SHIPPING TERMS – SHIPPER/BUYER RESPONSIBILITIES
Most companies ship merchandise under the shipping terms of FOB FACTORY or FOB ORIGIN, which means the same thing. Likewise, FOB DESTINATION or FOB BUYER’S WAREHOUSE is indistinguishable. Specified shipping terms “assign risk” to the buyer and seller in a “Freight Contract.” Freight contracts run between the carrier and either a seller or a buyer. There are two types of Freight Contracts; a SHIPMENT CONTRACT and a DESTINATION CONTRACT. A vast majority of freight is moved by SHIPMENT CONTRACTS. All shipping documents require the use of Freight Terms, which determines if goods are being delivered under a “Shipment Contract” or a “Destination Contract.”
DESTINATION CONTRACT – The “carrier risk of loss” passes upon tender of delivery at the destination point specified in the Destination Contract. If delivery is specified at a destination point other than the buyer’s place of business or buyer’s warehouse, then it is the duty of the seller to deliver and “hold the goods at the destination specified for a reasonable period of time.” FOB DESTINATION, FOB BUYER’S WAREHOUSE, FOB JOBSITE are examples of shipping terms of a Destination Contract. The “ship to” address is not considered a freight term, just merely where goods are to be tendered for delivery. The “ship to” is only an instruction in the Freight Contract.
FOB FACTORY OR FOB ORIGIN – These shipping terms are characteristic of a “SHIPMENT CONTRACT” and the seller bears the expense and risk of putting the goods in the possession of the carrier. Title transfers to the buyer at the point when the goods leave the shipper’s loading dock but reverts back to the seller if the buyer follows the correct procedures of notifying the seller of “breach” by “rightfully revoking acceptance.” Even if “breach” has occurred, the buyer remains responsible for filing “carrier loss claims.”
BREACH – Given that merchandise is shipped FOB ORIGIN or FOB FACTORY and the buyer has “rightfully revoked acceptance” then the “title” of the goods in the possession of the buyer reverts back to the seller until the seller “cures” the breach. If the buyer accepts “non-conforming merchandise” with notification to the seller prior to the carrier’s departure from the delivery point, then “title” remains with the buyer. Breach includes shortages and damages as noted on the Delivery Receipts or the Bill of Lading. It is the buyer’s obligation to communicate “breach” to the seller in a timely fashion. Upon the buyer’s discovery of “breach” the buyer must also “rightfully revoke acceptance,” which includes the buyer’s responsibility of timely filing a formal freight claim with the carrier and also timely notifying the seller with formal notice of non-conformity.
PROPER, TIMELY AND RIGHTFUL REVOCATION – If the buyer does not properly and timely “rightfully revoke acceptance,” then “title” to the merchandise remains with the buyer, which dictates that the buyer pay for the merchandise according to invoice terms. Given the freight terms of FOB FACTORY or FOB ORIGIN, to “rightfully revoke acceptance” means the onus is solely upon the buyer to serve “notice of claims” upon the shipper and upon the freight carrier. This requires the buyer to file a formal claim with the carrier for shortages, freight damages, concealed freight damages and non-conforming merchandise. In lieu of filing a formal claim with the carrier, if the buyer timely notifies the shipper of deficiencies that were documented on the delivery receipts, the courts have ruled that this type of notice from the buyer may be sufficient to “rightfully revoke;” however, it is still incumbent upon the buyer to also file a formal claim with the carrier. It is equally important that when the buyer places the seller on any type of notice, the seller becomes obligated to file its formal claim with the carrier.
FOB DESTINATION OR FOB BUYER’S WAREHOUSE – This is a term for a DESTINATION CONTRACT and the seller bears the expense and risk of transporting the goods to the specified location.
FOB means Freight on Board and also signifies that the seller loads the goods at its own risk. This means that the seller is responsible for loading and may be held responsible for damages resulting from negligent loading.
FACTORY DEFECTS – If the buyer discovers factory defects or manufacturing defects after delivery, then the risk of carrier loss still remains with the buyer. However, “title” of the defective merchandise reverts back to the seller only when the buyer timely and rightfully notifies the seller of the non-conformity. “Timely” is generally construed as within 14 days of receipt. It is the buyer’s responsibility to make arrangements to ship the merchandise back, i.e. securing return authorizations from the shipper and contacting a carrier for pickup. The “invitation” to pick up defects must originate from the possessor of such goods. The delivering carrier is not liable in this type of “non-conformity,” as the factory defects did not arise from negligent actions of the freight carrier. Under the Uniform Commercial Code, the buyer must follow reasonable return instructions of the seller and may not unilaterally dispose of non-perishable items without prior approval of the seller. The buyer may not impose “penalties,” as the seller has the right to “cure” by shipping replacement product.
REFUSING DELIVERY – When the buyer refuses to accept delivery, this is a rightful method of “revoking acceptance,” if the buyer immediately informs the seller by formal notice that the delivery was refused or will be refused. “Breach” and not revocation determines if “title” transfers back to the shipper.
NOTATIONS ON THE BILL OF LADING, I.E. DAMAGED CARTONS AND SHORTAGES – When conspicuous damage notations are made on delivery records, the buyer is still obligated to take another step and “rightfully revoke acceptance” by formally filing claim forms and notices and submitting same to both the shipper and carrier.
CONCEALED DAMAGE – If a buyer opens a carton after delivery and discovers “concealed freight damage,” it is the buyer’s sole responsibility to file a formal claim with both the freight carrier and the seller. The carrier then launches an investigation to determine fault and then remedies the damage issues with the seller or with the buyer.