A Brief Introduction About the Shipment Contract
A shipment contract definition comprises comprehensive obligations of both the parties involved. So, what is a shipment contract? This Contract passes on the risk of safe custody and transit of goods to the shipping company.
Shipping contracts relieve the seller by making him accountable only up to the place of shipment and that of the buyer after prompt shipment of the goods. The shipping company is held responsible for the safe transit and delivery of goods. In other words, the contract does not require the seller to deliver the goods at a particular destination.
The terms of delivery are not defined in the original contract; hence, none of the parties to the contract is bound within the terms of delivery unless a prompt shipment is explicitly stated. Through a shipping contract, both parties know the rights and responsibilities of the other party
Often Destination Contract and Shipment Contract are used synonymously. A remarkable distinction would be to consider when is delivery considered completed in a shipment contract? This should be asked in tandem with the questions, ‘What’s the difference between shipment and destination contract?’ In the case of a Shipment agreement, the goods belong to the seller until they are delivered to a common carrier.
However, in the case of Destination contracts, the buyer’s destination is defined as the point where the seller’s obligation to deliver is complete. Goods are the property of the seller until they are delivered to the shipping company.
Who Takes the Shipment Contract? – People Involved
A shipping contract is signed between the buyer and seller of goods. Shipping contracts are particularly important for a company that’s shipping the goods or an individual who wants to ship the goods. The importance lies in the fact that assigning the uncertainty limits the liability of loss on both the parties. Therefore, these contracts help in defining the relationship between the shipper and the client.
Purpose of the Shipment Contract
The purpose of the agreement is to mention the cost of the shipment required for both parties. It also mentions the freight and insurance policies that are required for any shipment to be in the transaction. The agreement provides services like freight forwarding, which help to guarantee that the shipments are in good condition and also reach to the required destination on time. There are in total 10 types of shipment agreement which covers all the terms and conditions ensuring that the loading-unloading, storage, and transport is done smoothly.
Contents of the Shipment Contract
In a typical shipment contract example, the contents must include
- Terms of Sale
- “Free on Board” or “Freight on Board” (FOB) and the seller’s location. This is an important clause as it states the location of the seller from which the goods will be sent. Once the seller makes the goods available at the FOB, he is relieved of his liability towards the buyer on the transfer of title and possession of goods.
- Details of the goods being sent.
- Alternatively, this contract may also contain the following terms
- FAS – It means Free Along Side, and the term is followed by the name of the port/vessel.
- CIF – Cost Insurance Freight. If this contract contains CIF, it means that the seller is responsible for bearing the cost of freight to make the goods delivered at the buyer’s place.
- Description of Services
- Performance of Services
- Term/Expiry of the Contract
- Exclusive Control
- Health & Safety
- Force Majeure
- Governing Law
- Additional statutory expenses
- Responsibility of compliance with the law
How to Draft the Shipment Contract?
The seller and the buyer enter into this contract to pass on their respective conditions and requirements to a third party (carrier). Any business would want to get things done in an appropriate manner that is beneficial to every person in the value chain of business. Hence while entering into this contract, both the buyer and seller shall duly consider the competency, expertise, and quality of services provided by the shipping company.
However, while drafting a Shipment Agreement, you must mandatorily include
- Description of Services
- Payment and Payment Modes
- Term/Expiry of the Contract
- Default & Remedies
- Waiver of Contractual Rights
- The liability on the parties in the event of loss
- Duration and condition
- Due to the changes in the goods over time for shipping, the tolerance limit for the changes in the goods.
- The types of vessels and the stocking of those goods in the vessel
- Type of insurance
In addition, the cost-effectiveness of various terms of this contract must be considered by the parties to the agreement.
Negotiations shall purely happen on the terms of shipment contracts like FOB Source, FOB Destination, FAS, and CIF. Not every contract can follow the same terms of shipment. Hence, the buyer and the seller shall negotiate to have suitable terms for each shipment that optimizes cost and saves time. Negotiation strategies will also include elements like the liability in the event of loss after the insurance coverage. They may also include the nature of the vessel and how the goods are stocked in the vessel
Benefits & Drawbacks of the Shipment Contract
There are various advantages derived from a shipment contract:
- Reduction of burden – The risk of loss or damages to goods is transferred to the carrier. Hence the buyer and seller are released from the burden of worrying about the safe transit of goods.
- Value addition – The buyer and the seller can concentrate on their core activities instead of spending time and resources on processes that do not add value to the business.
- The merit turns out to be a disadvantage at times. The seller and the buyer are left with anxiety about making the goods delivered in proper condition. Since the carrier will be transporting a large number of goods, it is very difficult to make him accountable for reasons beyond his control.
What Happens in Case of Violation?
Breach or violation(1) of this contract can happen in a case where the seller states the terms of shipment as FOB destination but does not track and take care of the shipment until delivery. Also, in case of bearing the costs of freight, the seller or the buyer may violate the terms by not accepting the costs originally accepted through the contract. In case of violation, the aggrieved party is eligible to claim damages from the party, causing harm. Also, if the violation is on the part of the seller, the buyer may refuse to accept the goods.
A shipment contract is normally entered between a buyer and seller, holding a long-standing relationship. Also, when the frequency and size of shipments are high, it is very simple to follow this contract for sending the goods. The efficiency of the carrier or shipping company is nevertheless.
The quality of service provided by the carrier shall only be the trust factor for entering this contract. The contract though seems to pass the burden of a transaction from person to person; it actually streamlines the risks on need basis. This helps in eliminating non-value-added processes from the day to day business transactions and saves time and money.