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Part 2: Risk of Loss & Warranties

Assignment 6 — Commercial Law: UCC & Sales

Start Here: 5 Things You MUST Know

1

UCC separates risk of loss from title — do NOT just say "risk follows title"

2

Merchant seller retains risk until buyer actually receives the goods (no carrier involved)

3

Implied warranty of merchantability applies ONLY to sales by merchants

4

Selling goods "as is" disclaims ALL implied warranties

5

Express warranties cannot be disclaimed if they were part of the basis of the bargain

1. Risk of Loss Under the UCC

Critical Concept!

While title and risk of loss are related, the UCC deliberately separates risk of loss from title in many situations. Under UCC 2-509 and 2-510, risk depends on contract terms, shipping arrangements, and merchant status — not simply who holds title.

Key Rules for Risk of Loss

(a) Carrier Involved (Shipment Contract)

Risk passes to buyer when goods are delivered to the carrier. Example: FOB Shipping Point.

(b) Goods Held by a Bailee

Risk passes when the buyer receives the document of title (like a warehouse receipt).

(c) All Other Cases — Merchant Status Matters

Seller IS a Merchant

Risk does NOT pass until the buyer actually receives the goods

Seller is NOT a Merchant

Risk passes when the seller tenders delivery (makes goods available)

Real-World Scenario: Merchant Risk of Loss

The Setup: Wanda buys furniture from Selma's store. The furniture is marked with Wanda's name and set aside. Wanda is to pick it up within a week.

What Happens: A fire destroys Selma's store (NOT caused by Selma's negligence) and the furniture is destroyed before Wanda picks it up.

The Result: Title likely passed to Wanda (goods were identified and marked). BUT since Selma is a merchant, risk of loss does NOT pass until the buyer actually receives the goods. Wanda does NOT have to pay for the destroyed furniture.

2. Breach of Sales Contracts & Remedies

Revocation of Acceptance

A buyer can revoke acceptance of goods if there is a substantial nonconformity that impairs the value of the goods.

Three Excuses for Nonperformance

Loss of Identified Goods

The specific goods designated in the contract are destroyed without fault of either party.

Unavailable Shipping

The agreed transportation method becomes unavailable.

Failed Presupposed Condition

A basic assumption underlying the contract turns out to be false.

Seller's Remedies (Buyer Breaches)

  • Withhold delivery of goods
  • Stop delivery if goods are in transit and buyer is insolvent
  • Resell goods and recover damages
  • Recover the price if goods cannot be resold
  • Cancel the contract

Buyer's Remedies (Seller Breaches)

  • Reject nonconforming goods
  • Revoke acceptance for substantial nonconformity
  • Cover — buy substitutes elsewhere, recover price difference
  • Recover damages for non-delivery
  • Specific performance (force delivery of unique goods)
  • Deduct damages from price still owed

Real-World Scenario: Seller Stops Delivery

The Setup: A seller delivers goods to a carrier for shipment to a buyer.

What Happens: The seller discovers the buyer is insolvent (cannot pay debts).

The Result: The seller can stop delivery of the goods in transit. The seller can withhold the goods and demand cash payment before releasing them.

3. Express Warranties

Express Warranty

Any statement of fact, description, or sample/model that becomes the basis of the bargain creates an express warranty. The seller does NOT need to use the word "warranty" or "guarantee."

IS an Express Warranty

"This car gets 35 MPG." — A specific, measurable factual claim that becomes part of the deal.

NOT an Express Warranty (Puffery)

"This is the best car on the market!" — Just sales talk. No specific, verifiable claim.

Real-World Scenario: Breach of Express Warranty

The Setup: A salesperson tells a buyer, "This industrial generator will run continuously for 10,000 hours without maintenance."

What Happens: The generator breaks down after 2,000 hours.

The Result: The buyer can claim breach of express warranty. The specific claim about 10,000 hours became the basis of the bargain. The seller is liable even without the word "warranty."

4. Implied Warranties

Implied warranties exist automatically by operation of law — nobody has to say anything. They are built into every applicable sale unless properly disclaimed.

Implied Warranty of Merchantability

Only arises in sales by a merchant (someone who regularly deals in goods of that kind). Means the goods are fit for their ordinary purpose.

A toaster must toast. A car must drive. Shoes must be wearable. If a merchant sells goods that cannot do what they are supposed to do, the warranty is breached.

Critical Distinction!

The implied warranty of merchantability is implied in a sale by a MERCHANT but NOT in a sale by a nonmerchant. If your neighbor sells you their old lawnmower at a garage sale, there is no merchantability warranty.

Implied Warranty of Fitness for a Particular Purpose

Arises when the buyer relies on the seller's expertise in selecting a product for a specific (not ordinary) purpose. Two requirements:

Requirement 1

The seller must know the buyer's particular purpose

Requirement 2

The seller must know the buyer is relying on the seller's judgment

Real-World Scenario: Fitness for a Particular Purpose

The Setup: A customer walks into a paint store and says, "I need paint that can withstand constant exposure to saltwater on my boat hull."

What Happens: The paint store employee recommends a specific paint. The customer buys it, but it peels off after one month in saltwater.

The Result: Breach of the implied warranty of fitness for a particular purpose. The seller knew the purpose (boat hull/saltwater), the buyer relied on the seller's expertise, and the product failed that purpose.

Third-Party Beneficiaries of Warranties

A seller's warranty extends beyond just the buyer to cover:

  • The buyer's family
  • Members of the buyer's household
  • Any guest in the buyer's home who suffers injury from breach of warranty

Example: Tom buys a defective space heater from HomeStore. Tom's dinner guest, Sarah, is burned when the heater explodes. Sarah can sue HomeStore for breach of warranty even though she did not buy the heater.

5. Disclaiming Warranties

Key Rule

Sellers can limit or exclude warranties under UCC 2-316, but each warranty type has different disclaimer requirements.

Disclaiming Merchantability

Must mention the word "merchantability" and, if in writing, must be conspicuous (bold, capitalized, or otherwise noticeable).

Disclaiming Fitness for a Particular Purpose

Must be in writing and conspicuous.

Easiest Way: Sell "As Is"

Selling goods "as is" or "with all faults" disclaims ALL implied warranties at once.

Express Warranties: Generally CANNOT Be Disclaimed

If a specific promise was part of the basis of the bargain, you cannot disclaim it after the fact.

Real-World Scenario: "As-Is" Disclaimer

The Setup: A used car dealer sells a car with a sign on the dashboard reading "SOLD AS-IS, NO WARRANTIES EXPRESS OR IMPLIED."

What Happens: The transmission fails two days later.

The Result: The buyer likely has NO warranty claim. The "as-is" language effectively disclaimed all implied warranties. However, if the dealer verbally promised "this car will run great for years," that express warranty may survive despite the disclaimer.

Cheat Sheet

Print this page for quick reference

Risk of Loss Rules

  • Risk does NOT simply follow title under UCC
  • Carrier involved: risk passes at delivery to carrier
  • Bailee: risk passes when buyer gets document of title
  • Merchant seller (no carrier): risk stays until buyer receives
  • Non-merchant seller: risk passes at tender of delivery

Warranty Quick Guide

  • Express: specific factual claims = warranty (no magic words needed)
  • Merchantability: MERCHANTS only, goods fit for ordinary use
  • Fitness: buyer relies on seller for specific purpose
  • "As is" = disclaims ALL implied warranties
  • Express warranties generally CANNOT be disclaimed
  • Warranties extend to family, household, guests

Exam Trap Alerts

1. Risk Does NOT Follow Title

The UCC intentionally separates risk of loss from title. When goods are at a merchant seller's location waiting for buyer pickup, the merchant retains risk even if title has passed. Do NOT default to "risk follows title."

2. Merchantability = Merchants ONLY

The implied warranty of merchantability applies ONLY when the seller is a merchant who regularly deals in goods of that kind. Your neighbor's garage sale has no merchantability warranty.

3. Puffery Is NOT an Express Warranty

"Best product ever!" is puffery (sales talk). "Gets 35 MPG" is an express warranty (specific claim). The exam will test this distinction with tricky wording.

4. "As Is" Kills Implied Warranties, Not Express Ones

Selling "as is" disclaims all implied warranties. But if the seller made a specific factual promise (express warranty), that promise may survive the "as is" disclaimer.

5. Fitness vs. Merchantability

Merchantability = fit for ORDINARY purpose (a toaster toasts). Fitness for a particular purpose = buyer relies on seller for a SPECIFIC, unusual use (paint for saltwater boat hull). They are different warranties with different triggers.

6. Buyer's "Cover" Remedy

When a seller breaches, the buyer can "cover" by buying substitute goods elsewhere. The buyer recovers the DIFFERENCE in price, not the full cost of the substitutes.

Quick Reference Summary

Risk of Loss (Merchant)

Stays with merchant seller until buyer actually receives goods.

Risk of Loss (Non-Merchant)

Passes when seller tenders delivery (makes goods available).

Express Warranty

Specific factual claim that becomes basis of the bargain. Cannot be disclaimed.

Merchantability

Goods fit for ordinary purpose. Merchants only. Disclaimer must say "merchantability."

Fitness for Particular Purpose

Buyer relies on seller's expertise for specific use. Written disclaimer required.

"As Is" Sales

Disclaims ALL implied warranties. Express warranties may survive.