Friday, December 4, 2009

Risk of Loss, Holding Title

CASE: In this commercial contract, KLT Knitwear was contracted to deliver 20,000 pounds of yarn to GFG Inc. GFG hired a trucking company to pick up the yarn from KLT. KLT identified the yarn and placed the goods on the truck. From that point, risk of loss was transferred to GFG. The truck hired by GFG was hijacked and all the yarn was stolen. When GFG heard about the incident, they stopped payment they made prior to delivery, and then sued KLT claiming they must pay for the goods since they bore the risk of title.

F.O.B. or free on board means the selling price of a good includes transportation to the place named in the contract. The seller pays expenses and carries the risk of loss to the place named. If a contract is “F.O.B. seller”, it is a shipment contract and the buyer pays shipping expenses and carries the risk of loss. In an “F.O.B. buyer” contract, the seller pays expenses and carries the risk of loss until the goods are delivered to the buyer; this is a destination contract.

Prior to the hijacking, GFG sent a purchase order to KLT that stated the price for yarn was F.O.B. seller. This means the contract between the GFG and KLT is a shipment contract. In a shipment contract, the title to the goods is passed to the buyer (GFG) once the seller (KLT) delivered the goods to the designated location, in this case, the carrier. If the price for yarn was F.O.B. buyer, then KLT Knitwear would assume title until the yarn was received by GFG who would also then assume risk of loss.

In this case, the trucking company hired by GFG was hijacked. Since buyers have some legal recourse against carriers, GFG would have to seek compensation from that company. That is of course assuming that they insured their shipment.

I think the courts would find that GFG Inc defaulted on the terms of their contract with KLT Knitwear. The contract obliged KLT to deliver the conforming goods (20,000 pounds of yarn) to GFG and GFG to accept and pay for it. KLT completed their end of the contract. They put 20,000 pounds of yarn on a truck hired by GFG. In my opinion, the fact that GFG hired the truck further proves that they were assuming the title of the goods. This shipment contract determined that GFG had ownership of the yarn. They assumed the risk of loss the minute they picked the yarn up from KLT.

What protection would companies like KLT have if they had to assume risk of loss even when a buyer picked up their own goods? What legal recourse would they have to protect them against scamming buyers? It would just be bad business practice to send goods off with a trucking company hired by the buyer if they had to assume the risk of loss. This is why I think GFG doesn’t have a leg to stand on. I am not saying that they committed any crime, but laws are created to protect against such crimes and hold people accountable. I one hundred percent believe KLT will win this case.

Instructor's Notes: Excellent questions at the end. Protection in a commercial contract is the key. In this contract title passes upon the trucking company hired by the buyer receiving goods in conforming condition. FOB seller means the seller bears risk. To minimize situations like this either party who assumes risk should purchase an insurable interest in the merchandise. The key to prevent loss is the determination of interests and risk. The party who assumes risk has the insurable interest - a concept that is important in contract carrier cases.

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