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The importance of shipping terms. (Legaljargon).

When a customer purchases goods for delivery at a later date, how does the credit professional respond when the customer refuses to pay because the goods were delivered late, the goods were damaged in shipment or there was some other problem with delivery? To adequately respond to these claims, a credit professional will need to understand the contract's shipping terms. Shipping terms are more than delivery instructions. Shipping terms also assign risk in the event of delivery problems as the goods are transported to the customer.

The most important thing to remember is that risk passes when the goods are deemed delivered. To understand when delivery occurs, you first need to know whether it is a shipment contract or a destination contract. Where unclear, the presumption is that it is a shipment contract.

Shipment Contract

The risk of loss passes on delivery to the carrier in shipment contracts. If the contract calls for the goods to be shipped, it is a shipment contract, and delivery of the goods to a carrier is delivery to the buyer. Under a shipment contract, the duties of the seller are to deliver the goods to the carrier, make a reasonable contract of shipment, notify the buyer and send any required documents.

Destination Contract

The risk of loss passes on tender of delivery at the destination in destination contracts. If the contract specifies delivery at a specific destination other than seller's factory or warehouse, it is a destination contract, and the seller must deliver the goods to the buyer at the specified destination. The duties of a seller under a destination contract are to deliver the goods to the specific destination and hold the goods there for the buyer for a reasonable time, if necessary.

Delivery terms show whether it is a shipment contract or a destination contract. The following are some common delivery terms.

* FOB (place): if the place is the place of shipment (e.g. FOB factory), this is a shipment contract, and seller only bears the expense and risk of putting the goods in the possession of the carrier, if place is destination (e.g. FOB customer's warehouse), then it is a destination contract, and seller bears expense and risk of transporting the goods to that place. FOB place of shipment and method of transport (FOB carrier) also require that seller load goods at its own risk.

* FAS: Unless otherwise agreed, seller at own expense and risk must deliver goods "free along side" transport at a main port or terminal and tender receipt, e.g. FAS Port of Seattle. Delivery occurs when they arrive at the port.

* CIF: (Price includes cost, insurance, freight); C&F (price includes cost and freight only): the seller must load, insure and send goods--a shipment contract.

* Ex (ship, truck, etc.): The seller must deliver to the buyer, at the seller's expense, off the ship at destination and free of liens.

* "To arrive" or "no arrival no sale": This term excuses seller from non-delivery if resulting solely from hazards of transportation, not if resulting from negligence of seller.

To answer the question posed in the first paragraph, if the goods were shipped FOB factory and on time, then the seller must pay. However, if the goods were shipped FOB destination, then the credit professional may be facing a problem.

A major exception is when the seller is in breach. For example, where the goods are non-conforming and buyer is entitled to reject, then the risk remains with the seller until it cures, despite tender or actual delivery to buyer. However, if the buyer accepts the non-conforming goods, then the risk of loss shifts to the buyer at that point. Alternatively, if the buyer rightfully revokes acceptance, it can treat the risk of loss as having rested with the seller from the beginning, to the extent the buyer's insurance is insufficient to cover the loss.

There are also exceptions and nuances. Additionally, the facts of any dispute are important in analyzing these issues. Obviously, the laws of each jurisdiction vary. Everyone is strongly encouraged to consult with counsel and learn more.

Henry K Hamilton is a founding member of the Seattle, Washington law firm of Grieff & Hamilton, PLLC. Mr. Hamilton.
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Title Annotation:delivery contracts and their regulations
Author:Hamilton, Henry K.
Publication:Business Credit
Article Type:Brief Article
Geographic Code:1USA
Date:Feb 1, 2002
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