Risk of Loss: FOB Shipping & Destination. Shipment Versus Destination Contact. CPA Exam REG

In this video, I explain the delivery and risk of loss including FOB shipping, FOB destination, shipment contract and destination contract.
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The concept of "Delivery and Risk of Loss" is a crucial aspect of sales and contracts, particularly under the Uniform Commercial Code (UCC). It primarily concerns two main issues: the delivery of goods and the point at which the risk of loss shifts from the seller to the buyer. Let's break it down with different examples for clarity:
Basic Duty of the Seller: The seller must keep the goods that meet the contract's requirements and notify the buyer so they can take delivery. This is the general rule, though many contracts might specify different terms.
Example: A furniture maker must store a custom table until the customer is ready to collect it and must inform the customer when it is ready.
UCC Guidelines for Delivery and Risk of Loss: If the contract doesn't specify, the UCC rules on delivery location and timing apply. The risk of loss, meaning who suffers the loss if the goods are damaged or lost, typically shifts to the buyer once delivery occurs. If goods are damaged after this risk transfers, the buyer still owes the payment.
Example: If a bookshop delivers books to a school, and the books are damaged after delivery, the school is responsible for the loss and must still pay for the books.
Identification of Goods: Before the risk of loss can pass, the goods must be identified to the contract. This means they are designated as the specific goods for that buyer.
Example: A winery marks certain barrels of wine for a specific restaurant, identifying these barrels as the goods for that contract.
As Agreed by Parties: The primary rule is the agreement between the buyer and seller. If they decide when and where delivery occurs or when the risk of loss passes, their agreement is key.
Example: An online electronics store might agree with the buyer that the risk of loss passes when the courier delivers the items to the buyer's address.
In Absence of Specific Agreement:
Noncarrier Cases: This is when the buyer usually picks up the goods from the seller's business.
Example: Buying a TV from an electronics store and taking it home yourself.
Carrier Cases: This involves a third-party carrier to ship goods.
Example: Ordering a piece of art online and having it shipped via a courier service.
Risk of Loss in Noncarrier Cases:
If the seller is not a merchant, the risk of loss passes to the buyer once the seller offers the goods for delivery.
If the seller is a merchant, the risk of loss passes to the buyer when they actually take possession of the goods.
Example of Non-Merchant: A person selling their old piano to a neighbor. The risk of loss passes to the neighbor once the seller offers the piano for pickup.
Example of Merchant: Buying a laptop from a tech store. The risk passes to you when you take the laptop from the store.
Understanding these principles is crucial for both buyers and sellers to know their rights and responsibilities in a transaction.
In transactions involving a common carrier (like a shipping company or a postal service), the contracts are classified as either shipment contracts or destination contracts. This classification determines when the risk of loss passes from the seller to the buyer.
Shipment Contracts: In a shipment contract, the risk of loss passes to the buyer as soon as the goods are delivered to the carrier. The seller's responsibility is to get the goods to the carrier, and once that is done, any risk of damage or loss during transit is the buyer's responsibility.
Example: Imagine a company, Oceanic Electronics, agrees to sell and ship 50 laptops to a retailer, TechWorld. This is a shipment contract. Oceanic Electronics hands over the laptops to a shipping company to deliver to TechWorld. Once the shipping company takes possession of the laptops, TechWorld bears the risk of loss. If the laptops are damaged or lost in transit, TechWorld still has to pay Oceanic Electronics for them.
Destination Contracts: In these contracts, the risk of loss passes to the buyer only when the goods reach the specified destination and the seller tenders delivery there.
Example: Let's say Artisan Furniture agrees to sell and deliver a custom dining table to a customer's home. This is a destination contract. The risk of loss stays with Artisan Furniture until the table is delivered and tendered to the customer at their home. If the table gets damaged on the way, Artisan Furniture is responsible for the loss and must either replace the table or refund the customer.
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