Contracts and Risk

In contracts that require the transporting of goods from one party to another, there is always an element of ‘risk.’ Before agreeing terms, it is important to consider who bears the burden of the risk in particular stages of the contract. This is especially important if a third party carrier is being used, or if either party is taking out insurance to cover the time when the goods are in transport.

Transportation Risks

For example, if goods originate in one country, such as China, and are transported over land to a sea port, loaded onto a boat for exporting to the UK, and then are moved onto a lorry for distribution throughout the UK, there are numerous parties involved in moving the goods from one location to another, and an infinite number of events that could mean the loss or damage of those goods. The goods could be destroyed in fire, stolen or lost, if they are perishable they could become rotten or stale, they could be damaged by water or heat, seized by pirates while on the high seas, or any number of other perils.

In contracts in which the goods originate in the same country as their destination, the process is relatively straightforward. Where there is some element of transport between the buyer and the seller, it is always a good idea to have terms in writing before any money exchanges hands. In the event that the goods are lost, damaged or stolen the terms will stipulate who carries the burden of risk. At a bare minimum, you should agree:

• whether the goods are specific (i.e. you have singled out the goods that are the subject of the contract) or whether you have just agreed to supply/buy an amount of or type of goods.
• the number of items or amount of goods, if not specified in terms of units
• the dates that the goods will be delivered
• the cost per unit
• whether there are any warranties or guarantees with the goods
• whether you agree to submit to arbitration in the event of a dispute
• the situations in which the contract can be terminated

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Sale of Goods

In English law, the sale of goods is governed by the Sale of Goods Act 1979. There is a distinction to be drawn between the passing of the property in the goods (the ownership) and the risk in the goods (who stands to lose if something happens to the goods.) The general rule is that the risk follows the property in the goods, so the owner of the goods bears the risk, although there are some exceptions. These are:

• the parties have agreed something else other than the risk passing with the goods
• one party was at fault for the loss of the goods
• one party does not take reasonable care of the goods, in which case they are liable for the loss or damage, or
• the contract stipulates that the seller sends the goods to the buyer – delivery to the carrier is deemed to be ‘delivery to the buyer’.

As a result, it is extremely important as a buyer of goods to ensure that you have satisfactory carriage arrangements and that the apportionment of risk is clear before any money changes hands.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Contract Red Flag Checker lets you describe a contract you are about to sign and get a plain English summary of the clauses that could hurt you. Takes about 2 minutes. Try it now →