Business Law Chapter 23 Homework Possession Bailee where Bailee Has Possession The Goods

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B. RISK OF LOSS

Losses are borne by either the seller, the buyer or both when goods have

been damaged, destroyed, or lost without the fault of either the seller or the

buyer. If the loss is placed on the buyer, he is under a duty to pay the price

for the goods even though they were damaged or he never received them. If

placed on the seller, she has no right to recover the purchase price from the

buyer, although she does have a right to the return of the damaged goods.

CISG — Loss or damage after the risk of loss has passed to the buyer does

not excuse the buyer from paying for the goods.

*** Chapter Outcome ***

Identify and explain the rules covering risk of loss in the absence of a breach,

and risk of loss when there is a breach.

Risk of Loss Where There Is a Breach

Where one party breaches the contract, the Code places the risk of loss on

the party who breaches the contract. If, however, the nonbreaching party is

in control of the goods, the Code places the risk of loss on him to the extent

of his insurance coverage. Except in a finance lease, risk of loss is

retained by the lessor and does not pass to the lessee. 2A–219(1). In a

finance lease, risk of loss passes to the lessee as discussed below

Breach by the Seller — The risk of loss is on the seller until the buyer has

accepted the goods or until the seller has remedied the defect. If the buyer

Risk of Loss in Absence of a Breach

Where there is no breach, the risk of loss may be allocated by the agreement

of the parties. If the parties have not otherwise agreed, the Code places the

risk of loss, for the most part, on the party who is more likely to have greater

control over the goods, is more likely to insure the goods, or is better able to

prevent the loss of the goods.

Agreement of the Parties — The parties, by agreement, may not only shift

the allocation of risk of loss but may also divide the risk between them.

Such an agreement is controlling.

NOTE: See textbook for a discussion of how consignment arrangements are treated by the Code.

Contracts Involving Carriers — Sales contracts frequently contain terms

which identify it as either a shipment contract or a destination contract.

Under a shipment contract, risk of loss passes to the buyer when the goods

are delivered to the common carrier. Under a destination contract, risk of

loss passes to the buyer when the goods are tendered to the buyer at the

named destination.

CASE 23-3

WINDOWS, INC. V. JORDAN PANEL SYSTEMS CORP.

United States Court of Appeals, Second Circuit, 1999

177 F.3d 114 http://scholar.google.com/scholar_case?

case=11386214941351710507&q=177+F.3D+114&hl=en&as_sdt=2,21

Leval, C. J.

This is an appeal by a buyer from a grant of summary judgment in favor of the seller

dismissing the buyer’s claim for incidental and consequential damages resulting from

damage suffered by the goods during shipment. The district court found that any negligence

that might have caused the damage was attributable to the carrier and not the seller. It

therefore concluded that the buyer’s claim for incidental and consequential damages was

barred by UCC §2–613, which precludes the award of such damages when the goods are

damaged “without fault of either party.” We affirm, but in reliance on different provisions of

the Code.

Windows, Inc. (“Windows” or “the seller”) is a fabricator and seller of windows, based

in South Dakota. Jordan Systems, Inc. (“Jordan” or “the buyer”) is a construction

shipment was damaged due to “load shift.” Jordan, seeking to stay on its contractor’s

schedule, directed its employees to disassemble the window frames in an effort to salvage as

much of the shipment as possible.

Jordan made a claim with Consolidated for damages it had sustained as a result of the

casualty, including labor costs from its salvage efforts and other costs from Jordan’s inability

to perform its own contractual obligations on schedule. Jordan also ordered a new shipment

from Windows, which was delivered without incident.

Jordan did not pay Windows for either the first shipment of damaged windows or the

* * *

Jordan seeks to recover incidental and consequential damages pursuant to [the] UCC.

Under that provision, Jordan’s entitlement to recover incidental and consequential damages

depends on whether those damages “result[ed] from the seller’s breach.” A destination

contract is covered by §2–503(3); it arises where “the seller is required to deliver at a

particular destination.” In contrast, a shipment contract arises where “the seller is required *

* * to send the goods to the buyer and the contract does not require him to deliver them at a

particular destination.” §2–504. Under a shipment contract, the seller must “put the goods in

the possession of such a carrier and make such a contract for their transportation as may be

reasonable having regard to the nature of the goods and other circumstances of the case.”

§2–504(a). * * *

Where the terms of an agreement are ambiguous, there is a strong presumption under the

UCC favoring shipment contracts. Unless the parties “expressly specify” that the contract

requires the seller to deliver to a particular destination, the contract is generally construed as

one for shipment. [Citations.]

Jordan’s confirmation of its purchase order, by letter to Windows dated September 22,

1993, provided, “All windows to be shipped properly crated/packaged/boxed suitable for

Under the terms of its contract, Windows thus satisfied its obligations to Jordan when it

put the goods, properly packaged, into the possession of the carrier for shipment. Upon

Windows’ proper delivery to the carrier, Jordan assumed the risk of loss, and cannot recover

incidental or consequential damages from the seller caused by the carrier’s negligence.

This allocation of risk is confirmed by the terms of [the] UCC §2–509(1)(a), entitled

“Risk of Loss in the Absence of Breach.” It provides that where the contract “does not

require [the seller] to deliver [the goods] at a particular destination, the risk of loss passes to

the buyer when the goods are duly delivered to the carrier.” UCC §2–509(1)(a). As noted

* * *

The judgment of the district court is affirmed.

Goods in Possession of Bailee

Where a bailee has possession of the goods, delivery can be made without

movement of the goods. The Code provides that the risk of loss will pass in

this situation: a) when the buyer receives the negotiable title document, and

b) when a non-negotiable title document is tendered to the buyer. If title

documents are not used, the risk passes when the seller tenders to the

buyer instructions directing the bailee to deliver or the bailee acknowledges

the buyer’s right to possession.

CISG — When a buyer is to take goods at a place other than the seller’s

business, risk of loss passes when the buyer knows that the goods are

available to the buyer at that place.

All Other Sales

If the contract is not a trial sale, does not require delivery by a carrier, and

the goods are not possessed by a bailee, risk of loss will depend on the

status of the parties. Where the seller is a merchant, the buyer assumes the

risk after receiving the goods. If the seller is a nonmerchant, the risk shifts

when the goods are tendered.

CASE 23-4

MARTIN V. MELLAND’S INC.

Supreme Court of North Dakota, 1979

283 N.W.2d 76

http://scholar.google.com/scholar_case?case=283656012940553957&hl=en&as_sdt=2&as_vis=11&oi=scholarr

Erickstad, C. J.

The narrow issue on this appeal is who should bear the loss of a truck and an attached

haystack mover that was destroyed by fire while in the possession of the plaintiff, Israel

Martin (Martin), but after certificate of title had been delivered to the defendant, Melland’s

Inc. (Melland’s). The destroyed haymoving unit was to be used as a trade-in for a new

haymoving unit that Martin ultimately purchased from Melland’s. Martin appeals from a

On June 11, 1974, Martin entered into a written agreement with Melland’s, a farm

implement dealer, to purchase a truck and attached haystack mover for the total purchase

price of $35,389. Martin was given a trade-in allowance of $17,389 on his old unit, leaving a

balance owing of $18,000 plus sales tax of $720 or a total balance of $18,720. The

agreement provided that Martin “mail or bring title” to the old unit to Melland’s “this week.”

Martin mailed the certificate of title to Melland’s pursuant to the agreement, but he was

Fire destroyed the truck and the haymoving unit in early August, 1974, while Martin was

moving hay. The parties did not have any agreement regarding insurance or risk of loss on

the unit and Martin’s insurance on the trade-in unit had lapsed. Melland’s refused Martin’s

demand for his new unit and Martin brought this suit. * * *

The district court found “that although the Plaintiff [Martin] executed the title to the * *

* [haymoving unit], he did not relinquish possession of the same and therefore the Plaintiff

No longer is the question of title of any importance in determining whether a buyer or

seller bears the risk of loss. [Citation.]

* * *

Thus, the question in this case is not answered by a determination of the location of title,

but by the risk of loss provisions in [UCC §2–509]. Before addressing the risk of loss

question in conjunction with [UCC §2–509], it is necessary to determine the posture of the

parties with regard to the trade-in unit, i.e. who is the buyer and the seller and how are the

responsibilities allocated. It is clear that a barter or trade-in is considered a sale and is

therefore subject to the Uniform Commercial Code. [Citations.] It is also clear that the party

* * *

The courts that have addressed this issue have agreed with White and Summers.

[Citations.]

It is undisputed that the contract did not require or authorize shipment by carrier

pursuant to Section [2–509(1)]; therefore, the residue section, subsection 3, is applicable:

In any case not within subsection 1 or 2, the risk of loss passes to the buyer on his

receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on

tender of delivery.

Martin admits that he is not a merchant; therefore, it is necessary to determine if Martin

tendered delivery of the trade-in unit to Melland’s. * * *

*** Chapter Outcome ***

Explain how bulk transfers concern creditors and how the Uniform Commercial Code

attempts to regulate such transfers.

C. SALES OF GOODS IN BULK

Bulk transfers occur where the entire or a major portion of inventory of a

Article 6

Requirements – The Code provides that a bulk transfer of assets is

ineffective against any creditor of the transferor, unless the following four

requirements are met:

1. The transferor furnishes to the transferee a sworn list of his existing

creditors

2. The transferor and transferee prepare a schedule or list of the

property being transferred.

3. The transferee preserves the list of creditors and schedule of property

for six months and permits inspection by any creditor.

4. The transferee gives notice of the proposed transfer in bulk to each

creditor at least ten days before the transferee takes possession of the

goods or makes payment for them.

If all of the above steps are taken, the transfer in bulk complies with the

statute, and the transferee acquires the goods free of claims of the

transferor’s creditors.

NOTE: See Figure 23–5: Passage of Risk of Loss in Absence of Breach

Failure to Comply – Should a bulk transfer fail to comply with the

requirements of Article 6, the goods in the transferee’s possession continue

to be subject to the claims of unpaid creditors of the transferor.

Revised Article 6

Revised Article 6 was promulgated in response to the complaint that,

compliance with the existing Article is time-consuming and expensive and

the fact that it applies to transferors even in the absence of evidence of

wrongdoing. The major changes in revised Article 6 include the following:

1. The buyer is subject to the Article only when he has notice, or should

have had notice, that the seller will not continue to operate the same

or a similar type of business

2. When the seller is indebted to two hundred or more persons, the

buyer may give notice by #ling and need not send individual notices.