If you are purchasing goods from a supplier, it is important that you pay attention to when risk and title to the goods transfer to you. This is important because you want to know when you will have complete ownership of the goods. This way, you can deal freely with your new goods. Knowing when risk passes to you is important so you know when you are responsible for loss or damage to the goods. This article explores how risk and title works in Australia. It also looks into Incoterms, which are commonly used when engaging in the supply and purchase of goods internationally.

What is Risk?

Risk describes whose responsibility it is to look after the goods. Once risk in the goods transfers to you, you will be responsible for anything that happens to the goods, including:

  • damage to the goods; and
  • storage and transport of the goods.

Often, you will take responsibility for the risk in the goods when they are physically transferred to you. This is regardless of whether:

  • you have collected the goods; or
  • they are delivered to you.

It is important you have adequate insurance in place from the time that risk transfers from the supplier to you.

What is Title?

Title describes who the legal owner of the goods is. When the title transfers from the supplier to you, it means you are now the owner of the goods. The supplier no longer has any rights to the goods. If you are purchasing large pieces of equipment or other items for your business, these clauses may have the effect of you being able to use the equipment and pay for it at a later date. Here, you will not be the legal owner of the equipment until you have paid for it. This is even though it is in your possession.

If you are expecting title to the goods to transfer to you, your contract with the supplier should include a warranty from the supplier that they have legal title to the goods and that the goods will be free from any encumbrances and any other third party rights.

For larger purchases, you should search the Personal Property Security Register (PPSR) to check whether any other parties have an interest in the title of the goods.

Example Clause

  1. Title to the Goods will pass to the Customer on the date the Customer pays the Price for the Goods in accordance with this Agreement.
  2. Subject to the terms of this Agreement, risk in the Goods will pass to the Customer when the Goods have been Delivered to the Customer or when the Customer has Collected the Goods (as applicable), and the Customer has not rejected the Goods, in accordance with this Agreement.

What is Retention of Title?

When suppliers are providing goods to you on payment terms, their key concern is ensuring they receive payment for the goods. Suppliers will often do this by:

  • including a retention of title clause in their supply contract with you; and 
  • registering their security interest on the PPSR.

For example, you purchase a commercial printer from a supplier. You receive the printer and start using it in your office, but you do not need to pay the full purchase price until 60 days after delivery. If a supplier includes a retention of title clause in the supply contract, they are asserting that while you may have the right to possess the printer, they retain ownership of the printer until you have fully paid the price to them.

To manage credit risk and further show that the supplier retains title over the goods, they may choose to register it on the PPSR. The PPSR is an Australian wide electronic system for registration of interests in personal property. This includes all sorts of property, such as: 

  • plant;
  • equipment;
  • vehicles; and 
  • company shares.

If the goods are registered on the PPSR, anyone can see this registration. Suppliers often do this because registration makes it easier for suppliers to recover the goods from you should you not pay them, as it shows that the supplier legally owns the goods. If you are to go into liquidation and a liquidator seizes your assets, the supplier will have priority over the goods they registered on the PPSR.

How Do Incoterms Work?

If you are contracting with an overseas supplier to purchase goods, it is common that the international commercial terms developed by the International Chamber of Commerce (ICC) will be used. Incoterms set out the obligations, risks and costs for both parties to a contract at the various stages of delivery. While incoterms are not a compulsory requirement for international trade, they provide standard concepts which ease the transfer of goods between countries.

Importantly, Incoterms only apply to the delivery of goods. They do not cover details of:

  • the ownership and transfer of the title of the goods;
  • events beyond your control; 
  • termination; or 
  • the payment process.

As such, these terms will need to be clearly drafted into your contract.

Incoterms do not automatically apply and will need to be agreed between both parties within the contract to be effective.

As a customer, you will need to consider whether these terms are beneficial to your business. Practically, you will need to consider whether the relevant Incoterm makes sense. 

For example, you may not be able to arrange an export shipment from the supplier’s location, so agreeing to such Incoterm will put you in a position where you may breach the contract.

As such, before entering into any international arrangement, it is best practice to obtain insurance and tax advice.

Incoterms® 2020 Cheat Sheet

Incoterms® for Any Mode of Transportation
EXWEx Works

The supplier’s obligations are fulfilled when the goods are made available to the customer.

The goods are collected by the customer at the supplier’s premises or at an agreed upon location and the customer takes the risk of the goods from that point. 

The supplier does not need to assist with loading the goods onto the customer’s vehicle or assist with export clearance, if applicable. The customer must pay all duties and taxes and other charges relating to the export of the goods.The customer arranges carriage of the goods.

FCAFree Carrier

The supplier delivers and loads the goods, cleared for export, on the customer’s transport at the supplier’s premises or delivers them to another premises (typically a forwarder’s warehouse, airport or container terminal) not unloaded from the supplier’s vehicle.

Risk in the goods transfers when delivery has been made.

The supplier is responsible for export formalities and the customer is responsible for import formalities and insurance from the time of delivery.

CPTCarriage Paid To

Supplier delivers the goods to the carrier nominated by the supplier at the agreed place of shipment, at which point risk transfers to the customer. The supplier must pay the costs of carriage to the agreed named place of destination. The customer will bear all costs after the goods have been delivered. 

The supplier must clear the goods for export and the customer will be responsible for paying for import clearance.

CIPCarriage and Insurance Paid ToThis Incoterm is the same as CPT however the supplier must procure insurance against the customer’s risk of loss or damage to the goods during the carriage of the goods. The minimum level of insurance is stipulated by Institute Cargo Clauses (A), beyond that, the customer needs to pay any additional insurance (unless otherwise agreed between the parties).
DPUDelivered at Place Unloaded

The supplier clears the goods for export and bears the risk and costs associated with delivering the goods and unloading them at the named port or place of destination. The goods are delivered at the time of unloading at arrival by any means of transport. Risk transfers to the customer at this point. The customer is responsible for import clearance and any applicable local taxes or import duties.

DPU is the only Incoterms rule that requires the supplier to unload the goods at the place of destination. 

DAPDelivered at Place

The supplier must deliver the goods to the place named by the customer, typically the customer’s premises. The supplier must pay for carriage of the goods and the customer is responsible for unloading the goods. Risk passes to the customer on delivery of the goods.

The supplier must clear the goods for export and the customer will be responsible for paying for import clearance.

DDPDelivery Duty PaidThe supplier is responsible for clearing the goods for export, arranging carriage and delivery of the goods at the named place, unloading the goods, as well as clearing them for import and paying all applicable taxes. Risk transfers to the customer when the goods are made available to the customer at the arrival terminal.
Incoterms® for Sea Transport
FASFree Alongside Ship

The supplier delivers the goods alongside the vessel at the named port of shipment. The customer bears all costs and risk to the goods from that point, including loading the goods onto the vessel.

The supplier must clear the goods for export and the customer is responsible for clearing the goods for import.

FOBFree on BoardThe supplier shall deliver the goods (at its cost) on board the ship selected by the customer at the named port of shipment. The supplier bears all costs and risks until the goods are loaded onto the ship including export clearance. The customer assumes all risks once the goods are on the ship, including the costs related to damage or theft of the goods after they are loaded on board and all destination port and import costs.
CFRCost and FreightThe goods are considered delivered by the supplier when the supplier delivers the goods at the port of shipment. The supplier must clear the goods for export and pay for freight to transport the goods to the final port of destination, however, risk transfers to the customer when the goods are on board the vessel. The customer must pay for import clearance and formalities. 
CIFCost, Insurance, and FreightThis Incoterm is the same as CFR however the supplier also has to procure marine insurance against the customer’s risk of loss/damage during carriage which is at least the equivalent to the conditions of the Institute Cargo Clauses (c), beyond that, the customer needs to pay any additional insurance (unless otherwise agreed between the parties).

Key Takeaways

If you are purchasing goods from a supplier, it is important that you are aware of when you will:

  • take ownership of the goods; and
  • be responsible for them.

Once you are responsible for them, you should consider taking out insurance to cover the goods. When ordering goods from a business within Australia, the contract generally clearly sets out when title and risk transfers. If you are purchasing goods from overseas, you and the supplier may choose to use an Incoterm to set out the obligations of both parties and when risk and title transfers. If you need assistance with your supply contracts, then call LegalVision’s commercial contracts lawyers today on 1300 544 755 or fill out the form on this page.

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