Supply Chain Survival Series: Risk of Loss and Transfer of Title (Article #16)
In recent articles, we discussed rights and obligations arising from breaches of contract. However, at times goods may be damaged or destroyed during transit, without any fault on the part of the seller or the buyer. In this article we examine who bears the risk of damage to goods before they have been accepted by a buyer.
Risk of Loss in the Absence of Breach
Imagine you entered into a contract to buy widgets. The widgets are supposed to arrive by truck, but the truck gets into an accident and the widgets are destroyed. Who bears the loss when neither you nor the seller breached the contract?
The first step in answering this question is, as usual, to review what your contract says. While UCC § 2-509 establishes baseline rules for when risk of loss transitions from a seller to a buyer, § 2-509(4) permits parties to agree upon different terms in their contract. So, a contract might specifically state that risk of loss transfers to a buyer at the time the seller provides the goods to the buyer’s designated carrier. In that case, the UCC would honor the parties’ written agreement.
Often, however, contracts do not so clearly identify when risk of loss shifts, and in those cases the parties would look to an analysis of UCC § 2-509 to determine who bore the risk at the time of loss. Assuming the contract requires or authorizes the seller to ship the goods by carrier,1 we next need to determine whether the contract requires delivery at a particular destination.2 If the contract requires the seller to deliver goods to a particular destination (sometimes known as a “destination contract”), the seller bears the risk of loss until the goods are duly tendered to buyer by the carrier.3 If the contract does not require the seller to deliver goods to a particular destination (sometimes known as a “shipment contract”), the buyer assumes the risk when the goods are duly delivered to the carrier.4
It is important to note that merely stating that goods will be delivered to Buyer at a specific location is not generally enough to result in a delivery contract.5 There is a strong presumption favoring shipment contracts over destination contracts, unless the agreement includes “an explicit written understanding” that the seller is responsible for the delivery.6
If the contract does not authorize the seller to ship by carrier, and the contract does not contemplate a bailment, we next need to look at whether the seller is a merchant.7 In these situations, the UCC attributes the risk of loss to a merchant-seller until the buyer receives the goods.8 If the seller is not a merchant, the risk of loss passes to the buyer at the time the seller tenders the goods for delivery.9
Effect of Breach on Risk of Loss
Section 2-509 of the UCC addresses risk of loss when neither party has breached its contractual obligations. But what happens if one party breaches the agreement before the goods are lost? The UCC also has default risk of loss provisions for these scenarios—where one party may be at fault but for something other than the loss of the goods.
Let’s say you ordered red widgets but the seller mistakenly manufactured blue widgets. On the way to the buyer’s facility, however, the carrier’s truck that is transporting the widgets gets into an accident and the widgets are destroyed. Imagine that the contract is clearly a shipment contract, and so risk would ordinarily shift to the buyer when the goods are duly delivered to the carrier. In this case, where the seller breached by shipping non-conforming goods, UCC § 2-510 attributes the risk of loss to the seller. “Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection,” UCC § 2-510 provides that “the risk of their loss remains on the seller until cure or acceptance.”10 Similarly, if the buyer repudiates or breaches the contract before risk of loss has shifted to the buyer, the seller may (to the extent of any deficiency in its effective insurance coverage) treat the risk as resting on the buyer—at least “for a commercially reasonable time.”11
Title Transfer
In addition to knowing when the risk of loss transfers from one party to another, at times it also becomes important to know when title to the goods transfers from the seller to the buyer. Title transfer is addressed in UCC § 2-401.
The parties can generally agree in their contract on when title to the goods will pass to the buyer. However, there are some limitations contained in the UCC. One important limitation is that the parties typically cannot contract for the seller to retain title after the goods have been delivered. Section 2-401(1) of the UCC states that “Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.” So, a seller who is attempting to retain title in goods that it has sold to a buyer on credit may instead be left with a security interest in those goods (which could be subordinate to the buyer’s other secured creditors).
Another important limitation on the parties’ ability to contract for the transfer of title is that title cannot pass until the goods are “identified.”12 The parties may agree on how or when the goods are considered to have been identified, but absent such agreement any already existing and identified goods are considered identified when the contract is made, and any future goods (e.g. goods that have yet to be manufactured) are considered identified when they are “shipped, marked or otherwise designated by the seller as goods to which the contract refers.”13
For goods that have been identified, if the parties haven’t agreed otherwise title will pass at the time the seller completes its obligations for physical delivery of the goods.14 So, if the contract requires the seller to deliver the goods to a carrier, then title would pass upon delivery to the carrier. If, instead, the contract requires the seller to be responsible for the goods until final delivery at the buyer’s facility, title would pass to buyer at the time of that delivery.
If you have any specific questions on this article, please contact your Quarles attorney:
- Patrick Taylor: (414) 277-5523 / patrick.taylor@quarles.com
- Brandon Krajewski: (414) 277-5783 / brandon.krajewski@quarles.com
- Lauren Rosso: (414) 277-5242 / lauren.rosso@quarles.com
Quarles attorneys Hannah Schwartz and Elizabeth Lacey also contribute to the Supply Chain Survival Series.
Learn more and explore the full article series here.
END NOTES
1 See UCC § 2-509(1). This article focuses on situations where a carrier is utilized to transport the goods. Less common situations, such as bailments, are outside the scope of this article.
2 See UCC § 2-509(1)(a) and (b).
3 See UCC § 2-509(1)(b) (if the contract allows the seller to ship the goods by carrier but does not require the seller to deliver them at a particular destination “and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.”).
4 Id. at (1)(a).
5 See, e.g., Windows, Inc. v. Jordan Panel Sys. Corp., 177 F.3d 114 (2d Cir. 1999), finding a shipment contract despite language in the contract requiring the goods to be delivered to New York City.
6 Dana Debs, Inc. v. Lady Rose Stores, Inc., 319 N.Y.S.2d 111, 112 (Civ. Ct. 1970). See also Windows, Inc. 177 F.3d at 114.
7 Sellers who are in the business of selling the products at issue are typically considered merchants under the UCC. The UCC defines a merchant as someone “who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary....” UCC § 2-104(1).
8 UCC § 2-509(3).
9 Id. For information on what constitutes tender of delivery, see UCC § 2-503.
10 UCC 2-510(1).
11 Id. at (3).
12 UCC § 2-401(1).
13 UCC § 2-501(1). This section also contains some additional rules on the identification of crops and unborn animals, which are not discussed here.
14 UCC § 2-401(2).