#10 – Title vs. Risk

Transfer of title and transfer of risk. Two equally important but very different concepts which can mean the difference between agony and success.

So, you have agreed a date for physical delivery of the goods. Does that mean that the title to the goods shifts to your customer at that time, and does it mean that all risk is transferred at the same time? Well, it depends on what you have agreed.

Firstly, you should make sure that the contract actually include clear terms specifying when transfer of title and risk is supposed to occur. Ambiguity and inconsistency in contract language regarding title and risk transfer is a regular hotbed for disputes.

Secondly, you should be aware that although transfer of title and transfer of risk may be closely linked, it is not the same and they serve distinct purposes in supply contracts. Furthermore, you don’t necessary want both to pass to your customer at the same time. As you probably have experienced, your customer certainly doesn’t want both to pass at the same time.

Here’s the kicker - understanding the difference between title transfer and risk transfer is essential for determining the parties' respective obligations and liabilities in the event of loss, damage, or other unforeseen circumstances. It has direct implications for insurance coverage, as the party holding title may need to insure the goods against loss or damage until the risk is effectively transferred.

Transfer of Title:

The transfer of title simply refers to the passing of ownership rights from the seller to the buyer. However, upon the transfer of title, your customer gains legal ownership of the goods, obtaining the right to use, sell, or transfer them to a third party. The transfer of title is a critical element in determining issues such as the right to sue for damages, insolvency, or the ability to pass clear title to subsequent buyers.

Title transfer typically occurs at a specific point in the transaction, hopefully outlined in the contract terms. Commonly, title transfer happens upon the delivery of goods or upon reaching a specified location, such as the seller's warehouse or a designated shipping point. But, as you probably have experienced, the customer will often request title transfer even earlier, sometimes as early as when the components in the delivery have been designated.

Transfer of Risk:

Conversely, the transfer of risk involves the shifting of potential loss or damage associated with the goods from one party to another. Risk transfer is not necessarily tied to the transfer of title and may occur at a different point in time. This is most certainly an important risk element, and the allocation of risk is, as always, a matter of negotiation between the parties. My point is that you should not forget to address this as it most definitely needs to be specified in the terms of the contract.

The transfer of risk is usually specified with reference to various Incoterms, which provide a standardized set of rules defining the responsibilities of buyers and sellers in international trade. For example, under the "Free on Board" (FOB) Incoterm, risk is generally transferred from the seller to the buyer when the goods pass the ship's rail at the port of shipment, regardless of the point of title transfer. And, please remember that Incoterms are updated from time to time. Make sure your contracts refer to the latest version (2020).