With respect to the sale of goods such as fireworks, the buyer and seller may freely decide in the contract of sale which party will bear the risk of loss of the goods or, as the case may be, how the two of them will share the risk of loss. Generally speaking, when the loss occurs while the goods are in the seller’s possession, the seller’s insurance coverage will be available; similarly, where the loss occurs while the goods are in the buyer’s possession, the buyer’s insurance coverage will be available.
However, when the goods are to be carried by a third party, determining who bears the risk of loss depends upon whether the parties have entered in to a “shipment contract” or a “destination contract”. In a “shipment contract”, the seller’s responsibility for the risk of loss ends when the seller properly delivers the goods to the third party carrier; whereas, in a “destination contract”, the seller’s responsibility continues until the goods arrive at the final destination. This article offers an introduction into the concept of risk of loss, and it is most timely given the events of the M/V Hyundai Fortune; an incident where, apparently, neither a buyer or sell of fireworks is at fault.
If a contract for the sale of goods does not contain any terms relating to risk of loss, it is then presumed that the parties agreed to a shipment contract. The reasoning for the presumption is that, between the buyer and seller, the buyer (presumably) has a greater interest in protecting the goods it has agreed to purchase. As a legal matter, if a contract for the sale of goods does not contain any terms relating to risk of loss, the provisions of the Uniform Commercial Code (“UCC”) relating to risk of loss will likely apply.
Oftentimes, the parties agree to include risk of loss terms and provisions within the contract for sale with the understanding that a sales contract that specifies when the risk of loss passes will override the standard UCC provisions. As a matter of convenience, various abbreviations are frequently used by buyers and sellers for standard shipping terms that allocate the risk of loss during shipping and also to designate responsibility for other identified expenses (e.g., insurance, freight).
The term F.O.B, or “free on board”, applies to both shipment and destination contracts. Invariably, the term F.O.B. is followed by the name of a city; e.g., ‘F.O.B. Cleveland’. When the identified city is the city of embarkation (where the goods are coming from) a shipment contract is created, and the risk of loss shifts to the buyer when the seller transfers the goods to the carrier for shipment. In contrast, when the identified city is the destination of the goods, a destination contract is created, and the risk of loss shifts to the buyer only after the goods arrive at the agreed destination.
To summarize by use of an example, if a fireworks purchaser located in Michigan agrees to purchase fireworks from seller located in Cleveland, and the contract says ‘F.O.B., Cleveland’, the buyer accepts risk of loss at Cleveland, whereas ‘F.O.B. Ann Arbor’ would mean that the buyer only accepts risk of loss at the time the goods arrive in Ann Arbor.
F.A.S., or “free along side”, is most frequently used in connection with shipments over water. The term operates in the same manner as F.O.B. To use an example, if a fireworks purchaser located in Michigan agrees to purchase fireworks from seller located in China, and the contract says ‘F.A.S., Shanghai’, the buyer accepts risk of loss at Shanghai, China; whereas ‘F.A.S. Ann Arbor’ would mean that the buyer only accepts risk of loss at the time the goods arrive in Ann Arbor, Michigan.
C.I.F., or “cost of goods, insurance and freight” – This term bundles the 3 vital components to any transaction. When used in the connection with the purchase price, it means that the quoted price includes the costs of the goods, the insurance covering the goods, and the freight expenses to a specified destination. For example, “the purchase price is $1,000,000.00, C.I.F.” The inclusion of insurance and freight as part of the seller’s purchase price creates a shipment contract (whereby it is presumed that the sell is acting as buyer’s agent for purposes of paying insurance and freight expenses). However, the insurance and freight components can be unbundled, thereby eliminating the agency relationship. For example, if insurance charges are not included in the lump sum purchase price, the term “C&F” or “C.F.” is used.
To fully understand how the use, or absence, of a shipping term will be interpreted in the event a claim for the loss of goods is made, you need to refer to the risk of loss provisions contained in the sales agreement and insurance policies, if any, and examine the Uniform Commercial Code and the statues and court opinions of the states where both the buyer and seller reside. The safest way to eliminate any doubt about whether the buyer or seller will be responsible for a given expense or risk is to expressly identify the responsibilities of each party in the sales contract, and the use of abbreviations will be given the customary meaning.