Legal Definitions - Shipment Contract

A Shipment Contract is a type of agreement, primarily used in the sale of goods, that specifies when the responsibility for potential loss or damage to those goods shifts from the seller to the buyer. Under this contract, the seller's main duty is to properly prepare the goods, deliver them to a common carrier (such as a trucking company, airline, or postal service), and make reasonable arrangements for their shipment to the buyer.

Once the seller has completed these steps, the risk of any loss or damage to the goods during transit immediately transfers to the buyer. This means that if the goods are lost, stolen, or damaged while they are with the carrier and before the buyer physically receives them, and neither the buyer nor the seller is at fault for the loss, the buyer is typically responsible for the financial cost. This type of contract is often indicated by terms like "FOB (Free On Board) Seller's Location."

• Example 1: Online Retail Purchase

  A customer in Florida orders a custom-designed surfboard from a small artisan workshop in California. The artisan (seller) carefully packages the surfboard and hands it over to a national shipping carrier, arranging for standard delivery. While the surfboard is in transit across the country, the shipping container is accidentally dropped during a transfer at a hub, and the surfboard is severely damaged.

  Explanation: In a shipment contract, the risk of loss transfers when the seller delivers the goods to the carrier. Once the artisan gave the properly packaged surfboard to the shipping carrier in California, the risk of damage shifted to the customer (buyer). Therefore, even though the customer never physically received the surfboard, they would bear the financial loss for the damaged item, assuming the contract was a shipment contract (e.g., "FOB California Workshop").

• Example 2: Wholesale Supply Order

  A restaurant chain with locations across the Midwest places a large order for specialty olive oil from a supplier in Italy. The Italian supplier (seller) bottles and crates the olive oil, then delivers it to a port in Italy, where it is loaded onto a cargo ship bound for the United States. During the ocean voyage, a severe storm causes some of the crates to break open, and a significant portion of the olive oil bottles are shattered.

  Explanation: Since this is a shipment contract, the supplier's responsibility ended when they delivered the properly packaged olive oil to the shipping company at the port in Italy. The risk of damage then transferred to the restaurant chain (buyer). Consequently, the restaurant chain would be responsible for the loss of the shattered olive oil bottles, even though they were damaged before reaching the U.S. port.

• Example 3: Industrial Equipment Procurement

  A construction company in Arizona purchases a specialized piece of heavy machinery from a manufacturer in Pennsylvania. The manufacturer (seller) prepares the equipment for transport, loads it onto a designated flatbed truck, and secures all necessary shipping documents. En route to Arizona, the truck is involved in a multi-vehicle accident, and the machinery is significantly damaged.

  Explanation: Under a shipment contract, the manufacturer fulfilled its obligation by delivering the equipment to the carrier in Pennsylvania and making proper shipping arrangements. At that point, the risk of loss transferred to the construction company (buyer). Therefore, the construction company would be responsible for the financial loss resulting from the damaged machinery, despite it never arriving at their job site in Arizona.