CPA Exam — REG (Regulation)Business LawMedium
A buyer enters into a contract with a seller for the purchase of 500 widgets, with delivery specified as 'FOB Seller's Place of Business.' During transit from the seller's warehouse to the buyer's location, the truck carrying the widgets is involved in an accident, and all 500 widgets are destroyed. Assuming no fault on the part of either party, who bears the risk of loss for the destroyed widgets?
- AThe seller, because the goods had not yet reached the buyer.
- BThe carrier, as they were responsible for the goods in transit.
- CBoth buyer and seller equally, as it was an unforeseeable event.
- DThe buyer, because the risk of loss passed upon shipment.
Show answer & explanationAnswer & explanation
Correct answer: D. The buyer, because the risk of loss passed upon shipment.
Under a 'FOB Seller's Place of Business' (or 'FOB Shipping Point') contract, the risk of loss passes to the buyer once the seller delivers the goods to the carrier. Since the goods were destroyed during transit, after leaving the seller's place, the buyer bears the risk.
Why the other options are wrong
- A. The seller would only bear the risk if the contract was FOB Buyer's Place of Business (FOB Destination).
- B. While the carrier might be liable to the party who bears the risk, the question asks who bears the risk of loss between buyer and seller, not who is ultimately responsible for the damage.
- C. Risk of loss is typically borne by one party or the other, not equally, based on the contract terms.
FOB Shipping Point (UCC)
A shipping term under the UCC where the risk of loss passes from the seller to the buyer when the goods are delivered to the carrier.
- Seller pays to get goods to the carrier.
- Buyer pays freight from shipping point to destination.
- Buyer bears risk of loss during transit.
Memory trick: FOB: Follow Our Business to know where risk shifts.