On the other hand, the price of the goods specified in an “F.O.B. Origin” contract does not include a charge for transporting the goods from the seller to the buyer.
However, it should be noted that whichever F.O.B. term is used, it can be modified by agreement between the parties based upon their individual preferences and also bargaining power. Thus, deciding whether to use F.O.B. Origin or F.O.B. Destination for the term of sale is just the beginning of the analysis.
In the next installment of PARCEL Counsel, we will look at the factors to be considered in choosing, modifying and negotiating the basic UCC F.O.B. term of sale.
All for now!
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor of transportlawtexts, inc. Previous columns, including those of William J. Augello, may be found on the PARCEL website. Your questions are welcome at email@example.com.
This article originally appeared in the July/August, 2019 issue of PARCEL.