Risk of loss is an issue that, if it shows up, will show up in Contracts questions involving the sale of goods. The delivery terms of a contract are important because they determine when the risk of loss passes from the seller to the buyer if the goods are damaged or destroyed.

Before highlighting the specific rules involving risk of loss, it's important to understand a few general principles. If the seller ships defective goods to the buyer, the risk of loss will remain on the seller until the defects are cured or until the buyer accepts the goods in spite of the defects. Similarly, if the buyer accepts goods from the seller but then rightfully revokes that acceptance, the risk of loss is treated as having remained with the seller to the extent of any deficiencies in the buyer's insurance coverage.

Along with those general principles, there are some specific rules to know well, and these rules are dependent upon whether or not the contract calls for a carrier to deliver the goods. A noncarrier case is a sale in which the parties did not intend that the goods would be moved by a carrier. An example would be a situation in which the buyer has the obligation to pick up the goods at the seller's place of business.

In such cases, if the seller is a merchant, risk of loss passes to the buyer only when the buyer takes physical possession of the goods. If the seller is not a merchant, risk of loss passes to the buyer upon tender of delivery (generally, the seller holding the goods for the buyer and notifying the buyer that the buyer can take possession).

Carrier cases (contracts in which goods are to be shipped by a carrier) are further subdivided into shipment contracts and destination contracts. A shipment contract requires the seller to ship the goods by a carrier but does not require the seller to deliver the goods at a particular destination. The risk of loss in shipment contracts passes to the buyer when the goods are delivered to the carrier. The seller must, however, make a reasonable contract with the carrier to deliver the goods to the carrier, notify the buyer of the shipment, and provide the buyer with any documents necessary to receive the goods.

Destination contracts, in contrast, do require the seller to deliver the goods at a particular destination. The risk of loss passes to the buyer only once the goods are delivered at that destination.

With certain contracts, the buyer takes the goods for the purpose of re-selling them but also reserves the right to return them if not re-sold. The rules as sated apply, and if the buyer does return the goods, the risk of loss remains on the buyer until the goods have been returned to the seller. In other contracts, the buyer takes goods but reserves the right to return them even if they conform to the contracts. Here, risk of loss does not pass to the buyer until the buyer accepts the goods.

An additional point to consider is whether obligations to perform are affected by loss of the goods. We know from the above that in a destination contract, the risk of loss passes to the buyer only upon delivery of the goods at the stated destination. And so, assume the goods are destroyed (through no fault of either party) in a destination contract while en route to the buyer. We know that the risk of loss has not passed to the buyer (so the buyer need not pay for the goods), but is the seller excused from having to ship new goods to to the buyer? Said otherwise, is seller's performance excused, since the seller was not at fault?

This will depend on whether the goods were identified when the contract were made. If the goods were identified when the contract was made, the contract is avoided (seller's performance is excused). If the goods were not identified until after the contract was made, the seller would need a defense (for example, impracticability) to avoid having to perform.

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