Goods Damaged En Route: Who Is Responsible?
In our case study, Brian purchases a refrigerator from a retailer, Big Buy, which agrees to deliver it to Brian’s house. Before the truck is able to deliver, it is involved in a traffic accident and all contents, including Brian’s refrigerator, are destroyed. Who should bear the loss, Big Buy or Brian?
There are a number of legal guidelines that cover circumstances like these, albeit not very clearly. Although we cite the Uniform Commercial Code (UCC), it is interesting to note that Article 68 of the U.N. Convention addresses the issue of who bears the risk of loss of goods during transit in a simple point-to-point sale. The introduction of the widespread use of shipping containers and the “daisy chain” of shippers and handlers between seller and buyer introduce complications the Convention did not offer any firm guidance about, however, leaving it a grey area. The general rule is that the buyer bears the transit risk, because the seller will be at a distance from the damaged goods and the buyer will be in a better position to access the damage and issue a claim against the shipper (Grewal, 1991).
The UCC’s provisions are more detailed than the Convention’s when dealing with loss of goods during transit: § 2-510 states “Where […] delivery of goods so fails to conform to contract as to give a right of rejection, the risk of loss remains of the seller until cure or acceptance.” UCC § 2-509 and § 2-510 focus less on “property” concerns (who owns what when) and more on sales contracts themselves; it still presumes that the risk falls onto the buyer — when there has not been a breach by the seller (such as knowing selling damaged items) — due to the buyer’s proximity to the damaged goods, unless the sales contract between buyer and seller specifically designate the seller as responsible for damages occurred in transit. UCC § 2-501(1) asserts that the buyer acquires an “insurable interest” in the purchased goods even if the goods are non-conforming and the buyer intends to reject them on those grounds (Grewal, 1991). There are exceptions, however, and Brian’s case applies.
UCC § 2-613 states that when goods suffer damage between point A and point B, and the buyer has not yet been able to identify the state of those goods when the damage occurs, the buyer can insist on inspecting those goods and choose to consider the contract voided if the goods are non-complaint with reasonable standards, or work with the seller to settle upon an acceptable remedy, which may include a discount of the previously-agreed-upon cost to the buyer to cover the buyer’s presumed repair costs (if applicable) “but without further right against the seller,” meaning that the buyer can’t drag the seller into court and demand punitive damages for damaged goods, she or he can only ask for a refund (voiding the contract due to non-complaint goods) or an equitable replacement.
The problem is determining when the damage occurred (or dealing with hidden damage that the buyer could not be aware of immediately). Unlike under the Convention, which generally requires buyers to bear any loss, the UCC allows buyers to reject goods that do not pass muster. Sales contracts should include clear language that addresses the problem of damage in transit and clarifies which party bears the brunt of responsibility for those goods.
The method of delivery determines, to a great degree, when ownership of goods occurs. A shipment contract requires the seller to relinquish the goods to a middle-man carrier or shipper, and the ownership of those goods falls on the buyer at the point where they are shipped. In a delivery contract, the seller is responsible for the goods until they reach the buyer (or a third party designated by the buyer). In the latter case, the condition of those goods is the responsibility of the seller until the buyer or the buyer’s representative actually takes possession of what are assumed to be conforming goods (UCC § 2-401, § 2-503).
For our purposes, Brian and Big Buy have a destination contract, and probably a “sale or return” contract as well, as most big box retailers allow a buyer to return purchased items within a limited time period, but we don’t know that as fact from the details given. The right to identify (or inspect) purchased goods protects the buyer, as risk of loss cannot pass to the buyer until the buyer acknowledges receipt of conforming goods (§ 2-105(2) specifies that title can’t pass to buyer until buyer examines goods and accepts them, § 2-505(1) specifies when identification takes place).
UCC § 2-509(1)(a) assumes that buyer and seller have a shipment contract when it states that risk of loss mid-transit or shipment falls on the buyer, as long as the seller makes a good-faith and reasonable arrangement with a carrier that takes the nature of the goods into account (in other words, perishables would have to be placed in a refrigerated container, fragile breakables would have to be handled with due care to avoid damage), as long as the seller promptly provides the buyer with any documentation required to take possession of the goods, and as long as the seller promptly informs the buyer when goods are to be shipped (Oberman, 1997).
When type of contract is not specified or it is ambiguous, a shipment contract is assumed (Barnes, 2009, citing Windows, Inc. v. Jordan Panel Systems Corp., 177 F.3d 114 (2nd Cir. 1999)), and the buyer bears the brunt if goods in transit are damaged, but, according to Cornell University, Best Buy (we’ll assume Big Buy is a pseudonym) uses destination contracts (“all shipments are FOB (“free on board” or “freight on board” (UCC § 2-319)) destination, with freight pre-paid and added to the invoice”), so we can presume that our case study also refers to a situation covered by a destination contract (Benson, 2012).
If the contract is (as we are inferring) a destination contract, Big Buy needs to honor Brian’s purchase and replace the damaged refrigerator. Brian did not have the opportunity to examine the refrigerator and to accept or reject it as non-conforming (and a damaged appliance – whether fully destroyed or partially damaged — would certainly qualify). Big Buy’s responsibility does not lapse until Brian receives the item he purchased, whether or not a middle-man (or third-party bailee (Twomey, 2011) acting as carrier) fails to deliver the goods, and whether or not the bailee is at fault for that (such as when the bailee’s delivery truck is totaled in a traffic accident).
Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu
Benson, D. (Cornell University Contract Administrator). (2012). Best Buy. Retrieved from http://www.dfa.cornell.edu/supply/supplierlist/electronics/bestbuy.cfm
Barnes Jr, L. K. (2009, October). Determining Which Party Bears Risk of Loss for Shipments Governed by the Uniform Commercial Code. Retrieved from http://barnespc.com/news-risk-loss-shipments-governed-ucc.php
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Oberman, N. G. (1997, June). Transfer of risk from seller to buyer in international commercial contracts: A comparative analysis of risk allocation under the CISG, UCC and Incoterms. Retrieved from http://www.cisg.law.pace.edu/cisg/thesis/Oberman.html
Pellissippi State Community College. (n.d.). Title, Risk, & Insurable Interest (Originally published in Clarkson, Miller, Jetz, & Cross, West’s Business Law, 7th Edition, 1998). Retrieved from http://www.pstcc.edu/departments/lat/classes/2300/notes/chap19.htm
Grewal, S.S. (1991, November 1). Risk of Loss in Goods Sold during Transit: A Comparative Study of the U.N. Convention on Contracts for the International Sale of Goods, the U.C.C., and the British Sale of Goods Act (Originally published in 14 Loy. L.A. Int’l & Comp. L. Rev. 93 (1991). Retrieved from http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1239&context=ilr
The American Law Institute and the National Conference of Commissioners on Uniform State Laws. (2003, January 23). Uniform Commercial Code (Hosted by: Cornell University Law School, Legal Information Institute). Retrieved from http://www.law.cornell.edu/ucc/ucc.table.html