Contracts: Contract Terms: Risk of Loss in Sales of Goods

  • Risk of Loss in Sales of Goods
    • When goods are damaged before the buyer gets the goods and neither the buyer nor the seller is to blame, who bears the risk of loss? Significant consequences:
      • If seller bears the risk of loss, the seller must provide new goods to the buyer at no additional cost, or be liable for breach of contract.
      • If the buyer bears the risk, the buyer must still pay the contract price.
    • The hierarchy which determines who bears the risk of loss:
      • Agreement of the parties controls
      • If there’s a breach: the breaching party bears any uninsured loss, even if the loss is unrelated to the breach.
          • Pearl Beer Co. of San Antonio contracts to ship beer to a Bronx Pub via UPS. An electrical short causes the beer to spoil in transit. The contract is silent on the risk of loss and neither party is to blame for the short. Who has the risk of loss if Pearl shipped the beer after the contract deadline? Pearl does because it breached the contract by shipping the goods late. It doesn’t matter whether the breach of contract was related to the short. The breaching party bears the risk of loss.
      • Delivery by common carrier (UPS, FedEx): risk shifts to the buyer when the seller completes its delivery obligations.
        • Shipment contract = seller must get the goods to a common carrier, make reasonable delivery arrangements and notify the buyer. [look for “FOB+seller city]
        • Destination contract = seller must get the goods to a specific destination (usually where the buyer is located). [FOB + Buyer city}
      • BAR TIP: Look for a shipment contract, where the buyer bears the risk of loss long before it actually gets the goods. It’s counterintuitive and therefore frequently tested.
          • Same facts, except that Pearl shipped the beer on time. Who has the risk of loss if the contract was a shipment contract? As long as Pearl had met its delivery obligations, the risk of loss is on the pub.
          • If the contract was a destination contract, the risk of loss is on Pearl (seller) until beer gets all the way to destination.
      • Non-carrier cases (where the buyer is to pick up or the seller is to deliver): the answer depends on whether the seller is a merchant.
        • If seller is a merchant, seller bears the risk of loss until the buyer takes possession of the goods.
        • If the seller is a non-merchant, the seller bears the risk of loss until the seller tenders the goods (makes them available).
      • If a contract gives the buyer the right to return the goods, the key is whether the buyer is buying primarily for resale or for his own use.
        • Primarily for resale (“sale or return”): same rules apply.
  • For the buyer’s own use (“sale on approval”): risk of loss remains on the seller until the buyer has accepted the goods.
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