Risk of loss is a term used in the
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior, with its precise definition a matter of longstanding debate. It has been variously described as a science and as the ar ...
of
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
s to determine which party should bear the burden of risk for damage occurring to goods after the sale has been completed, but before delivery has occurred. Such considerations generally come into play after the contract is formed but before buyer receives goods, something bad happens.
Under the
Uniform Commercial Code
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of uniform acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through U ...
(UCC), there are four risk of loss rules, in order of application:
# Agreement - the agreement of the parties controls
#
Breach - the breaching party is liable for any uninsured loss even though breach is unrelated to the problem. Hence, if the breach is the time of delivery, ''and'' the goods show up broken, then the breaching rule applies risk of loss on the seller.
# Delivery by
common carrier
A common carrier in common law countries (corresponding to a public carrier in some civil law (legal system), civil law systems,Encyclopædia Britannica CD 2000 "Civil-law public carrier" from "carriage of goods" usually called simply a ''carrier ...
other than by seller.
##Risk of loss shifts from seller to buyer at the time that seller completes its delivery obligations
##If it is a
destination contract (
FOB (buyer's city)), then risk of loss is on the seller.
##If it is a delivery contract (standard, or FOB (seller's city)), then the risk of loss is on the buyer.
# In cases not covered by the foregoing rules, if the seller is a merchant, then the risk of loss shifts to the buyer upon buyer's "receipt" of the goods. If the buyer never takes possession, then the seller still has the risk of loss.
In
bankruptcy law, the risk of loss rule under a
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
can be abrogated by a
secured interest.
[''In re H.S.A., II, Inc. (GMAC Business Credit, L.L.C. v. Ford Motor Co.)'', 271 B.R. 534, 47 UCC Rpt.Serv. 747 (Banktcy. E.D. Mich. 2002).]
References
Contract law
{{contract-law-stub