Key Takeaways

  • A destination contract requires the seller to bear risk and responsibility for goods until they reach a specified delivery point.
  • Key terms like FOB destination, EX SHIP, and no arrival, no sale define when risk passes and who pays costs.
  • The Uniform Commercial Code (UCC) mandates “perfect tender” and outlines when risk transfers from seller to buyer.
  • Unlike shipment contracts, destination contracts place more liability and performance obligations on the seller.
  • Understanding delivery obligations, insurance coverage, and breach remedies is crucial for minimizing disputes and financial loss.

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.

How Destination Contracts Differ From Shipment Contracts

The most significant difference between a destination contract and a shipment contract lies in the point at which risk of loss and responsibility for goods transfer from seller to buyer. In a shipment contract, the seller’s obligations end once the goods are handed over to the carrier. By contrast, in a destination contract, the seller remains responsible for the goods until they arrive at the specified destination — typically the buyer’s warehouse, facility, or another agreed-upon location.

This distinction has several implications:

  • Risk of Loss: The seller retains risk throughout transit and bears the cost of loss or damage until delivery is complete.
  • Control Over Shipping: The seller often manages transportation, selects carriers, and handles logistics, ensuring delivery conditions are met.
  • Insurance Considerations: Because risk remains with the seller during transit, obtaining adequate shipping insurance is crucial to mitigate potential financial losses.
  • Inspection Rights: The buyer’s inspection and acceptance typically occur upon delivery at the final destination, not at the point of shipment.

This structure provides more certainty and protection to buyers but increases obligations for sellers, making careful contract drafting and risk planning essential.

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.

Key Clauses and Delivery Obligations

In addition to standard terms like FOB destination and EX SHIP, destination contracts often include detailed clauses governing how and when delivery is deemed complete. These provisions clarify obligations and reduce the risk of disputes:

  • Delivery Window: Specifies the timeframe in which goods must arrive. Missing this window can constitute a breach.
  • Delivery Method: Outlines the type of transportation (e.g., truck, air, sea) and delivery standards (e.g., temperature-controlled, secure handling).
  • Notice of Arrival: Requires the seller or carrier to notify the buyer when goods are en route or have arrived, triggering acceptance procedures.
  • Right to Inspect: Grants the buyer the right to inspect the goods before final acceptance. If the goods do not conform to the contract, the buyer may reject them or seek remedies.
  • Force Majeure Clause: Protects parties from liability if unforeseen events — like natural disasters or strikes — prevent delivery.

Clear definitions of these terms help avoid misunderstandings and ensure both parties know their roles in the shipping process.

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.

Risk Transfer Scenarios and Examples

Understanding how risk transfers in a destination contract is vital for both parties. Here are common scenarios illustrating how liability shifts:

  • Before Delivery: The seller is responsible for loss or damage until the goods reach the destination. If the goods are damaged in transit, the seller must replace or refund them.
  • Upon Delivery: Once goods arrive and are made available for unloading or inspection, risk transfers to the buyer — even if the buyer delays acceptance.
  • Rejection or Non-Conformity: If goods do not meet contractual specifications and the buyer rightfully rejects them, risk remains with the seller until the issue is resolved.
  • Buyer’s Delay: If the buyer refuses to accept conforming goods or delays beyond the agreed delivery window, the risk may transfer earlier, depending on contract terms.

Example:A manufacturer sells machinery under a destination contract specifying delivery at the buyer’s warehouse. The goods are damaged in transit due to rough handling. Because the seller retains risk until delivery, the seller must repair or replace the machinery. If, however, the goods arrive intact and the buyer delays acceptance, risk may shift to the buyer once the delivery conditions are met.

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.

Remedies, Breach, and Legal Considerations

The UCC (Uniform Commercial Code) governs destination contracts and sets out key remedies for breach. Sellers must provide “perfect tender,” meaning goods must conform exactly to the contract terms. If they fail to do so, buyers have several remedies:

  • Reject the Goods: If non-conforming goods are delivered, the buyer can reject them outright.
  • Demand Cure: The buyer may require the seller to correct defects within the contractual timeframe.
  • Seek Damages: Buyers can claim damages for late delivery, defective goods, or financial losses caused by breach.
  • Cancel the Contract: In cases of fundamental breach, buyers may terminate the contract and recover costs incurred.

Sellers also have remedies if buyers breach, such as withholding delivery, reselling goods, or suing for damages.

Because destination contracts place substantial legal and financial responsibility on the seller, precise drafting and clear allocation of duties are essential. Parties should consult legal counsel to ensure compliance with UCC provisions and to protect their interests throughout the transaction lifecycle.

Frequently Asked Questions

  1. What is a destination contract in shipping?
    A destination contract is a legal agreement in which the seller bears responsibility for goods until they arrive at a specified destination, such as the buyer’s warehouse.
  2. How is risk of loss handled under a destination contract?
    The seller retains the risk of loss during transit and until delivery is completed. Once the goods arrive, risk transfers to the buyer.
  3. What happens if goods are damaged in transit?
    If goods are damaged before delivery, the seller is liable for repair or replacement. The buyer is only responsible once the goods are delivered in conforming condition.
  4. How does the UCC regulate destination contracts?
    The UCC requires perfect tender and outlines remedies for breach, including rejection, damages, or cancellation if delivery terms are not met.
  5. Why might a buyer prefer a destination contract?
    Buyers often prefer destination contracts because they provide greater protection — the seller assumes risk and ensures delivery to a specific location, reducing the buyer’s exposure to shipping-related losses.

If you need help with reviewing a freight contract, you can post your legal on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.