What are Shipment Contracts?
How do you legally define it?
What are the important elements you should know!
In this article, we will break down the business and legal definition of Shipment Contracts so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
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Table of Contents
Shipment contracts (also referred to as freight contracts or shipment agreements) are a type of contract where a seller agrees to deliver goods to a buyer.
In addition to the “shipment” obligations, the seller will bear the risk of damage to the goods shipped until the goods reach the place of shipment.
In other words, a shipment contract is a legal and binding agreement between a buyer and a seller of goods who is then required to ship the same to the buyer.
What is the shipment contract definition?
A shipment contract is a type of contract where the seller of a good is obligated to place the goods in the hands of a carrier or transporter instead of bringing the goods all the way to the buyer.
When the seller delivers the goods to the carrier, the seller’s “shipment” responsibilities are fulfilled and the buyer will become responsible for any damages to the goods or loss.
What are the elements of a shipping contract?
A shipment contract will generally include the following:
- Identification of the buyer
- Identification of the seller
- Description of the goods sold
- Quantity of goods sold
- Price at which the buyer is purchasing the goods
- Payment obligations
- Shipment details (or delivery details)
- Seller’s liability
- Buyer’s liability
- Agreement on when there is a shift of risk of loss from the seller to the buyer
Risk of loss
Now that we have a good basic understanding, let’s look at the shipment contract risk of loss.
Typically, the risk of loss of the goods in a shipment agreement passes on to the buyer at the point of shipment or delivery.
This begs the question: what is the point of shipment?
In essence, the seller remains liable for damages to the goods, destruction, theft or other liability from the moment the contract is signed until the seller loads the goods onto a carrier for delivery to the buyer.
The moment the goods are on board the transportation vessel or vehicle, the risk of loss of the goods gets transferred to the buyer.
Even though the buyer has yet to receive the goods (as the goods are on their way), should the goods get destroyed, damaged or lost after the seller has provided them to the transporter, the buyer will bear the risk.
UCC Shipment Contract
How is the shipment contract defined under the Uniform Commercial Code (UCC)?
The Uniform Commercial Code specifically defines a shipment contract.
The objective of the UCC in the United State is to achieve uniformity among the different U.S. states giving businesses a uniform legal framework to do business across state lines.
Article 2 of UCC states:
A shipment contract is one way in which buyer and seller could contract to allocate risk of loss between buyer and seller when goods or lost or damaged before the buyer obtains them from the seller and neither buyer nor seller is to blame for the loss.
As a result, in the event the UCC applies, in a shipment contract the buyer will bear the risk of loss of the goods before even receiving them.
In other words, when the seller makes proper shipping arrangements and delivers the goods to a common carrier, the risk of loss shifts from the seller to the buyer at that point in time.
What are the shipment terms that may be found in shipment contracts?
It’s quite common to see buyers and sellers negotiate the risk of loss in a shipment contract.
The objective is for the parties to mutually agree as to the point in time where there is an effective transfer of responsibility for the goods shipped.
The shipment terms in a contract are important as they allow the parties to fine-tune their liability and avoid any surprises.
Here are some common shipment terms you may find in a shipment contract:
- FOB Place of Shipment
- FOB Seller’s Location
Let’s do a quick overview of the shipment terms:
FOB means “free on board” or “freight on board”.
It’s when the goods are loaded and onboard of the common carrier.
FOB Place of Shipment
This is when the goods are loaded with the carrier at the specific place of shipment by the seller.
In this case, the seller may have a factory and will have to bring the goods to the transporter’s location (the place of shipment).
FOB Seller’s Location
This is when the seller has an obligation to load the goods for shipment at its own factory or distribution center.
In this case, when the goods leave the seller’s factory, the risk of loss shifts to the buyer.
FAS means “free alongside ship” or “free along ship”.
Generally, the parties will also specify the name of the port, ship or vessel that will carry the goods.
When the goods are placed free and clear alongside the named ship or vessel, the buyer becomes liable for the goods as of that point on.
CIF means “Cost, Insurance, and Freight” or CF “Cost and Freight”.
In this case, the seller is responsible for the goods or freight (including insurance if it’s CIF) until the port of destination.
In the context of a destination contract, we may find other shipment terms or variations of what we saw above, namely:
- FOB Destination
- FOB Buyer’s Factory
- Ex Ship
- No Arrival, No Sale
This means “freight on board” or “free on board” at the destination of the buyer.
When the goods reach the destination of the buyer, the risk of loss transfers to the buyer.
FOB Buyer’s Factory
This means “freight on board” or “free on board” the buyer’s factory.
In this case, the seller remains responsible until the goods reach the buyer’s factory.
Ex Ship means that the seller is responsible for the goods until the part of destination.
Liability for the goods transfers from seller to buyer when the goods arrive.
The buyer will be responsible for unloading the goods from the ship.
No Arrival, No Sale
The No Arrival, No Sale is the right given to a buyer under UCC to cancel the contract or accept the goods at a reduced price when the goods are lost or damaged at a point in time when the seller is responsible for the delivery.
What is the difference between shipment vs destination contract?
Have you ever wondered: is this a shipment contract or a destination contract?
To clarify the concept, let’s nuance a shipment contract vs destination contract.
Just like a shipment contract, a destination contract is a type of contract related to the sale of goods.
Under a destination contract, as the name suggests, the seller has the obligation to deliver the goods at the “destination” of the buyer.
This means that the seller’s liability and risk of loss remain until the moment the goods arrive at the destination of the buyer.
In a shipment contract, the seller’s obligation is to ensure proper shipping arrangements are made and the goods are delivered to a common carrier for delivery to the buyer.
The real difference between shipment and destination contracts can be summed up to be the moment when the risk of loss (or the seller’s liability for the goods) shifts to the buyer.
To further understand the concept, let’s look at a shipment contract example.
Imagine that a seller is the distributor of laptop computers.
A company contacts the seller and places an order to purchase 1,000 laptop computer units.
The parties enter into a “shipment contract” where the shipment terms are defined to be FOB Florida Factory.
In this contract, the seller’s obligation is to load the 1,000 units of laptop computers onto the carrier’s transportation vehicle from its Flordia factory.
The moment the laptop units are loaded on a truck, the seller’s responsibility for the goods passes on to the buyer.
So, what is a shipment contract?
Let’s look at a summary of our findings.
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