In the last PARCEL Counsel, we looked at several factors to consider when deciding whether an F.O.B. Origin or F.O.B. Destination term of sale is best for your company. Since then, I had the opportunity to participate in a panel discussion addressing this very question at a major industry event for shippers. Also on the panel were a recently retired director of global logistics for a very large shipper and a leading transportation consultant.
Although the actual title of the panel was “Prepaid vs. Collect,” from a lawyer’s point of view, this is just one aspect of determining whether to use an F.O.B. Origin or F.O.B. Destination term of sale. To explain, the term “F.O.B. Origin” standing alone means that the purchaser/consignee of the goods being shipped will be paying the carrier its freight charges. Conversely, the term “F.O.B. Destination” standing alone means that the consignor/seller of the goods being shipped will be paying the freight charges. (See “F.O.B. Origin or F.O.B. Destination: What Is the Difference?”
The analysis of my fellow panelists focused on the first factor listed in last issue’s PARCEL Counsel, which was, “Do you want to be able to route the freight yourself to reduce congestion by having control over delivery pick-up schedules?”
It may be tempting to think that an F.O.B. Origin term of sale with the customer arranging for the carrier and paying the freight charges is the simplest approach; all the seller has to do is get the goods loaded on to the truck and its obligations have ended. However, the realities of the world soon demonstrate that this simple approach is actually not that simple.
This is because customer arranged freight is indeed arranged by the customer. While the seller may think that the shipment is scheduled to be picked up on a Wednesday, the customer’s truck might be in the area and arrive on Monday to pick up the shipment… which won’t be on the loading dock; it might not even be assembled or packaged. If the shipment is not ready, then it will not be picked up, and the customer’s truck may not be willing to come back on Wednesday. To this, we interject the issue of “consignee chargebacks.” While it may seem counterintuitive that a seller could be charged for a late delivery for customer arranged freight, it does indeed happen.
With this and other factors in mind, the consensus of the panelists was that for outbound freight, F.O.B. Destination is preferred over F.O.B. Origin. Furthermore, while F.O.B. Destination means that the seller will be paying the carrier its freight charges, the cost can be passed on by slightly modifying the term of sale to “F.O.B. Destination, Prepaid and Add” (to the seller’s invoice).
F.O.B. Destination allows the seller to use its preferred carriers under its own contract. A less obvious benefit is that by managing the freight oneself, it will have the effect of lowering the number of carriers, which in turn enhances dock utilization.
Similar considerations apply with regard to inbound shipments. Again, the ability to manage the freight is a paramount consideration. For inbound shipments, one could use the term “F.O.B. Origin, Freight Collect.” Under this term of sale, the customer would be arranging for the freight, i.e., a customer pick-up. And, by adding “Freight Collect & Allowed,” the actual cost of the transportation could be passed through to the supplier even though the customer would be paying the carrier’s invoices.
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 at http://parcelindustry.com/by-author-1130-1.html. Your questions are welcome at firstname.lastname@example.org.
This article originally appeared in the November/December issue of PARCEL.