Question: The shipment of goods is a major aspect of commercial transactions. Many issues arise when an unforeseen event, such as fire or theft, causes damage to goods in transit. At the time of contract negotiation, both the seller and the buyer should determine the importance of risk of loss. In some circumstances, risk is relatively unimportant (such as when ten boxes of copier paper are being sold), and the delivery terms should simply reflect costs and price. In other circumstances, risk is extremely important (such as when a fragile piece of pharmaceutical testing equipment is being sold), and the parties will need an express agreement as to the moment risk is to pass so that they can insure the goods accordingly. The point is that risk should be considered before the loss occurs, not after. A major consideration relating to risk is when to insure goods against possible losses. Buyers and sellers should determine the point at which they have an insurable interest in the goods and obtain insurance coverage to protect them against loss from that point.
CHECKLIST TO DETERMINE RISK OF LOSS The UCC uses a three-part checklist to determine risk of loss:
1 If the contract includes terms allocating risk of loss, those terms are binding and must be applied.
2 If the contract is silent as to risk, and either party breaches the contract, the breaching party is liable for risk of loss.
3 When a contract makes no reference to risk and the goods are to be shipped or delivered, if neither party breaches, then the risk of loss is borne by the party having control over the goods (delivery terms).
If You Are the Seller If you are a seller of goods to be shipped, realize that as long as you have control over the goods, you are liable for any loss unless the buyer is in breach or the contract contains an explicit agreement to the contrary. When there is no explicit agreement, the delivery terms in your contract can serve as a basis for determining control. Thus, "F.O.B. buyer's business" is a destination-delivery term, and risk of loss for goods shipped under these terms does not pass to the buyer until there is a tender of delivery at the point of destination. Any loss or damage in transit falls on the seller because the seller has control until proper tender has been made. If You Are the Buyer From the buyer's point of view, it is important to remember that most sellers prefer "F.O.B. seller's business" as a delivery term. Under these terms, once the goods are delivered to the carrier, the buyer bears the risk of loss. Thus, if conforming goods are completely destroyed or lost in transit, the buyer not only suffers the loss but is obligated to pay the seller the contract price. T Who Bears the Risk of Loss-the Seller or the Buyer?* CHECKLIST FOR THE SELLER OR THE BUYER
1 Prior to entering a contract, determine the importance of risk of loss for a given sale.
2 If risk is extremely important, the contract should expressly state the moment risk of loss will pass from the seller to the buyer. This clause could even provide that risk will not pass until the goods are "delivered, installed, inspected, and tested (or in running order for a period of time)."
3 If an express clause is not agreed on, delivery terms determine passage of risk of loss.
4 When appropriate, either party or both parties should consider procuring insurance.