Risk of Loss. Today we are going to cover how to draft a clause explaining ownership, title and risk of loss. This kind of contract clause is handy because it lets you control the point that the seller switches responsibility for goods sold to the buyer. This way, you can manage loss prevention in risk management, as well as limit operational risk losses. Additionally, now you’ll know how to negotiate a risk of loss clause and how to figure out, when you transfer ownership of goods, the key risk definition point for when the seller passes to the buyer the goods’ risk of loss.
This video explains the three common situations where sellers and buyers negotiate heavily who will assume ownership, title and risk of loss for the goods being sold. Click play below to learn these three key points now.
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As noted in the video, you really want to be sure that you consider the following key moments in a deal where you are selling or buying goods:
- Shipment. Most sellers consider this to be the point where ownership, title and risk of loss transfer to the buyer. Basically, once the goods leave the seller’s loading dock and hit the truck bed of a common carrier like UPS, the seller normally books the income from the sale and considers the goods to be figuratively in the hands of the buyer. As a result, if a customer ever accepts this variation of the clause, it should insist that the seller make sure that the goods are fully insured by a reputable insurance provider during the entire time of shipment.
- Receipt. One of the great ironies of modern accounting is most vendor finance employees will book a sale as complete once the goods are shipped, while many of their customers’ finance employees will only book the expenditure once the goods are received. This creates a strange gap in time during the shipment period where neither party’s finance system agrees as to who has ownership, title and risk of loss responsibility for the goods sold. So that’s why it’s important to spell out the answer to this typical dispute in the applicable sales contract. As a result, a buyer who is aware of this issue will insist that risk of loss only transfers once the buyer actually receives the goods on its premises.
- Acceptance. Savvy buyers purchasing goods that are either complex, or will be installed in a complex production environment, will definitely want to condition transfer of risk of loss based on acceptance. “Acceptance” basically means that the customer will specify certain performance conditions that the goods have to meet (such as, a camera capable of producing photos at a certain level of image quality). The customer will test the goods to see if they meet those conditions, and, if they do, then give written notice to the seller that the goods are accepted. Only at that point does the buyer take final ownership of the goods.
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