TERMS OF SALES AND RISKS

WHO PAYS THE FREIGHT AND WHO FILES THE CLAIM?

Reproduced with the Permission of Miles L. Kavaller

Many shippers include the cost of transportation in the selling price of their products to their customers. They ship freight "prepaid" from their facilities to their customers, have the right to select the carriers which transport this freight and pay those carriers in accordance with rates which the parties negotiate. Many shippers and receivers also include the cost of inbound transportation in the price which they negotiate for the materials which are purchased. The freight charges of those carriers who transport those products are often "collect".

The terms "prepaid" and "collect" refer only to the party responsible for the payment of freight charges. The passage of title and risk of loss are determined by the terms of sale, either "F.O.B." origin or "F.O.B" destination. California Commercial Code #2319 addresses these terms. When the purchase or sales contract uses the term F.O.B. the place of shipment (Los Angeles for example), the seller must, at that place, put the goods in the possession of a carrier and make a contract for transportation, provide documents including a bill of lading enabling the buyer to obtain possession of the goods and notify the buyer of the shipment. See California Commercial Code #2504. When the term F.O.B. the place of destination (New York City for example) is used in the sales contract, the seller must at its own expense and risk transport the goods to that place and make the goods available for delivery to the purchaser/consignee.

Ordinarily, ownership and the risk of loss are subject to the F.O.B. terms in the sales contract. The sales contract between vendor and customer may provide for delivery at the point the goods are placed in the possession of a common carrier, typically at origin. This is known as a shipment contract and is accomplished by the use of the term "F.O.B." and a location such as the shipper's warehouse. In a shipment contract the risk of loss of the goods and ownership passes to the buyer when they are relinquished to the carrier. See California Commercial Code #2509.

Alternatively, the sales contract may provide for delivery of the goods at the point of destination. This is known as a destination contract and is also illustrated by the use of the term "F.O.B." and a location such as the facilities of the buyer. In a destination contract the risk of loss remains with the seller while the goods are in the possession of the carrier. See California Commercial Code #2509.

There are different variations on this theme. Terms of sale can vary and include FOB origin, freight prepaid; FOB origin, freight prepaid and charged back; and FOB collect. The party responsible for the payment of freight charges is controlled by the term "collect" or "prepaid". The party to whom title passes and who is entitled to submit freight loss and damage claims is determined by the "FOB" term. The risk of loss passes to the buyer where the terms of sale are "FOB Origin" regardless of the party responsible for the payment of freight charges.

The bill of lading and the sales contract should be consistent. For example, the sales contract should be FOB origin if the seller expects the buyer to file freight loss and damage claims. The sales contract should be FOB destination if the seller expects to file freight loss and damage claims. The bill of lading must also properly designate the party responsible for the payment of freight charges consistent with the terms of sale. If the seller has agreed to be responsible for the carrier's freight charges, the bill of lading must be marked "prepaid". If the buyer is to be responsible for the payment of freight charges, the bill of lading must be marked "collect". To ensure that the carrier does not look to the seller for the payment of freight charges on a collect shipment, the seller should be careful to sign the provisions of Section 7 on the uniform domestic straight bill of lading. Otherwise, the seller remains liable to the carrier in the absence of payment of collect freight charges by the consignee. See  "The Section 7 Conundrum."