Risk of loss concerns the issue of who must pay when the subject of the contract is destroyed or lost and the contract does not spell out who bears the loss in such a situation. The first important point to realize about risk of loss is that the Code abandons any notion of determining "title" to the good at the time of loss. The common law was terribly interested in "title"; thus, if it could be shown that title had passed, the inquiry was finished. However, it became something of a joke in legal circles of long ago that only a handful of people knew the complex rules of title in cases of loss, and these handful did not know each other [I never said that lawyers were funny]. In any case, the Code wants to take the issue of loss out of the "property law" context and put it in the "contract law" context. Thus, if the parties contracted for risk of loss, it will be honored; if they did not, sections 2-509 and 2-510 apply. Comment 1 explains this.
I then gave an outline of how to walk through the various provisions of 2-509 and 2-510. I replicate it here.
I. Risk of Loss when NO Breach of Contract (2-509)
Comment 3 is helpful in spelling out some of the difference betwen these two alternatives. "Whether the contract involves delivery at th eseller's place of business or at the situs of the goods, a merchant seller cannot transfer risk of loss and it remains upon him until actual receipt by the buyer even though full payment has been made and the buyer has been notified that the goods are at his disposal."
B. When dealings are with a Carrier (2-509(1)). A carrier is a truck, a train, or some mode of transportation that has a contract to deliver the goods. This is when goods move.
1. If it is a "shipment contract" ("FOB place of shipment"). The default rule, risk passes to the seller when the goods are delivered to the carrier
2. If it is a "destination contract" ("FOB place of destination"). Risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery (23-509(1)(b)).
Cases under this section have emphasized that the language to make a "destination contract" must be express. Use of terms such as "FOB" or "Risk of Loss" with reference to the destination or the risk-bearing party necessary for a court to apply other than the default rule.
C. When dealings are with a Bailee (2-509(2)). A bailee is usually a warehouse, not controlled by either of the two parties, which holds the goods by contract. This is when goods stay put. The rules on risk of loss with bailees are complex and would take us into negotiable instruments and bills of lading and other things we do not have time to consider. It is just enough to know that this section exists for our purposes.
II. Risk of Loss when Contract has been Breached (2-510).
This section gives three instances in which breach affects the risk of loss. I will summarize the Code sections.
A. Risk of loss remains on Seller when the tender gives a right of rejection to the Buyer. Note that in order to understand the effect of this section, we need to direct ourselves back to the 600 series on what constitutes a sufficient ground for rejection of a contract. Two important sections are the perfect tender rule of 2-601, which has been relaxed in some instances, and 2-612 on installment sales, where the issue of substantial impairment, rather than perfect tender, is in view.
B. In the case of revocation of acceptance, the risk will revert to the seller to the extent that the buyer has any deficiency in effective insurance coverage. The subject of insurance is important to the consideration of risk of loss (see also Comment 3, second paragraph, to 2-509), and is usually taken as an indication of a person's sense of responsibility for the good.
C. Where the buyer repudiates the contract, the risk of loss would not normally pass to him or her. Yet, if the seller has identified the goods and the goods are conforming, the seller may transfer the risk of loss to the buyer to the extent that the seller lacks effective insurance coverage. In addition, the seller can only do this for a commercially reasonable time.
The first case assigned (Silver, p. 222), had to do with a plaintiff's purchase of custom furntirue from defendent. in February 1982 the furniture was ready for delivery. Plaintiff tendered payment in full and directed that one room (of two rooms) of furniture be shipped. In between the time of shipping of the two rooms of furniture, defendant's warehouse burned and the furniture was destroyed. The question for the court was who bore the risk of loss in this instance. As expected, the court directed us to 2-509(3) and emphasized that in the case of a merchant, the standard of actual receipt is crucial, even if payment has been made (p. 223). Defendant's attempt to redefine the issue into one of bailment was unavailing.
In the second case (Jakowski, p. 225), plaintiff purchased a 1980 Chevrolet Camaro and too it home but discovered that one of the coatings contracted for had not been applied. Plaintiff returned the car to the dealership for coating. The car was stolen during the time the car was being coated. The question at issue was who bore the risk of loss for the car. The court's analysis on page 226 shows the interrelationship of 2-509 and 2-510. The court concluded that the buyer never actually accepted the nonconforming auto, and therefore risk of loss had not passed to him.