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14 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
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 THE 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 neither party breaches, 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 UCC uses the delivery terms in your contract 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.
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.
whole or in part.
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
TEACHING SUGGESTIONS
1. Students have difficulty understanding that title is relatively unimportant under the UCC. Before explaining
that title is important to individuals, but it is of only small importance in determining rights under a contract for
a sale of goods, ask students what they think title means and how they think it affects who bears the risk of a
loss of goods. Emphasize the importance that possession has in this context.
2. Despite the difficulty, students should be encouraged to learn the UCC rules governing identification, risk
of loss, and insurable interest. These rules are indispensable to anyone selling or buying goods under con-
tracts subject to the UCC, and this includes virtually everyone doing business. A businessperson may be at a
serious disadvantage if he or she is not aware of these rules when a competitor is, and it would do little good
to learn the rules after a problem has arisen.
3. Ask students to assume that they are buying produce for a supermarket. What different approaches
might they take to avoid having to pay for a delivery of wilted produce? There are several ways to
protect against the risk of having to pay for produce that has spoiled en route to you, the buyer. First of all,
you can obtain insurance that covers the goods from the moment title passes to you in a shipment contract
(when conforming goods are delivered to the carrier). That way, if something happens to the produce in
transit, you will be able to recover insurance proceeds. Second, you could include a provision in your contract
with the carrier stating that trucks that are not refrigerated must drive on a route specified by you (not through
Death Valley in the heat) and/or specifying that the carrier must obtain your approval before changing the
route for any reason (for instance, when a rock slide is blocking the usual route). You might also negotiate for
a destination contract instead of a shipment contract when you are purchasing produce that will spoil quickly,
such as lettuce or fruit.
4. Parties can agree to many things in their contracts, but some of the principles imposed by the UCC
cannot be avoided or changed. Parties cannot agree not to follow the duty of good faith and fair dealing, for
example. Many of the obligations apply only in the absence of an agreement to the contrary, however. That is,
if the contract is silent, the UCC rules apply. In this way, the UCC is comparable to the rules of a game—the
rules are the rules, unless the players agree to make their own.
Cyberlaw Link
Are the UCC’s principles regarding the topics discussed in this chapter changed when a contract
for a sale of goods is entered into in cyberspace? If so, in what ways?
DISCUSSION QUESTIONS
whole or in part.
14 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
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 THE 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 neither party breaches, 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 UCC uses the delivery terms in your contract 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.
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.
whole or in part.
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
TEACHING SUGGESTIONS
1. Students have difficulty understanding that title is relatively unimportant under the UCC. Before explaining
that title is important to individuals, but it is of only small importance in determining rights under a contract for
a sale of goods, ask students what they think title means and how they think it affects who bears the risk of a
loss of goods. Emphasize the importance that possession has in this context.
2. Despite the difficulty, students should be encouraged to learn the UCC rules governing identification, risk
of loss, and insurable interest. These rules are indispensable to anyone selling or buying goods under con-
tracts subject to the UCC, and this includes virtually everyone doing business. A businessperson may be at a
serious disadvantage if he or she is not aware of these rules when a competitor is, and it would do little good
to learn the rules after a problem has arisen.
3. Ask students to assume that they are buying produce for a supermarket. What different approaches
might they take to avoid having to pay for a delivery of wilted produce? There are several ways to
protect against the risk of having to pay for produce that has spoiled en route to you, the buyer. First of all,
you can obtain insurance that covers the goods from the moment title passes to you in a shipment contract
(when conforming goods are delivered to the carrier). That way, if something happens to the produce in
transit, you will be able to recover insurance proceeds. Second, you could include a provision in your contract
with the carrier stating that trucks that are not refrigerated must drive on a route specified by you (not through
Death Valley in the heat) and/or specifying that the carrier must obtain your approval before changing the
route for any reason (for instance, when a rock slide is blocking the usual route). You might also negotiate for
a destination contract instead of a shipment contract when you are purchasing produce that will spoil quickly,
such as lettuce or fruit.
4. Parties can agree to many things in their contracts, but some of the principles imposed by the UCC
cannot be avoided or changed. Parties cannot agree not to follow the duty of good faith and fair dealing, for
example. Many of the obligations apply only in the absence of an agreement to the contrary, however. That is,
if the contract is silent, the UCC rules apply. In this way, the UCC is comparable to the rules of a game—the
rules are the rules, unless the players agree to make their own.
Cyberlaw Link
Are the UCC’s principles regarding the topics discussed in this chapter changed when a contract
for a sale of goods is entered into in cyberspace? If so, in what ways?
DISCUSSION QUESTIONS
whole or in part.
