Title to Goods & Risk of Loss: Breach

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From the course by University of Illinois at Urbana-Champaign

Corporate & Commercial Law I: Contracts & Employment Law

12 ratings

University of Illinois at Urbana-Champaign

Corporate & Commercial Law I: Contracts & Employment Law

12 ratings

This class deals with the business law topics that appear on the CPA exam: Agency, Contracts, Debtor-Creditor Relationships, Government Regulation of Business, and Business Organizations. Students will gain an understanding of how these areas of the law affect businesses and their operations, with an eye on preparation for the business law portions of the REG section of the CPA exam. By the end of the class, students will be able to identify the legal principles that govern various business situations and apply those principles to an issue to determine the outcome when the law is applied to the facts of a scenario.

From the lesson

Module 2: Special Rules for Sales Contracts

In this module, you will learn the special rules that apply to contracts for the sale of goods. A set of statutes, known as UCC Article 2, modifies the common law rules governing contract formation, and this module will detail those modifications. By the end of this module, you will be able to determine which contracts are governed by UCC Article 2 and how they differ from contracts that do not involve the sale of goods.

Title to Goods & Risk of Loss: Breach4:26

Meet the Instructors

Professor Michael R Fricke
Teaching Assistant Professor
Department of Business Administration

In this, the second of our two-part series

on Title to Goods and Risk of Loss,

we discuss when transfer of title occurs and when risk of

loss transfers from sellers to

buyers when one of those parties has breached the contract.

In the previous lesson we learned about transfer of title and

transfer of risk of loss for contracts from the sale of goods,

but we only discussed that in the context of each party doing what it was supposed to do.

Nobody had breached the contract.

But if one party does breach the contract

the rules about transfer of title and risk of loss change a little bit.

Actually, just the rules about risk of loss.

The first thing we need to learn in this lesson is

that transfer of title is not affected.

But if one party breaches the contract the transfer of the risk of loss is affected.

So, let's take separately the buyer and

the seller and what happens when each of them breach the contract.

So for a buyer,

how does a buyer breach a contract for the sale of goods?

Well, far and away,

the most common way is just to say,

"I'm not going to pay or I can't pay" or some

indication that they're not going to pay for the goods.

Now, when that happens the buyer

immediately obtains the risk of loss to the goods at the time they breached the contract.

Even if it would not have transferred it to them until some time later.

So for instance, suppose we have

a destination contract and the goods are on their way. They're being shipped.

Remember, in a destination contract the seller bears

the risk of loss until the goods get to the buyer.

But say the goods are on their way when the buyer

notifies the seller that it won't be paying for the goods.

At that moment even though the goods are still in transit,

the risk of loss of those goods shifts from the seller to the buyer.

So, if they're damaged or destroyed after

that time it's on the buyer and not on the seller.

This makes sense, right? If you breach the contract you bear the consequences of it.

We shouldn't hold a seller liable for

this loss when the other party has breached the contract.

Now on the flip side if the seller breaches the contract we have some different remedies.

So, how does a seller breach a contract?

Well, the most common way is to send nonconforming goods.

Obviously, they can breach a contract by not sending any goods at all,

but if they haven't sent any goods at all we're not super

concerned about risk of loss because the seller still has them.

So, when the seller sends goods but sends the wrong goods, what do we do?

Well, the rule here is that the seller keeps the risk of damage or loss to those goods

until the seller either cures the nonconformity or the buyer accepts the goods.

So, let's take an example.

Suppose we have a shipment contract calling for

a bicycle company to ship me 10 blue bikes using FedEx or whatever.

So, normally under this contract the moment they deposit the bikes

with FedEx title and risk of loss would both transfer to me the buyer.

But if instead of shipping 10 blue bikes they ship 10 red bikes,

those are nonconforming goods.

Therefore the seller keeps the risk of loss until they get to me,

and even once I get them,

they in my possession if they're damaged,

that still is the responsibility of the seller until one of two things happen.

Either I say, you know what?

I like these red bikes, I'll keep them, they're fine.

That's acceptance. At that point the risk of loss finally transfers to me.

Or the seller comes up with some form of cure.

Now, it's hard to turn a blue bike into a red bike,

but with some products if you ship the wrong products it may be possible to ship a fix to

those products or to show up and make

a modification to them so that they are now conforming.

Sellers have the opportunity to cure when they ship nonconforming goods.

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