A shipment contract and a destination contract differ on one question: who carries the risk while the goods are moving. In a shipment contract, the seller’s responsibility ends when the goods are handed to a carrier, and the buyer bears the risk of loss during transit. In a destination contract, the seller bears that risk the whole way and only sheds it when the goods are properly tendered at the agreed location. Under the Uniform Commercial Code, which governs sales of goods in all 50 states, a shipment contract is the default; a destination contract exists only when the parties explicitly agree to one.1Legal Information Institute. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach
What a Shipment Contract Requires
A shipment contract puts three duties on the seller: deliver the goods to a carrier, make a reasonable transportation contract for them, and notify the buyer that the shipment is on its way. The seller must choose a carrier and method appropriate for the goods. Shipping temperature-sensitive pharmaceuticals in an unrefrigerated trailer would not qualify as reasonable. The seller also hands over any documents the buyer needs to take the goods from the carrier at the other end.2Legal Information Institute. Uniform Commercial Code 2-504 – Shipment by Seller
The notification duty catches sellers off guard more often than you’d expect. If the seller ships without notice and something goes wrong, the buyer can reject the shipment, but only if the missing notice caused a material problem. A buyer who didn’t know goods were coming couldn’t arrange insurance or schedule a receiving crew. Courts look at whether the failure led to real loss, not just whether the email went out late.2Legal Information Institute. Uniform Commercial Code 2-504 – Shipment by Seller
Once those duties are satisfied and the carrier takes possession, the risk of loss passes to the buyer. If a truck jackknifes on the highway after that point, the buyer still owes the full purchase price. The buyer’s recourse is a claim against the carrier or an insurer, not the seller.1Legal Information Institute. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach
Careful carrier selection matters here. A seller who picks an unlicensed or notoriously unreliable shipper to save a few dollars may not have made a reasonable transportation contract. If a court finds that the seller fell short of that standard, the risk may never have properly transferred, leaving the seller liable for in-transit damage.
What a Destination Contract Requires
A destination contract flips the exposure. The seller must physically deliver the goods to a specific location, usually the buyer’s warehouse, store, or another agreed site, and properly tender them there. Tendering means making the goods available at a reasonable hour and keeping them accessible long enough for the buyer to take possession.3Legal Information Institute. Uniform Commercial Code 2-503 – Manner of Seller’s Tender of Delivery
The seller also provides whatever documents the buyer needs to take control, whether a delivery receipt, a warehouse document, or something else the agreement calls for. Showing up at a loading dock at 2 a.m. without prior arrangement doesn’t count as proper tender, even if the goods are technically present. The seller bears all costs and risks of getting the goods to that final spot.3Legal Information Institute. Uniform Commercial Code 2-503 – Manner of Seller’s Tender of Delivery
Risk of loss stays with the seller for the entire journey. If a delivery van is rear-ended two blocks from the destination, the seller absorbs the total loss. The risk doesn’t shift until the goods are properly tendered at the named location and the buyer has a genuine opportunity to take delivery.1Legal Information Institute. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach
Because the seller carries risk for so much longer, destination contracts tend to show up in deals involving high-value equipment, custom-manufactured goods, or situations where the buyer doesn’t have the logistics infrastructure to manage a shipment. Sellers often price destination contracts higher to account for the extended exposure. Parties must be explicit if they want this arrangement, because the UCC will not assume it.
How to Tell Which One You Have
Most commercial contracts don’t spell out “shipment contract” or “destination contract.” They use shorthand. The most common is FOB (“free on board”), followed by a location. That location is the signal.
FOB Shipping Point, or FOB Seller’s Location, creates a shipment contract. The seller’s obligation ends when the goods are loaded onto the carrier at the seller’s facility. FOB Destination creates a destination contract. The seller bears expense and risk all the way to the buyer.4Legal Information Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms When a contract uses FOB followed by the name of a vessel or vehicle, the seller must also bear the cost and risk of loading the goods aboard.
If the contract has no FOB term and the delivery language is ambiguous, courts generally treat it as a shipment contract. This default protects sellers from accidentally taking on destination-level liability they never agreed to.
Watch out for CIF and C&F terms. CIF means the price includes cost, insurance, and freight to the named destination; C&F is the same without insurance.5Legal Information Institute. Uniform Commercial Code 2-320 – CIF and C and F Terms Despite the seller paying freight to the destination, these are still shipment contracts for risk-of-loss purposes. If a vessel sinks mid-ocean, the buyer bears the loss, though under CIF, insurance should cover it. Buyers who assume that paying freight to a destination also means the seller carries the transit risk sometimes learn the hard way that it doesn’t.
How a Breach Changes the Risk
The clean rules above assume both parties are holding up their end. When one side breaches, the allocation shifts.
If the seller ships non-conforming goods that give the buyer a right to reject, the risk of loss never leaves the seller. It doesn’t matter that the goods were handed to a carrier under a shipment contract. The seller’s breach prevents the normal transfer. Risk stays on the seller until the defective goods are replaced with conforming ones or the buyer accepts the shipment despite the defect.6Legal Information Institute. Uniform Commercial Code 2-510 – Effect of Breach on Risk of Loss
A buyer who initially accepted goods but later discovers a hidden defect and rightfully revokes acceptance can retroactively treat the risk as having been on the seller all along. This retroactive shift applies only to the extent the buyer’s own insurance doesn’t cover the loss. If the buyer has full coverage, the insurer pays and then pursues the seller through subrogation.6Legal Information Institute. Uniform Commercial Code 2-510 – Effect of Breach on Risk of Loss
The reverse works too. When a buyer repudiates or otherwise breaches after the seller has identified conforming goods to the deal but before risk has formally passed, the seller can treat the risk as resting on the buyer for a commercially reasonable time. Again, this only fills the gap in the seller’s insurance. A seller fully covered by its own policy can’t dump the loss onto the breaching buyer.6Legal Information Institute. Uniform Commercial Code 2-510 – Effect of Breach on Risk of Loss
Title Transfer Is a Separate Question
Risk of loss and title (legal ownership) usually move together under the UCC, but they are governed by different provisions and can diverge. Title passes to the buyer at the time and place the seller completes physical delivery. In a shipment contract, that is the point of shipment; in a destination contract, it is tender at the destination. Parties can override this by agreement.
The distinction matters beyond transit damage. Title determines who can grant a security interest in the goods, who owes property taxes on them, and whose creditors can seize them. A buyer who holds the risk of loss but not the title, which can happen in certain reservation-of-title arrangements, bears the financial consequences of destruction without full ownership rights. Checking whether the contract addresses title separately from delivery terms is worth the time, especially on large purchases.
A Note on International Sales
The UCC’s FOB, CIF, and related terms govern domestic transactions within the United States. For cross-border deals, a separate framework called Incoterms, published by the International Chamber of Commerce, serves a similar function with important differences, and only applies when the parties expressly incorporate it into the contract.
The most common source of confusion: “FOB” means different things in each system. Under the UCC, FOB works with any mode of transport and any named location. Under Incoterms, FOB applies only to sea and inland waterway shipments and must be followed by a specific port. A contract that says “FOB Chicago” makes sense under the UCC but is meaningless under Incoterms, because Chicago isn’t a seaport. Specifying “Incoterms 2020” or “UCC” in the contract itself eliminates ambiguity about which set of rules governs.