How do you review shipping terms in contracts?
As the examples below illustrate, the shipping terms are typically found in their own section that is clearly marked as “Shipping Terms”, “Delivery Terms”, etc., making them fairly easy to identify. Note, however, that certain terms, such as those that establish when title to goods passes from one party to the other, may be found elsewhere in the agreement (see example 3 below).
After locating all the shipping terms in each agreement, important information to focus on when reviewing these provisions includes:
- Incoterms or other standard shipping terms. The International Chamber of Commerce’s Incoterms are globally recognized rules for establishing the essential terms of trade for the sale of goods. Each three-letter abbreviation precisely defines how the obligations, costs and risks associated with a particular sale transaction will be allocated between the buyer and seller, thereby indicating in clear and unambiguous terms who will be responsible for what at each point in the transaction. There are plenty of publicly available resources that contain detailed information on the meaning of the various Incoterm rules, which parties can use to gain a deeper understanding of any Incoterm used in a particular contract. Note, however, that the Incoterm rules are also updated regularly, and so it is important to pay attention to any reference in a contract to a particular version of these rules (such as examples 2 and 5 below), as this will inform the interpretation of the Incoterm used in that agreement. While Incoterms may be the most widely used set of standard shipping terms, they are not the only option available to contracting parties. Several examples below, for instance, use FOB (see examples 1 and 4), which refers to the FOB shipping terms used in North America. Note that North American FOB terms are different from “FOB” as defined by the Incoterms rules. North American FOB terms typically specify one of two points of transfer - (i) FOB shipping point (or origin) or (ii) FOB destination - and, like Incoterms, these terms establish who is responsible for what at each point in the transaction. Even still, some agreements may, for greater certainty, supplement these terms with language stating what costs, duties, etc. the buyer will be responsible for once the seller has satisfied its delivery obligations (see examples 2, 3, 4 and 6 below).
- When title (and risk of loss) transfers. The shipping terms will also typically address when title to the goods passes from seller to buyer. Although title typically passes at the time of delivery at the location specified in the shipping terms, in some cases transfer of title may happen before (or even after) the goods are delivered, meaning that the seller may still be in possession of the goods at a time when the buyer holds legal title (or vice versa). Example 3 below, for instance, states that title to the Equipment passes to Customer (the buyer) upon payment in full of the purchase price, suggesting that title could pass before the Customer takes possession should payment in full be made prior to delivery (or, alternatively, if the Customer has not paid for the Equipment at the time of delivery, seller may retain title until payment in full is rendered). Where a contract contemplates circumstances in which one party may have possession of goods that are legally owned by another, check the governing law section to confirm which jurisdiction’s laws apply to the agreement as this will clarify any legal obligations that may arise in such circumstances. Finally, although each Incoterm generally specifies when risk of loss transfers from buyer to seller, the shipping terms may include language that modifies (or further clarifies) the applicable Incoterm. Be sure, therefore, to note any language addressing risk of loss in the shipping terms to understand how this interacts with the Incoterm used in the agreement.
- Handling of delays. The shipping terms may sometimes address the seller’s commitment to make timely delivery and its obligation, if any, to provide notice of anticipated delays (see examples 1 and 5). Note any language such as “best efforts”, “reasonable efforts”, etc. that indicates the standard to which the seller will be held regarding these obligations. Applicable law may ascribe particular meaning to these qualifying terms. The governing law section specifies which jurisdiction’s laws apply to a contract, and this, in turn, will help parties confirm how these qualifying terms should be interpreted for the purposes of the contract.
- Other conditions affecting the shipment of goods. There may be other provisions that parties should consider (and possibly clarify) when reviewing shipping terms, such as details related to packaging. Example 1 below, for instance, states that when special packaging is requested by the Customer (the buyer) or deemed necessary by the Manufacturer (the seller), the Customer pays the extra cost for this special packaging. In other words, this term gives the Manufacturer the discretion to decide when this special packaging is necessary, thereby imposing additional costs on the Customer. The Customer would want to clarify under what circumstances the Manufacturer can exercise this discretion. Similarly, example 4 below states that Products shall be “suitably packed” for shipment. Because this wording is vague, the Manufacturer (the seller) would want to confirm what “suitably packed” means in this context to ensure the requirements are clear. Besides packaging requirements, the shipping terms may also include important information about payment conditions (see example 4 below), materials to be included with the shipment (see example 6 below), or when goods are deemed accepted by the buyer (see example 3 below). Be sure, therefore, to read the shipping terms carefully to note any language that introduces ambiguity, affects party liability, or otherwise has a material effect on the supply of goods under the contract.
As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of shipping terms. The governing law section, for example, was mentioned in points 2 and 3 above. Payment terms establish the rules for effecting payment under a contract, which may be helpful in situations like example 4 below where the transfer price for each shipment of Products must be paid in full before it will be released to the carrier or forwarding agent. A contract’s pricing terms set out the amounts payable for goods purchased under the contract, which may be of particular interest to Buyers when evaluating shipping terms. For example, in cases where the seller is absorbing some of the shipping costs, the buyer may nevertheless end up paying these costs indirectly through the contract price. By examining or inquiring about the pricing terms, the buyer can assess whether any such pass-through costs are reasonable given the costs for which it is directly responsible under the shipping terms. Buyers may also be interested in provisions addressing rights of return to understand when and how goods can be returned to the seller should the need arise. Finally, the notice section of the agreement details how and to whom notice needs to be given to be legally binding, something which would be relevant to, say, the Company (the seller) in example 5 below who has to provide the Distributor (the buyer) with notice of any delay.
Software that uses AI to identify and extract shipping terms (as well as other terms that may affect their interpretation) can accelerate the work of finding these provisions and enable a more comprehensive review than can otherwise be done manually.
Examples of Shipping Terms
Below are some examples of shipping terms from different kinds of agreements. While these examples do not necessarily cover the full range of shipping terms one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract.
Example 1: From a Manufacturing Agreement
IX. Delivery. Delivery of all items under this Agreement shall be delivered F.O.B. Manufacturer’s plant located at the address specified in Exhibit A (“Delivery Point”), at which time risk of loss and title shall pass to the Customer. Products held or stored by Manufacturer at the Delivery Point or any other location after the delivery date of such Products, shall be held or stored at the risk and expense of the Customer. Manufacturer shall use best efforts to deliver the Products on the agreed upon delivery dates. While Manufacturer shall use reasonable efforts to notify the Customer of anticipated delays, Manufacturer shall not be liable for any failure to give notice of anticipated delays or to meet such delivery dates. Unless otherwise specified by the Customer, Manufacturer shall transport the Products by the method Manufacturer deems most advantageous, to the Customer’s address or to an address specified in writing by the Customer. All freight, insurance and other shipping expenses from the delivery point shall be borne by the Customer. When special packaging is requested or, in the opinion of Manufacturer, is required under the circumstances, the additional expenses related to such special packaging shall also be borne by the Customer.
Example 2: From a Supply Agreement
- Shipment and Delivery. CIF East Coast USA INCOTERMS 2010. Upon delivery, Buyer takes possession and title and is and will be responsible for United States customs, duties, transportation and insurance thereafter.
Example 3: From a Master Services Agreement
- SHIPPING AND HANDLING. All equipment purchased by Customer (the “Equipment”) is provided F.O.B. vendor facility. Shipment will be made as specified by Customer and Customer is solely responsible for all expenses in connection with the delivery of the Equipment. The Equipment will be deemed accepted by Customer upon shipment…
3. TITLE. Customer shall acquire title to the Equipment upon full payment of the purchase price(s) set forth herein.
Example 4: From a Manufacturing Agreement
- Delivery Terms. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for shipment, and marked for shipment to Customer’s destination specified in the applicable purchase order. Unless otherwise agreed in writing by Manufacturer, the transfer price shall be paid in full (in cash or letter of credit obtained by Customer or its customer for the benefit of Manufacturer drawn on a U.S. bank in form acceptable to Manufacturer) prior to release to the carrier or forwarding agent. Shipment will be F.O.B. the factory or final assembly plant of Manufacturer’s subcontractor, at which time risk of loss and title will pass to Distributor. All freight, insurance and other shipping expenses from the F.O.B. point, will be paid by Distributor.
Example 5: From a Distribution Agreement
4.5 Shipment Terms. Company shall ship all Products EXW (Incoterms 2010) Company’s distribution facility in UK city to be named in accordance with Distributor’s delivery instructions set forth in the relevant Purchase Order and consistent with the terms of this Agreement. If Distributor does not provide delivery instructions, Company shall request instructions from Distributor. Company shall use Commercially Reasonable Efforts to deliver Products at the times specified in accepted Purchase Orders, or as otherwise agreed by the Parties. Company shall promptly notify Distributor of any delays.
Example 6: From a Supply Agreement
a. The Products shall be delivered as specified on the Purchase Order.
b. With each shipment of Products, Supplier will deliver a packing list containing the following information:
i. Purchase Order number
ii. Customer part number
iii. Quantity ordered/Quantity shipped
iv. Material Certificate, when required
v. Material Safety Data Sheet, when required
c. Lead time for delivery to the Plant is outlined in Schedule B.
d. For Products shipped F.O.B. Destination, the Plant, the Supplier shall be responsible for all insurance costs, freight charges and import and/or export fees, duties, demurrage, taxes, etc. incurred on each shipment, and, title and risk of loss remain with the Supplier until delivery. Title, risk of loss, and freight charges shall become the responsibility of Customer when Customer arranges for the transport of materials from Supplier’s dock, F.O.B. Shipping Point.
Example 7: From a Distribution Agreement
9.1 Delivery. Seller shall not be responsible for warehousing finished goods for Purchaser. Purchaser is responsible for any delivery charges FCA (Incoterms 2000), Seller’s designated manufacturing site. All shipments shall be accompanied by a packing slip that describes the articles, states the Purchase Order number and shows the shipment’s destination. Seller shall use Commercially Reasonable Efforts to deliver Product in accordance with the delivery schedule set forth in the Initial Purchase Order or the Purchase Orders provided in compliance with Section 5.3 hereof.
9.2 Shipment. The risk of loss with respect to Product shall be in accordance with FCA (Incoterms 2000), Seller’s designated manufacturing site. Purchaser shall notify Seller within 24 hours of discovery of any lost or stolen goods to facilitate Seller’s notification of the FDA.
Example 8: From a Manufacturing and Supply Agreement
3.3. Freight Charges and Incoterms 2000. Freight charges to be borne according to the Incoterms 2000 definition of FCA per Manufacturer manufacturing facility. Where Enzymotec pays freight, Manufacturer will utilize Company’s preferred freight forwarder and/or carriers or assume responsibility for excess charges. Title to and risk of loss of the Product will pass to Company upon transfer to Company’s designated carrier or freight forwarder.
Example 9: From a Component Manufacturing Agreement
4.04. Delivery terms shall be FCA at Shanghai Pudong International Airport (as defined in Incoterms 2010), and COMPANY shall pay all costs and expenses of shipping to COMPANY’s facility. Risk in the Components shall pass to COMPANY on delivery and title to the Components shall pass to COMPANY on payment in full of the amount invoiced to COMPANY. Finished Components shall be packed in accordance with the packing requirements, which must be provided by COMPANY in advance.
Example 10: From a Manufacturing Services Agreement
4.5 Packaging and Shipping. COMPANY will package and label the Product for shipment in accordance with the Master Production Record and COMPANY’s standard practices in effect at the time of performance by COMPANY. COMPANY will ship the Product FOB Shipping Point delivered at the Facility to a common carrier designated by CLIENT to COMPANY in writing not less than ten days prior to the applicable delivery date unless otherwise agreed to in a Statement of Work. CLIENT will provide to COMPANY its account number with the selected carrier and will pay for all shipping costs in connection with each shipment of Product. Each shipment will be accompanied by the documentation listed in the Draft Plan. COMPANY will use commercially reasonable efforts to deliver each shipment of Product to CLIENT on the requested delivery date for such shipment. COMPANY will promptly notify CLIENT if COMPANY reasonably believes that it will be unable to meet a delivery date. CLIENT shall be required to take delivery of a Batch of Product within thirty (30) days after acceptance of such Batch in accordance with Section 5.2 (the “Delivery Period”)…
5.2.2…Title and risk of loss to such Product shall pass to CLIENT at the time of delivery to the common carrier pursuant to Section 4.5.
Example 11: From a Strategic Supply Agreement
a. Shipment Terms. Supplier shall ship all Products CIP to the named place of destination (according to INCOTERMS 2000) specified in the Release or purchase order, however Products quoted in USD in Exhibit C shall be shipped FOB (according to UCC) shipping point.
b. Title and Risk of Loss. Title to and risk of loss for all Products sold hereunder shall pass to Baxter upon delivery to Baxter pursuant to the terms of this Agreement. Supplier warrants that, upon delivery of the Products, title shall pass to Baxter free and clear of all liens, claims, security interests, or encumbrances, and that no Products purchased hereunder shall be subject to any agreement under which any interest therein or encumbrance thereon is retained by any third party.
Example 12: From a Manufacturing Services Agreement
(a) Manufacturer shall deliver Bulk Drug to Company’s designated carrier ex-works (as defined in Incoterms 2000) at the Manufacturer Facility in Portsmouth, New Hampshire. Title to and risk of loss of Bulk Drug shall be and remain with Manufacturer until Manufacturer places the Bulk Drug at the disposal of Company’s designated carrier at the Manufacturer Facility, at which time title to and risk of loss for the Bulk Drug shall transfer to Company. At Company’s expense, Company shall, or Manufacturer shall, at the request of Company, at Company’s expense and in accordance with Company’s instructions, arrange for shipment of Bulk Drug via Company’s designated carrier from Manufacturer’s Facility to a designee specified by Company and insurance coverage for Bulk Drug while in transit at its invoiced value. All additional reasonable costs and expenses incurred by Manufacturer in arranging such transportation and insurance shall be charged to Company in addition to the Price, provided that Manufacturer has obtained Company’s prior written consent to incurring such additional costs and expenses. Company shall be responsible for obtaining all appropriate approvals and consents of any governmental authority necessary for the transportation and shipment of the Bulk Drug according to Company’s instructions, and Manufacturer shall not transport or ship Bulk Drug until Company informs Manufacturer that it has obtained all such approvals and consents. Manufacturer shall comply with all applicable Legal Requirements regarding the packaging of Bulk Drug suitable for transportation.
Example 13: From a Supply Agreement
Section 8.1 Delivery. Supplier shall deliver Products on the delivery dates agreed to by the Parties. Delivery of 90% or more of the volume of each Product published in the purchase order, made within the two-day period before the delivery date(s) agreed to by the Parties, shall constitute timely delivery. Delivery will be on a CIF Buyer-designated facilities in Korea basis. Delivery shall be deemed to be made and risk of loss and title shall pass to Buyer when shipment is made to a carrier.
Example 14: From a Manufacturing Agreement
4.3 Shipping Terms. Buyer will designate where Company is to ship products with terms to be FOB TFS Calumba, the Philippines or FOB Buyer facility for the transition production period.
Example 15: From a Manufacturing Agreement
EXHIBIT B - SHIPPING TERMS
I. Incoterms: The trade terms used in this Exhibit B will have the meaning given to such terms in the International Chamber of Commerce Incoterms 2000.
II. The trade terms will be F.C.A. (Incoterms 2000) with title transferring over the high seas prior to entry at the port of disembarkation. The Parties may on occasion agree to revise the INCOTERMS and delivery locations, in all instances taking due account of Customer’s business requirements with respect to passage of title and risk of loss or damage.
III. Customer will pay all taxes, duties, shipping, insurance, and handling charges after the Delivery point.
IV. Company will be the exporter of record on all shipments of Products, provided, however, that Customer must first provide Company with background classification information (ECCN) for all Customer Provided Deliverables that are used in connection with the design and/or manufacture of Products, and assist as necessary in collaboration with Company in establishing the ECCN for each Product. Delivery will not occur until Company has obtained any export license or other official authorization necessary for export of Products. Company will pay all relevant export duties, including surcharges, taxes, or the like levied by the (origin country) government or its agency.
V. The terms of this Exhibit B will be subject to acquisition of any necessary export license or permit from the (origin country) government or its agency. Should such export license or permit be refused, Customer will have the right to cancel, and reissue Orders.
VI. Customer will be responsible for obtaining an import license and other governmental approval or permit required in the country to which the Products are imported.
VII. Other than for WIP, which Customer authorizes Company to manage and ship to and from Company and its contracted manufacturing sites, for product manufactured outside the United States Customs Territory and imported into the United States, the Party responsible for importing, clearing through U.S. customs, and acting as importer of record will be Customer.