The UCC has special provisions to determine who bears the risk of loss when goods are destroyed and the contract is silent about who bears the risk. To understand these principles, it is important to identify the goods, understand which party has title to the goods, and determine when the risk transfers from the seller to the buyer.
Before ownership in goods can pass from one seller to a buyer, the goods must exist and and be identified. In a sale of goods, identification occurs when specific goods are designated as the subject matter of a sales contract. Identification is a prerequisite for the title to pass from the seller to buyer. This is important because it also allows risk of loss to pass from the seller to the buyer.
Of course, the parties can agree as to when identification occurs; but if they don't, the UCC comes to the rescue to add clarity. For our purposes, if the contract involves the sale of goods that are already in existence, identification occurs when the contract is formed.
Again, the parties can agree as to when title (ownership) passes from the seller to buyer. In the absence of such an agreement, the UCC steps in to fill the gaps of contracts. In general, the UCC indicates that title passes to the buyer when the seller delivers the goods. However, when title passes may depend on which kind delivery is involved.
In a shipment contract, the seller is permitted to ship goods by carrier (e.g., UPS, FedEx, DHL). In a shipment contract, the seller delivers the conforming goods to the carrier, at which time title passes to the buyer. All contracts involving delivery are assumed to be shipment contracts unless something to the contrary is stated in the agreement.
A destination contract involves a delivery agreement where the seller must deliver the goods to a specific place, usually directly to the buyer. Title passes when delivered according to the terms of the agreement.
A third option occurs when the buyer picks up the goods. In these cases, there are no shipment terms, but rather title passes when the buyer takes possession and the seller gives the buyer a receipt (if applicable). If the goods do not move, title passes when the appropriate documents are delivered to the buyer.
If the contract is silent, the UCC adds clarity as to when the risk of loss (i.e., liability) transfers from the seller to the buyer. When the contract involves the movement of goods via a carrier, courts will look at the terms used in the contract. The most common shipping terms are known as Free On Board (FOB). This indicates that the selling price of the goods includes transportation costs to the specific FOB location. The seller carries the risk of loss to the FOB. location. If the location is the seller's location (i.e., the seller's city), the contract is a shipment contract. If the FOB location is the place to which the goods are being shipped (i.e., the buyer's city), the contract is a destination contract.
In a shipment contract, the seller can ship goods by carrier. The risk of loss in a shipment contract passes to the buyer when the goods are delivered to the carrier. Hence, if the goods are lost, stolen, or destroyed in transit, the buyer bears the risk of loss. In a destination contract, the risk of loss passes to the buyer when the goods are delivered to the buyer at the location specified in the contract. If the goods are lost, stolen, or destroyed in transit as before, the seller bears the risk of loss.
The UCC also addresses risk of loss when the goods are not moved. In these cases, the buyer picks up the goods from the seller. When the seller keeps the goods for pickup, it's important to know whether or not the seller is a merchant. If the seller is a merchant, risk of loss passes to the buyer when the buyer actually takes physical possession of the goods. If the seller is not a merchant, the risk of loss passes to the buyer upon tender of delivery. Tender of delivery occurs when the seller makes the goods available to the buyer and notifies the buyer that the goods are ready for pick up.
These rules may be modified if the contract is breached. For example, if the seller breaches by sending nonconforming goods, the risk of loss does not pass to the buyer when delivered to a carrier. As a result, if the goods are damaged en-route, it is the seller that must seek redress from the carrier.
This is a good time to clarify that risk of loss does not mean that a party is liable for the damage. Should you place goods with a carrier and they are damaged in transit, the carrier is going to bear responsibility and carry insurance to cover claims. Risk of loss determines whether the buyer or seller will have to file that claim with the carrier.
Performance under the UCC requires (1) that the seller delivers goods that measure up to the contract and (2) that the buyer pays for those goods. When one or both parties breach these duties, the UCC provides remedies. Underlying every UCC contract is the duty of good faith, meaning that the parties act honestly in the performance of the contract.
If the seller breaches the contract, the buyer has a number of options to seek redress. These involve:
The UCC also provides rights and remedies for sellers. These include:
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