Merchandise Risk of Loss

When two parties enter into a contract to buy and sell merchandise, they will usually determine who will bear the risk of loss if problems arise.

If the parties set no specific provisions, the Uniform Commercial Code (UCC) provides general rules for deciding who will bear the risk of loss.

How Do You Draft a Sale of Goods Contract?

When two parties wish to enter into a transaction to purchase and sell goods, they will generally form a sale of goods contract. The terms of the sale of goods contract will oversee their business relationship.

This document can also be used as a reference if any conflicts regarding the agreement arise between the two parties.

The following elements are generally required to form a legally enforceable and valid contract:

An offer must be made;
That offer must then be accepted;
There must be some form of consideration (e.g., something of value, which is usually money) present within the terms of the offer; and
The buyer and the seller must both agree to the final contract terms.

Article 2 of the Uniform Commercial Code (“UCC”) is the law answerable for regulating transactions to sell goods. Under the UCC, the term “goods” only refers to tangible and moveable objects, such as a piece of fruit. Therefore, Article 2 of the UCC will not apply to contracts for real estate transactions, leases, or service contracts.

What Should be Addressed in a Sale of Goods Contract?

A contract for the sale of goods can take on various forms. Parties can also negotiate what terms they want to include in the contract and how specific they want their contract to be.

There are some provisions that should always be included in a sale of goods contract, such as:

The names of the parties to an agreement;
Explicit descriptions of the goods being purchased;
The quantity of those goods;
The parties’ agreed-upon price of the transaction;
When, where, and how the goods will be delivered (e.g., at the buyer or seller’s place of business);
When, where, and how payment will take place;
Whether there are any warranties associated with the products;
When the agreement terminates; and
A general explanation of how to resolve future conflicts (e.g., through arbitration, mediation, litigation, etc.).

If the parties’ agreement is missing essential terms, such as the cost of goods or where the goods are supposed to be delivered, the UCC contains rules regarding “gap filler” provisions. Such provisions will address how courts should help the parties fill in these terms.

For example, suppose the place for delivery of the goods is not listed in the contract, and there is no other evidence available that shows the parties had a prior understanding about where the goods were supposed to be delivered. In that circumstance, the UCC delivers this basic rule:

When a contract is missing terms for where the goods should be delivered, the default place of delivery will be the seller’s place of business.

Do I Need to Put a Sale of Goods Contract in Writing?

While not every agreement must be in writing, it is typically a good idea to put any agreement in writing if a dispute arises. Having a written contract is useful for both parties.

Some types of contracts must be in writing according to the rules set out by the statute of frauds. One of those contracts involves the sale of goods contracts for specific dollar amounts.

In general, for a sale of goods contracts to be both lawfully enforceable and proper, it must meet the following statute of frauds requirements:

The contract must be in writing if it involves the sale of goods worth $500 or more;
The contract must be in writing if the transactions cannot be fully satisfied within one year (according to the terms laid out in the parties’ agreement);
A sale of goods contract must be in writing when it pertains to a lease for personal property that is worth $1,000 or more; and
When the agreement creates a security interest (e.g., loans), it must be in writing.

The above list only specifies the significant examples of when a sale of goods contract falls under the statute of frauds requirements. Individual states may have regulations that the parties will have to follow. This means that every state may have a different variation of the same law, so keep that in mind when creating a sale of goods contract.

What Is the Uniform Commercial Code?

The Uniform Commercial Code (UCC) is a model statute that has been adopted by every state in the United States in its totality (except for Louisiana).

The UCC is most often used to settle contract quarrels to sell goods.

What Parts of the UCC Govern the Sale of Goods?

When a sale of goods conflict occurs, the UCC is the body of law that governs. Nevertheless, a sale of goods dispute is governed only by Article 2 of the UCC. Every other article in the UCC oversees a different kind of transaction.

What Is Considered a Sale of Goods?

Something is sold if the ownership of the goods is passed from a seller to a buyer for a price. Getting a loan from the bank is not a sale because nothing passes from a seller to a buyer. Something is a good if the thing is tangible and movable.

Therefore, selling the rights to a trademark is not a sale of goods because the trademark is not tangible. The sale of your house is also not a sale of goods because the house is not movable. The UCC will oversee the dispute only if the “goods” criteria are satisfied.

What Are Some Examples of a Sale of Goods?

Here are some examples of a sale of goods:

Purchasing a television from an electronics store
Selling your used automobile to another person
A coffee business buying coffee grounds daily from a Colombian company

Shipment Contract

Suppose the contract does not require the seller to deliver the merchandise to a specified destination. The risk of loss passes to the buyer when the seller delivers the merchandise to a carrier. This type of contract is called a “shipment contract.”

The following is a list of standard terms that designate the contract as a shipment contract:

FOB (free on board): Also known as “point of origin.” This places the buyer’s risk of loss plus shipping and loading costs at the FOB point (usually the seller’s factory or warehouse).
FAS (free alongside ship): The seller must bear the risk of loss and costs for transferring the merchandise to a specified ship or port. The risk passes to the buyer once the merchandise reaches the dock alongside the ship.
CIF (cost, insurance, and freight): This suggests that the price for the merchandise includes the cost of shipping and insuring the merchandise to the buyer’s delivery point.
C & F (cost and freight): This suggests that the price for the merchandise includes the cost of shipping but not the cost of insuring the merchandise. The buyer bears the risk of not having their shipment insured.

Destination Contract

Suppose the contract does mandate the seller to deliver the merchandise to a specified destination. The risk of loss does not pass until the seller has delivered it to that destination. This kind of contract is called a “destination contract.”

How Can an Attorney Help Me?

Some experienced attorneys specialize in dealing only with the sale of merchandise disputes. If you are in a contract for the sale of merchandise, talk to a commercial lawyer to understand more about your rights and defenses.

If you are in a legal controversy over a sale of merchandise, contact an attorney to recover the losses you have suffered.

Merchandise Risk of Loss