Know the terms of sale

By Ray Bohman -- Logistics Management, 10/1/2006

When contracts for the purchase and sale of goods also involve the transportation of those goods, they usually include “terms of sale.” Terms of sale set forth certain conditions of such transactions, including when title to the goods passes from seller to buyer; who bears the risks of loss or damage to the goods during loading, transportation, and unloading; and who pays the costs of freight and insurance.

The F.O.B. (“free on board”) terms for passage of title and for payment of freight charges are two separate and distinct elements, although they generally are mentioned together. One does not govern the other; for instance, the use of “freight collect” does not automatically mean that title passes at origin. Thus, they must be addressed separately in every agreement.

In domestic transactions, the terms of sale are governed by Article 2 of the Uniform Commercial Code as well as by general trade custom. The relevant section of the Uniform Commercial Code, which provides the legal definitions for essential terms of sale, is §2–319.

There are six different terms of sale and freight-payment options open to sellers and buyers of goods:

F.O.B. Origin, Freight Collect
F.O.B. Origin, Freight Prepaid
F.O.B. Origin, Freight Prepaid and Charged
F.O.B. Destination, Freight Collect
F.O.B. Destination, Freight Prepaid
F.O.B. Destination, Freight Collect and Allowed

"F.O.B. Origin" means that title to the goods passes to the buyer the instant the driver signs for the goods at the point of origin. From that point on, the buyer assumes all of the essential risks and burdens in transportation, including loss or damage. Since the buyer owns the goods when they are shipped from the point of origin, the buyer has the right to select a carrier to perform the transportation. In many instances, however, the buyer leaves carrier selection to the discretion of the seller.

"F.O.B. Destination" is not as widely used. Under this term, sellers hold onto the title until the goods reach the destination. It is commonly used when it may not be known at the time of shipment who or where the buyer will be.

F.O.B. Origin terms are more widely used than F.O.B. Destination because most sellers want to finalize a sale as soon as the carrier picks up the goods at origin, and that term allows them to close out transactions right away.

As noted above, terms of sale also address the payment of freight charges. If the goods are shipped Freight Collect, the buyer is responsible for paying the freight charges. If goods are shipped Freight Prepaid, the seller is obligated to pay the freight charges. Finally, if the terms of sale are Freight Prepaid and Charged (more commonly called Freight Prepaid and Add), it means the seller pays the freight charges and then adds those charges to its invoice to the buyer.

Who sets the terms of sale? Usually it is the seller, but in some cases the buyer has the clout to set them, and will so indicate on its purchase order. That’s why it is so important to carefully read every purchase order. If a sales contract does not mention any F.O.B. terms, there is a strong presumption that the terms are F.O.B. Origin. To override that, the two parties must expressly specify, in writing, that the contract obligates the seller to deliver the goods at destination.

Note: For more information about domestic terms of sale, see Transportation, Logistics, and the Law, Second Edition, by William J. Augello, Esq.