When two parties enter into a contract to buy and sell merchandise, they will usually specify who will bear the risk of loss if problems were to arise. If no specific provisions are set by the parties, the Uniform Commercial Code (UCC) provides some general rules for determining who will bear the risk of loss.
If the contract does not require the seller to deliver the merchandise to a specified destination, then the risk of loss passes to the buyer when the seller delivers the merchandise to a carrier. This type of contract is called a "shipment contract"
The following is a list of common terms that designate the contract as a shipment contract:
- FOB (free on board): Also known as "point of origin." This places the risk of loss plus shipping and loading costs at the FOB point (usually the seller’s factory or warehouse) unto the buyer.
- FAS (free alongside ship): This requires the seller to bear the risk of loss and costs for transferring the merchandise to a specified ship or port. The risk passes to the buyer once the merchandise reaches the dock alongside the ship.
- CIF (cost, insurance, and freight): This indicates that the price for the merchandise includes the cost to shipping and insuring the merchandise to the buyer’s delivery point.
- C & F (cost and freight): This indicates that the price for the merchandise includes the cost of shipping, but not the cost of insuring the merchandise. The buyer bears the risk of not having his/her shipment insured.
If the contract does require the seller to deliver the merchandise to a specified destination, then the risk of loss does not pass until the seller has delivered it to that destination. This type of contract is called "destination contract."
The following is a list of common terms that designate the contract as a destination contract:
- FOB Destination: This is similar to FOB but now the risk of loss does not get transferred until the merchandise reaches the destination point.
- Ex-ship: The seller will bear the risk of loss until the merchandise has been unloaded from the ship.
- No arrival, no sale: This means that there is no contract unless the merchandise arrives to the buyer. The seller may have to compensate the buyer if the merchandise arrives damaged.
In the case where the terms of the contract are so ambiguous that it is extremely difficult or impossible to determine whether the contract is a shipment or a destination contract, the UCC provides two additional guidelines:
- If the seller is in the business of selling that merchandise, then the risk of loss does not pass until the merchandise is delivered to the buyer.
- If the seller is not in the business of selling that merchandise, then the risk of loss passes to the buyer when it becomes available to the buyer to take delivery.
There are experienced attorneys that specialize in dealing only with sale of merchandise disputes. If you are in a contract for a sale of merchandise, talk to a business attorney to learn more about your rights and defenses. If you are in a legal dispute over a sale of merchandise, contact an attorney to recover the losses you have suffered.