In a destination contract, the risk of loss is with the carrier until the product reaches a specified destination. When the shipment reaches its destination, it then transfers to the seller and is transferred to the buyer when it reaches the buyer's destination. There are rules and terms when shipping via a destination contract that you should review.

Destination Contract: Introduction

Freight contracts are contracts between the carrier and either a buyer or a seller. When shipping freight, you need to note the freight terms because it tells you the delivery agreement. You can either enter in a shipment contract or a destination contract.

  • With a destination contract, the risk of loss transfers from the carrier to the seller when the goods reach their destination. The seller is responsible for the goods until they reach the buyer's destination. However, if anything happens to the shipment once it's delivered, the buyer is responsible for any costs.
  • With a shipment contract, on the other hand, the seller is not responsible for the goods once he gives it to the carrier for delivery. Hence, if the shipment is damaged before it gets to the seller, the carrier, and not the seller, is responsible.

Destination Contract: Terms Used

There are terms including the following that indicates the agreement is a destination contract.

  • FOB (Free on Board) clause indicates a destination contract.
  • EX SHIP stands for “from the carrying vessel” and implies the seller is obligated to pay for the freight and unload the goods when it reaches the destination.
  • NO ARRIVAL, NO SALE clause denotes the seller is liable for the goods unless the goods are damaged due to the seller's negligence.
  • A BREACH clause means the buyer "rightfully revoked acceptance" and that the goods' title transfers from the buyer to the seller until the seller resolves the breach.
  • PROPER, TIMELY, AND RIGHTFUL REVOCATION clause requires the buyer to properly notify the seller of the breach. If the seller does not inform the seller, then he must pay per invoice terms.
  • FOB DESTINATION OR FOB BUYER'S WAREHOUSE clause, the seller is responsible for shipping cost and is responsible for transporting the goods to a stated location.
  • The term FACTORY DEFECTS indicate the buyer found factory or manufacturing defects with the goods. Title reverts to the seller only after the buyer properly notifies the seller.
  • A “timely” notification usually implies the buyer has 14 days of receipt to arrange shipment back to the carrier.
  • The “invitation” to pick up the defective goods must come from the person who has the goods.
  • REFUSING DELIVERY is a way for the buyer to revoke acceptance.
  • NOTATION ON THE BILL OF LADING happens when the delivery records contain damage notations. In this case, the buyer must still formally revoke acceptance.
  • CONCEALED DAMAGE is when the buyer opens the package after delivery and discovers “concealed freight damage.” The buyer still must file a claim with both the carrier and the seller. The carrier is responsible for investigating and remediating the issues with the seller or career.

Destination Contract: Determining Which Party Bears Risks of Loss for Shipments

If the seller delivers the goods to a common carrier for shipment and the goods are either lost or damaged in the carrier's position and the contract authorizes the carrier to ship the goods to the buyer via the seller then the risk of loss depends on whether the contract requires the carrier to deliver to a specified destination.

Destination Contract UCC Rules

Performance of a contract simply means to do the work required as stated on the contract. UCC laws call for “perfect tender” by the seller, meaning he must meet the precise terms stated in the contract. According to the UCC, if the seller fails in any aspect, then the buyer's options include rejecting the goods.

Learn the rules of destination contracts before shipping. Liability transfers at different points in the shipment process. However, most freight contracts are shipment contracts, and thus the carrier, not the seller, bears the risk. Contact your lawyer if you need help determining what type of freight contract you should use to deliver goods.

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