CPA Exam — REG (Regulation)Business LawEasy
A buyer, 'Retail Ventures Inc.', contracts to purchase 1,000 units of a new electronic gadget from 'Innovate Electronics Corp.' The contract states, 'Goods to be shipped F.O.B. destination, Retail Ventures' warehouse.' Innovate Electronics properly packages and ships the goods. While en route, and before reaching Retail Ventures' warehouse, the truck carrying the goods is involved in an accident, and all 1,000 units are destroyed. Who bears the risk of loss for the destroyed goods?
- AThe common carrier, as they were in possession of the goods.
- BBoth parties equally, as it was an unforeseen accident.
- CInnovate Electronics Corp., because the risk of loss had not yet passed.
- DRetail Ventures Inc., because they are the buyer.
Show answer & explanationAnswer & explanation
Correct answer: C. Innovate Electronics Corp., because the risk of loss had not yet passed.
F.O.B. destination means the seller bears the risk of loss until the goods are delivered to the buyer's specified destination. Since the goods were destroyed before reaching Retail Ventures' warehouse, Innovate Electronics still bore the risk.
Why the other options are wrong
- A. While the carrier may be liable for negligence, the primary risk of loss between buyer and seller is determined by the F.O.B. term.
- B. Risk of loss is determined by contract terms, not automatically split for accidents.
- D. The buyer bears the risk of loss only after delivery in an F.O.B. destination contract.
F.O.B. Destination (UCC)
A shipping term under the Uniform Commercial Code (UCC) where the seller retains the risk of loss until the goods are delivered to the buyer's specified destination.
- Seller pays shipping costs.
- Risk of loss passes to buyer upon tender of delivery at destination.
- Often used when the seller wants to ensure safe arrival.
Memory trick: F.O.B. is like a relay race: who holds the baton? That's who bears the risk.