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A term you use when someone fails or does something wrong, implying in a joking way that it was really bad or that it went wrong because they were stupid. It is in reference to "fail boat" pictures on [the internet] ([google image search] it) which ususally depict a boat that is sinking or capsized with the words fail boat underneath. If this were to be put on a scale of failure then it would be just below the term "[epic fail]".
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