Unit 7 Safe Assignment

Unit 7 Safe Assignment

Here is the fact pattern I want you to base your answer on:

  • You want the latest in mini laptop computers.
  • You find what you need by searching on the Internet.
  • The seller is in Taiwan.
  • You negotiate a deal with the seller over the Internet and buy the computer.
  • The seller agrees to ship you the computer by boat.

Answer this Question: (minimum 200 words; any format)

What terms (words) would you insist be included in the Sales Contract so you would not bear the Risk of Loss?

Explain in detail why you use specific words and terms (i.e. compare and contrast).

Use the following to guide you:

  • My Lecture
  • “Risk of Loss” (Chapter 19, esp. pp. 572 – 575)
  • “Risk of Loss in International Sales”

Lecture Focus on: “Risk of Loss” The Overall Framework Our main focus this Unit will be on the concept of “Risk of Loss”. Note that we are now dealing with the UCC. The Sale of Goods involves a transfer of ownership. The overriding question in most of the legal cases in this area involves when ownership was transferred, because it is the owner that bears the risk of loss if the gods are lost, stolen, destroyed etc. Title When the law talks about ownership the term “Title” is used, as in: “ who holds title to these goods?” Goods are considered to be “ personal property” (as opposed to “real property” which is land, buildings, and fixtures) that is tangible (something you can touch). The main issue here is “Passage of Title”. Page 536 of the Text list situations when title “passes”; that is, when the buyer becomes the owner and, as a result, bears the “risk of loss”. Risk of Loss Passage of Title depends upon the terms of the Contract for the sale of the goods. Our Text (pages 542 – 543) explains various commonly used terms that are put into Contracts such as FOB; FAS; CIF; C & F Each should be reviewed with risk of loss in mind. Each lists circumstances for the point at which the risk of loss or damage to gods identified to a contract passes to the buyer. “Identified to a contract” means the goods have been separated from a larger group or picked out specifically for this transaction. The Windows, Inc. v. Jordan Panel Systems Corp. case (link to this Case is in the Unit) provides an example of the risk borne by a buyer in a shipment contract. End of Lecture

Risk of Loss (pg 572-575)

Apply the Code’s rules concerning risk of loss to determine who had the risk of loss in a given transaction where the goods that were the subject of a contract were lost or destroyed before the buyer took possession.

The transportation of goods from sellers to buyers can be a risky business. The carrier of the goods may lose, damage, or destroy them; floods, hurricanes, and other natural catastrophes may take their toll; thieves may steal all or part of the goods. If neither party is at fault for the loss, who should bear the risk? If the buyer has the risk when the goods are damaged or lost, the buyer is liable for the contract price. If the seller has the risk, he is liable for damages unless substitute performance can be tendered.

The common law placed the risk on the party who had technical title at the time of the loss. The Code rejects this approach and provides specific rules governing risk of loss that are designed to provide certainty and to place the risk on the party best able to protect against loss and most likely to be insured against it. Risk of loss under the Code depends on the terms of the parties’ agreement, on the moment the loss occurs, and on whether one of the parties was in breach of contract when the loss occurred.

Terms of the Agreement The contracting parties, subject to the rule of good faith, may specify who has the risk of loss in their agreement [2–509(4)]. This they may do directly or by using certain commonly accepted shipping terms in their contract. In addition, the Code has certain general rules on risk of loss that amplify specific


shipping terms and control risk of loss in cases where specific terms are not used [2–509].

Shipment Contracts If the contract requires the seller to ship the goods by carrier but does not require their delivery to a specific destination, the risk passes to the buyer when the seller delivers the goods to the carrier [2–509(1)(a)]. Shipment contracts are considered to be the normal contract where the seller is required to send goods to the buyer but is not required to guarantee delivery at a particular location.

The following are commonly used shipping terms that create shipment contracts:

1. FOB (free on board) point of origin. This term calls for the seller to deliver the goods free of expense and at the seller’s risk at the place designated. For example, a contract between a seller located in Chicago and a buyer in New York calls for delivery FOB Chicago. The seller must deliver the goods at his expense and at his risk to a carrier in the place designated in the contract—namely, Chicago—and arrange for their carriage. Because the shipment term in this example is FOB Chicago, the seller bears the risk and expense of delivering the goods to the carrier, but the seller is not responsible for delivering the goods to a specific destination. If the term is “FOB vessel, car, or other vehicle,” the seller must load the goods on board at his own risk and expense [2–319(1)].

2. FAS (free alongside ship). This term is commonly used in maritime contracts and is normally accompanied by the name of a specific vessel and port—for example, “FAS Calgary [the ship], Chicago Port Authority.” The seller must deliver the goods alongside the vessel Calgary at the Chicago Port Authority at his own risk and expense [2–319(2)].

3. CIF (cost, insurance, and freight). This term means that the price of the goods includes the cost of shipping and insuring them. The seller bears this expense and the risk of loading the goods [2–320].

4. C & F. This term is the same as CIF, except that the seller is not obligated to insure the goods [2–320].

Destination Contracts If the contract requires the seller to deliver the goods to a specific destination, the seller bears the risk and expense of delivery to that destination [2–509(1)(b)]. The following are commonly used shipping terms that create destination contracts:

1. FOB destination. An FOB term coupled with the place of destination of the goods puts the expense and risk of delivering the goods to that destination on the seller [2–319(1)(b)]. For example, a contract between a seller in Chicago and a buyer in Phoenix might call for shipment FOB Phoenix. The seller must ship the goods to Phoenix at her own expense, and she also retains the risk of delivery of the goods to Phoenix.

2. Ex-ship. This term does not specify a particular ship, but it places the expense and risk on the seller until the goods are unloaded from whatever ship is used [2–322].

3. No arrival, no sale. This term places the expense and risk during shipment on the seller. If the goods fail to arrive through no fault of the seller, the seller has no further liability to the buyer [2–324].

For example, a Chicago-based seller contracts to sell a quantity of Weber grills to a buyer FOB Phoenix, the buyer’s place of business. The grills are destroyed en route when the truck carrying the grills is involved in an accident. The risk of the loss of the grills is on the seller, and the buyer is not obligated to pay for them. The seller may have the right to recover from the trucking company, but between the seller and the buyer, the seller has the risk of loss. If the contract had called for delivery FOB the seller’s manufacturing plant, then the risk of loss would have been on the buyer. The buyer would have had to pay for the grills and then pursue any claims that he had against the trucking company.

Goods in the Possession of Third Parties

If the goods are in the possession of a third-party bailee (like a carrier or warehouse) and are to be delivered without being moved, the risk of loss passes to the buyer upon delivery to him of a negotiable document of title for the goods; if no negotiable document of title has been used, the risk of loss passes when the bailee indicates to the buyer that the buyer has the right to the possession of the goods [2–509(2)]. For example, if Farmer sells Miller a quantity of grain currently stored at Grain Elevator, the risk of loss of the grain will shift from Farmer to Miller (1) when a negotiable warehouse receipt for the grain is delivered to Miller or (2) when Grain Elevator notifies Miller that it is holding the grain for Miller.

Risk Generally If none of the special rules that have just been discussed applies, the risk passes to the buyer on receipt of the goods if the seller is a merchant. If the seller is not a merchant, the risk passes to the buyer when the seller tenders (offers) delivery of the goods [2–509(3)]. For example, Frank offers to sell Susan a car, and Susan sends an e-mail accepting Frank’s offer. When he receives the e-mail, Frank calls Susan and tells her she can “pick up the car any time.” That night, the car is destroyed when a tree falls on it during a storm. If Frank is a used-car salesman, he must bear the loss. If Frank is an accountant, Susan must bear the loss.

The case that follows, Capshaw v. Hickman, illustrates another critical issue—that is, whether the seller in fact tendered delivery to the buyer.


Capshaw v. Hickman 64 UCC Rep. 2d 543 (Ohio Ct. App. 2007)

Charles Capshaw entered into a written contract with Rachel Hickman to purchase Hickman’s 1996 Honda Civic EX for $5,025. The contract provided, among other things, that “the title will be surrendered upon the new owner’s check clearing.” Capshaw made a down payment of $80 in cash and gave Hickman a personal check for the balance. She provided Capshaw with the keys to the vehicle and also complied with his request to sign the certificate of title over to his father and placed the certificate in the vehicle’s glovebox. They agreed the vehicle was to remain parked in Hickman’s driveway until the check cleared.

Unfortunately, before Hickman was notified by her bank that the check had cleared, a hailstorm heavily damaged the vehicle. Due to the damage, Capshaw decided that he no longer wanted the vehicle and asked Hickman to return his money. Hickman refused, believing that the transaction was complete and that the vehicle belonged to Capshaw. She also requested that it be removed from her driveway. Capshaw brought suit against Hickman, alleging, among other things, conversion, breach of contract, and “quasi-contract and unjust enrichment—promissory estoppel.” Capshaw contended that the risk of loss remained with Hickman until the check cleared; because it had not cleared at the time the hail damaged the car, Hickman sustained the loss. Hickman maintained that the risk of loss for a nonmerchant seller like her passes to the buyer after the seller tenders delivery to the buyer.

The trial court found that the parties agreed the transfer of title and delivery of the vehicle would occur only after the successful transfer of funds. Because neither had occurred at the time of the hailstorm, the court concluded that the risk of loss remained with the seller. Hickman appealed arguing that the risk of loss in this instance should depend on whether there had been a tender of delivery and not on whether or not title had passed.

Bryant, Judge

Where a motor vehicle identified to a purchase contract is damaged, lost or destroyed prior to the issuance of a certificate of title in the buyer’s name, the risk of such damage, loss or destruction lies with either the seller or buyer as determined under section 1302.53. In relevant part section 1302.53 states “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.” The parties here agree that defendant is not a merchant. Thus, if Hickman tendered delivery, Capshaw bore the risk of loss; if Hickman did not tender delivery, the risk of loss remained with her.

Although the trial court concluded Hickman did not tender delivery, it incorrectly focused on ownership and legal title in reaching its decision. Title is no longer of any importance in determining whether a buyer or seller bears the risk of loss. Rather, tender of delivery “requires that the seller put and hold conforming goods at the buyer’s deposition and give the buyer any notification reasonably necessary to enable him to take delivery.” In this context, disposition means “doing with as one wishes: discretionary control.”

When tendering delivery, the seller must not limit the buyer’s disposition of the goods. When, however, limitations upon a buyer’s disposition of personal property do not result from the seller’s activity, then the requirements for tender of delivery are met.

Hickman contends she fulfilled the statutory requirements for tendering delivery by turning over the keys to the vehicle and, after signing the certificate of title over to Capshaw’s father per Capshaw’s request, by placing the certificate of title in the vehicle’s glove box. She asserts Capshaw chose to leave the vehicle at her residence in order to induce her to take a personal check. Hickman argues that “for all intents and purposes” Capshaw “possessed and controlled the vehicle when the keys were given to him.” She thus claims not only that she tendered delivery of the vehicle, but that Capshaw was in actual possession of the vehicle at the time it was damaged. Describing the fact that the vehicle remained parked in her driveway as a “red herring,” Hickman asserts she could have done “absolutely nothing else” to complete her performance with respect to the physical delivery of the vehicle.

The vehicle’s continued presence in Hickman’s driveway is not a red herring. Under Ohio law, a purchaser’s performance under a contract generally is completed when the purchaser tenders the check. Section 1302.55(B) states “tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.” Thus upon tendering the check, Capshaw ordinarily would be free to drive away in the vehicle. Understanding why the car remained in the driveway is central to determining whether Hickman tendered delivery.

The difficulty in applying the law to this case lies in determining why the car remained on Hickman’s property as the pleadings do not disclose that information. If Capshaw paid by check but Hickman refused to consider payment made until the check cleared, then Capshaw was not free to remove the vehicle from Hickman’s driveway until the check cleared. Under those circumstances Hickman did not tender delivery under section 1302.47, as Capshaw lacked the discretionary control over the vehicle. As a result, the risk of loss would not have passed to Capshaw.

By contrast, if to induce Hickman to accept payment by check Capshaw offered to allow the vehicle to remain on Hickman’s driveway until the check cleared, then the risk of loss passed to Capshaw who in his discretion volunteered to leave the car on

Risk of Loss in International Sales

Risk of loss is an important concept in the sale of goods—and takes on additional significance in international sales because of the substantial distances and multiple modes of transportation that may be involved. Between the time a contract is formed and the time the obligations of the parties are completed, the goods that are the subject of the contract may be lost, damaged, or stolen. Both the UCC and the Convention on Contracts for International Sale of Goods (CISG) explicitly address risk of loss in four different situations: (1) where goods are being held by the seller, (2) where goods are being held by a third person or bailee, (3) where goods are in transit, and (4) where goods are in the control of the buyer. Moreover, the CISG deals with risk of loss where goods have been sold or resold while in transit. Under both the UCC and the CISG, breach by a party may alter the basic rules regarding risk of loss.

Before discussing the CISG provisions, it is important to note that the definitions of some terms in the UCC differ from the meaning those terms may have in international trade. The International Chamber of Commerce has compiled a list of widely accepted international shipping terms in a document known as “INCOTERMS.” The most recent version, INCOTERMS 2000, includes 13 different terms that are placed in four different categories, depending on the seller’s responsibilities concerning the goods.

Under the first category (known as Group “E”), the seller’s obligation is only to make the goods available to the buyer at the seller’s place of business. This is referred to as an EXW, or EX Works, term. Risk passes from the seller to the buyer when


the goods are placed at the buyer’s disposal. Under the second category (known as Group “F”), the seller is required to deliver the goods to a carrier designated by the buyer. This category includes terms like “F.O.B.” (Free on Board) and “F.A.S.” (Free Along Side Ship). Passage of risk varies with the term.

Terms in the third category (Group “C”) require the seller to contract for carriage of the goods but not to assume the risk of loss after shipment. Terms in the fourth category (Group “D”) impose on the seller the costs and risks of bringing the goods to the country of destination. Under one such term, “D.A.F.” (Delivered at Frontier), the seller must pay for the carriage of goods to some defined point after that where goods have been cleared for export in the country of origin but before the customs boundary of another identified, usually adjoining, country.

The CISG, like the UCC, provides a set of default rules governing risk of loss where the parties do not explicitly address risk of loss in their contract. However, it also permits parties to contract out of those rules. Parties to international agreements commonly utilize the INCOTERMS and incorporate them into contracts otherwise governed by the CISG. Thus, the INCOTERMS are used to define when risk of loss passes, and CISG, in turn, provides the legal consequences of the passage of the risk of loss in a particular case.