In our previous blog we looked at how important it is for suppliers to include a retention of title (ROT) clause in their contracts. Given the uncertain economic environment, a ROT clause is recommended as it can be a very useful tool to have in the event of a buyer getting into financial difficulties.
What if your goods are lost, destroyed or damaged after you have signed your contract but before you have been paid for them? Who bears the risk?
Here, LegalEdge’s Sarah Hill considers the linked issue of risk transfer and insurance and sets out some tips for drafting contractual terms which can help protect a supplier from loss if their goods are lost, destroyed or damaged.
Risk Transfer
- Make sure your contract clearly states when the risk of loss, destruction or damage to the goods you are supplying passes to your buyer.
- Remember risk can (and probably should) pass at a different time to legal title.
- If you have a ROT clause (which means you retain legal title until full payment has been made) you will want to provide that risk passes sooner – for example on delivery.
- Be crystal clear about what “delivery” is, define the meaning carefully in the contract so there can be no dispute about the exact moment that risk passes – you don’t want the buyer arguing that risk hasn’t passed to them because “delivery”, as defined in the contract, hasn’t actually happened.
- Check whether there are any International Chamber of Commerce (ICC) Incoterms® incorporated e.g. FOB, EXW as they can impact when risk transfers
Insurance
- Make sure your contract clearly specifies insurance responsibilities – you need to ensure that once the risk transfers to the buyer they are insured for that risk.
- Depending on the nature of the goods, you may wish to specify further details about the insurance cover the buyer must hold such as the type, minimum amount of cover and insurer rating.
- Consider if you want your interest in the buyer’s policy to be noted by their insurer and if so, provide for this in the contract.
- Make sure there are no gaps in insurance cover. For example, if your own insurance only covers the goods until they leave your warehouse, but your contract says risk passes to the buyer on delivery, what happens if the goods are lost or damaged in transit?
- Be aware the buyer may also require you to hold specific insurance (for example general liability and product liability) before they are prepared to sell your goods.
Part of wider risk management
Getting the drafting right in your contract is really important, but documentation should be just one part of your wider risk management strategy, your own insurance and internal processes are also key.
Making sure you fully understand the details of your own insurance is crucial – when are your goods insured under your policies and when are they not. Which insurance policy are they insured under at each point in your supply and distribution chain – for example so you can make sure there are no gaps in cover; your insurance broker should be able to assist with this.
Speak to your insurance broker about whether there are more specialist policies that could be relevant to your business. For example, if you only have a handful of very large contracts, trade credit insurance may be an option worth considering.
Finally, review your insurance policies regularly to check they continue to be appropriate for your business needs and that they work with the drafting of your commercial contracts to protect you to the fullest extent possible.
How can we help you?
We can review your commercial contracts to help minimise your risk through appropriate risk transfer and insurance clauses. To find out more contact: info@legaledge.co.uk
