Risk of Loss Under the Uniform Commercial Code

Assess who bears the risk of loss in various scenarios under the Uniform Commercial Code (UCC).

Explain how the contract terms such as FOB shipping point and FOB destination affect the risks for each party.

Propose best practices related to the drafting, interpretation, and enforcement of contracts.

Risk of Loss Under the Uniform Commercial Code (UCC)

Under the UCC, risk of loss determines which party bears responsibility when goods are damaged, lost, or destroyed during a transaction. The allocation of risk depends on factors such as contract terms, whether the seller is a merchant, and whether the goods are shipped.

Scenarios Under the UCC

1. Goods Without Shipment (Seller is a Merchant)

   • If the seller is a merchant, the risk of loss remains with the seller until the buyer takes physical possession of the goods.
   • If the seller is not a merchant, the risk transfers to the buyer once the seller has tendered delivery (i.e., made the goods available).

2. Shipment Contracts

   • If the contract requires shipment but does not specify delivery at a destination, the risk of loss transfers to the buyer when the seller delivers the goods to the carrier.

3. Destination Contracts

   • The seller retains the risk of loss until the goods arrive at the buyer’s specified destination.

4. Goods Identified to the Contract but Not Yet Delivered

   • If the goods are identified in the contract but are damaged before delivery and without fault of either party, UCC § 2-613 states that the contract is voided if the goods are totally destroyed. If partially destroyed, the buyer may accept them at a reduced price or cancel the contract.

5. Breach of Contract

   • If the seller breaches (e.g., delivering defective goods), the seller retains the risk of loss until the defect is cured or the buyer accepts the goods.
   • If the buyer breaches (e.g., wrongfully rejecting conforming goods), the risk of loss shifts to the buyer to the extent the seller lacks insurance coverage.

Impact of FOB Terms on Risk of Loss

“FOB” (Free on Board) terms dictate when the risk of loss transfers from the seller to the buyer:

1. FOB Shipping Point (or FOB Seller’s Location)

   • Risk of loss transfers to the buyer once the seller delivers the goods to the carrier.
   • The buyer is responsible for transportation costs and insurance.
   • The seller is not liable for damage once the goods leave its premises.

2. FOB Destination (or FOB Buyer’s Location)

   • The seller retains the risk of loss until the goods reach the buyer’s specified location.
   • The seller is responsible for transportation costs.
   • If the goods are damaged during transit, the seller must bear the loss unless otherwise specified.

Best Practices for Contract Drafting, Interpretation, and Enforcement

1. Clearly Define Shipping and Delivery Terms

   • Specify whether the contract is FOB Shipping Point or FOB Destination to avoid disputes over risk of loss.
   • Include insurance requirements if necessary.

2. Explicitly State When Title and Risk of Loss Transfer

   • Avoid relying solely on UCC default rules.
   • Specify in the contract when and how risk of loss transfers.

3. Use Well-Defined Terms for Breach and Remedies

   • Outline the responsibilities of each party in case of damaged goods.
   • Include clauses for return, refund, and replacement procedures.

4. Ensure Proper Documentation and Inspection Rights

   • Require inspection rights upon delivery.
   • Use Bill of Lading or Delivery Confirmation documents to verify receipt of goods.

5. Consider Insurance Requirements

   • Mandate that the responsible party (buyer or seller) must obtain adequate insurance coverage.

6. Ensure Compliance with UCC and Governing Laws

   • Clearly reference applicable UCC provisions.
   • Address force majeure (unforeseen events like natural disasters) to allocate risk fairly.

By implementing these best practices, businesses can minimize disputes and ensure smooth transactions under the UCC.