Goods Lost In Transit: Who Is Responsible?
In our case study, Good Buy Electronics has ordered 1,000 Blueberry cell phones. Foolishly, the contract between Good Buy and Blueberry Manufacturing Company fails to specify who will bear the risk of loss or the shipping terms. A common carrier is instructed to deliver the phones to Good Buy, but the goods are lost in transit. Who should bear the loss: Good Buy or Blueberry?
In a previous case study, Big Buy (presumed to be a pseudonym for Best Buy) sold an individual named Brian a refrigerator. The refrigerator was damaged en route before Brian could examine it and determine whether to accept or reject it as conforming to the standards Big Buy promised. The “real world” retailer, Best Buy, apparently has a destination contract with individuals and with businesses (like Cornell University) — it is not difficult to find examples of Best Buy’s terms online — and it is clearly assumed that the individuals and businesses will end up personally using the items sold to them (Benson, 2012). Thus we assumed that Big Buy might also have had a destination contract which, if true, would let Brian off the hook and not force him to pay for a non-functional appliance.
It matters when the title (or ownership) of the goods transfers from seller to buyer. UCC § 2-401(2) clarifies that the buyer takes ownership, or the title, once the seller successfully physically delivers the goods and the buyer deems them to be acceptable and as advertised. Brian would be within his rights (per UCC § 2-601 and 2A-509) to refuse to accept delivery of a damaged refrigerator, and thus its title would not be passed to him because the seller, Big Buy, did not place conforming goods into his care (UCC § 2-503). Traditionally conflicts over loss were covered by two vendors’ insurance carriers, but in our earlier case study, Brian, as a non-merchant, is unlikely to have insured a refrigerator he does not yet possess, and, in fact, the UCC has had to adjust its guidelines to cover cases where Internet-based merchants sell directly to consumers online because individuals (unlike fellow vendors) probably won’t be insured. The UCC now takes into account which party can be considered to have control over the goods, and the likelihood that one is more likely to have insurance than the other (Gardenswartz, 2001).
Here, however, we have one vendor selling items to another vendor, both of which can be assumed to have insurance in place to protect themselves from losses, but we are told that no contract (destination or otherwise) has been agreed upon. We thus have to establish which party was considered to be in control of the phones when they were lost. Even if we are to assume Good Buy is another pseudonym for Best Buy, the situation can not be assumed to fall under the same destination contract guidelines that Best Buy has for individual buyers who intend to make personal use of a purchased item (or to provide supplies for the person use of employees, as Cornell does).
There is also a difference between an item that is damaged, as Brian’s refrigerator was, and an entire shipment of Blueberry phones which have simply vanished into the ether and are presumed lost in transit. In one case, a physical object, albeit non-functional, can be examined and evaluated. In this case, the phones are misplaced, so no one can judge whether they conform to Good Buy’s standards and Blueberry’s advertising or not.
Normally UCC § 2-509 and § 2-510 dictate – if there is not a delivery contract specifying otherwise (see: UCC § 2-401, § 2-503) – that any risk for damaged goods is assumed by the buyer (as long as the goods were damaged in transit and not knowingly sold in a damaged state by the seller, which would be a breach of contract), because a buyer has the benefit of proximity to the items in question once they arrive at the buyer’s destination and s/he can examine them for conformity or damages more easily (Grewal, 1991). Per UCC § 2-509(1)(a), we would assume that Good Buy and Blueberry have a shipment contract by default, because no contract exists and when a contract is not specified, the presumption is that a shipment contract exists (Barnes, 2009). Good Buy and Blueberry failed to establish protocol that would clarify “risk of loss” guidelines (clarifying which party is required to pay if something goes wrong that is not the fault of either party). Establishing who is on the hook for a loss when selling or buying goods is vital because theft or loss of items (after the seller relinquishes possession of those goods to a carrier tasked with delivering the goods to a buyer) is not an unexpected or unprecedented possibility.
If Good Buy and Blueberry decide after the fact when, exactly, the title to the phones transferred from Blueberry to Good Buy, and thus which party should take the loss (assume it to be unlikely that either party is going to want to assume that financial burden), that simplifies the problem. As Good Buy and Blueberry (or their insurance companies) are both likely to contest who should suffer the loss, the UCC guidelines (§ 2-509) clarify that the title transfers to the buyer once the seller has reasonably fulfilled his or her obligations at his or her end of the sales contract. If there is no breach on the part of the seller, the risk of loss will then shift to the buyer once the goods are delivered; but if there has been a breach of contract (such as non-conforming goods), then UCC requires the breaching party (here, the seller) to bear responsibility (New Charter University, 2012), (Twomey, 2011). In short, UCC § 2-509(2) normally places the responsibility of loss in the hands of whichever party has legal ownership of the disputed goods at the time they were lost, but basic UCC guidelines clarify that risk of loss is not tied strictly to title ownership of goods. If two parties have a shipment contract (for example, the seller designating goods as “free on board” or F.O.B), risk of loss passes to the buyer once the seller has placed the goods into the care of a carrier. If two parties have a destination contract, risk of loss only passes to the buyer once goods have arrived at their intended destination (Klett, n.d.).
In John W. Jordan, II, v. Kentshire Galleries, Ltd., et al., Jordan appealed an earlier decision in favor of Kentshire Galleries. Jordan alleges that he purchased an antique from Kentshire and that it arrived damaged. This was a case where there was no clear contract drawn up and no language on any of the sales documents designating whether it was a shipping or destination contract; the latter would clearly hold Kentshire solely liable for the damaged furniture item. Initially the court had decided that Jordan and Kentshire had a shipping (shipment) contract, rather than a destination contract, and thus Kentshire was not responsible for the loss once the carrier picked up the antique furniture item. (The appellate court revised its opinion when Jordan clarified that the seller made him pay for insurance to cover the safe transport of the antique, that they recommended the art packer / carrier company that apparently caused the damage, and that the antique was not the age represented by Kentshire and also had inherent defects which made it susceptible to cracking and becoming damaged.) Had the antique been stolen or lost in transit, the court might still find for Jordan because the seller, Kentshire, required him to pay insurance to cover the shipping for the antique and urged him to select a specific art packer (which wound up damaging the antique). Jordan could be excused for reasonably believing that he would receive in good condition the item he bought from Kentshire. That the antique was also a “one of a kind” item may also have influenced the decision; Jordan could not exercise his right as a buyer to demand a replacement for a non-conforming item because there would likely be no comparable item available.
In Dana Debs v. Lady Rose Stores, Ltd., Dana Debs was a clothing manufacturer located in Long Island and Lady Rose was a vendor in New York City. Stuart Express Co. picked up 288 garments from Dana Debs, the seller, to deliver to Lady Rose Stores and eleven other vendor buyers. Stuart informed Debs that the entire shipment was lost, and its liability was limited to a dollar per item. Debs issued a bill for the retail cost for the lost garments to Lady Rose Stores, which disputed it and declined to pay. Both parties cited UCC 2-509, Dana Debs contending that the title for the garments passed to Lady Rose Stores once the carrier, Stuart, took possession of them. Lady Rose Stores contended that they had a destination contract, but the court disagreed, because Lady Rose Stores had designated Stuart to pick up the shipment and because Dana Debs had marked the bill of sale “Terms, FOB, NYC”. The court held that Lady Rose Stores, as buyer, assumed the risk of loss once Stuart picked up the goods, and held that they had to pay Dana Debs the requested amount in full.
Conversely, in Mark La Casse v. Stan Blaustein et al., the court found in favor of the buyer. La Casse was a student at the Massachusetts Institute of Technology (MIT) who helped defray tuition expenses by operating as a small-scale vendor, selling calculators to other students. He purchased 23 calculators for $2,744.00 from Stan Blaustein in New York City. As United Parcel Service was on strike, a Blaustein employee, Flor Perez, chose to use the United States Post Office as carrier and to pack the calculators into two separate boxes. La Casse sent Blaustein a $50.00 check to cover postage and insurance. Perez chose not to insure the packages for their full replacement value, which would have cost $16.26, and which would have been covered by the check La Casse sent Blaustein, and instead insured them for $200.00 total each, which cost $9.98. Perez also mistakenly sent one of the cartons to the wrong state. It was lost, and its replacement value was $1,663.00. La Casse did not receive a refund of the purchase price of the calculators nor the insurance payment for $200.00. Though the court found that La Casse’s instructions to use the USPS was insufficient to convert the sales contract into a destination contract as opposed to a shipping contract, and thus that he should be liable for the loss, the extenuating circumstances (Blaustein should not have insured the goods for less than their full replacement value, especially when La Casse had given Blaustein enough money to pay for full coverage, because normally the risk of shipment is placed on the purchaser and La Casse acted in good faith to mitigate that risk; as with Jordan v. Kentshire, the seller took it upon itself to interfere with the buyer’s insurance purchasing and carrier choice decisions) led the court to decide in favor of La Casse and Blaustein was ordered to refund La Casse’s money, plus interest, for the lost goods.
In our Good Buy / Blueberry case study, where there was no clarification in the sales contract determining who would bear the cost of potentially lost or damaged goods, no mitigating circumstances mentioned, and no defined shipping terms, Good Buy must bear the loss. The default contract, where none has been specified, is a shipping contract, and thus once Blueberry handed over the phones to a carrier, Good Buy was on the hook if something should go wrong, as it did.
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