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 the risk of loss. Risk should always be considered before a loss occurs, not after.

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). Here, the parties will need an express agreement as to the moment risk is to pass.

A major consideration relating to risk is when to insure goods against possible losses. Buyers and sellers should determine the point at which risk passes so that they can obtain insurance coverage to protect themselves against loss when they have an insurable interest in the goods.

The UCC uses a three-part checklist to determine risk of loss:

1. If the contract includes terms allocating the 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 the risk of loss.

3. If the contract makes no reference to risk and the goods are to be shipped or delivered, the risk of loss is borne by the party having control over the goods (delivery terms) if neither party breaches.
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 unlessthe 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, if goods are shipped “F.O.B. buyer’s business,” risk of loss does not pass to the buyer until there is a tender of delivery at the destination—the buyer’s business. 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
If you are a buyer of goods, it is important to remember that most sellers prefer “F.O.B. seller’s business” as a delivery term. Under this term, 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.

Question

1. Before entering into a contract, determine the importance of the risk of loss for a given sale.

2. If risk is extremely important, the contract should expressly state the moment the 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 included, delivery terms determine the passage of risk of loss.

4. When appropriate, either party or both parties should consider obtaining insurance.