Monday, June 11, 2012

Precision with Legal Definitions in F.O.B. Destination.

In my last post, I discussed some of the difficult issues faced by buyers and sellers of goods when those goods are damaged in transit. Basically, if the contract is silent on who bears the risk of loss or damage to the goods in transit, then responsibility for damage to the goods is with the buyer after the seller tenders delivery to the freight carrier. Article 31 of the CISG has comparable rules with some nuances.

I thought it might be useful to delve into the definitions of "receipt" and "tender of delivery." They do not mean the same thing, and are tantamount when examining issues or potential issues with carriage. "Receipt" means taking physical possession of goods. In many cases, delivery will be tendered and the buyer has title or ownership to the goods, yet the buyer will not have physical possession of them.

From a buyer's standpoint, this is not inconsistent with the default rule when goods are to be shipped and the contract is silent on who owns the goods in transit. If A manufacturer sells goods to B buyer, and B buyer takes ownership of the goods after tender of delivery, and the goods are damaged in transit, then B buyer is responsible for replacing the goods. The result is the same when the situation is examined through the F.O.B. concept.

Tender is such performance by the tendering party to render the other party in breach or default if they do not perform. Tender of delivery requires the seller to place and hold conforming goods at the buyer's disposition, as well as give the buyer notification reasonably necessary to enable the buyer to take delivery. Note that it says conforming goods, which are those meeting the obligations of the contract. In other words, the goods are in such condition that the seller has met its legal obligation.

Tender does not require the seller to give physical possession of the goods to the buyer. Delivery requires voluntary transfer of possession. Tender of delivery can mean transfer of physical possession if the parties so contract, but the default rule when a contract is silent demarcates physical possession and delivery.

So, tender of delivery essentially means that the seller must place goods at the buyer's disposition, and a voluntary transfer of possession occurs, but not necessarily physical possession. If contracted-for goods are shipped F.O.B. Origin, then tender of delivery does not mean the same thing as receipt. If the goods are shipped F.O.B. Destination, then tender of delivery does mean the same thing as receipt.

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