As with many things in law, the answer to a question like, “When does the risk of loss pass to a purchaser of goods in California?” is “It depends”. When one enters a store and purchases a Keurig coffee maker and pays the cashier for that product, the loss of that product generally passes from the store to the purchaser (absent any warranty from the manufacturer). However, what happens when one merchant agrees to buy one thousand Keurig coffee makers from the manufacturer and those coffee makers are to be shipped from Sacramento, California to San Diego, California? Of course, if the parties have entered into a written agreement which specifies the respective rights and obligations of the parties, one might expect that contract to define/dictate the answer.  And that expectation would be correct, at least in most instances. But what happens when no written contract exists?

In California, buyers and sellers of goods have certain rights and obligations under the California Commercial Code. Generally, under California law, a seller has an obligation to “transfer and deliver” the goods being purchased, while the buyer has an obligation to “accept and pay according to the contract.” California Commercial Code Section 2301. Commercial Code Section 2302 goes on to provide that where California law places “a risk or a burden as between the parties ‘unless otherwise agreed,’ the agreement may not only shift the allocation but may also divide the risk or burden.” If there is no written agreement, or if the agreement is seemingly silent on where the seller is to “transfer and deliver” the goods, California law supplies the answer at least where the term “F.O.B.” appears.

California Commercial Code Section 2319 provides: “[u]nless otherwise agreed the term F.O.B. (which means “free on board”) at a named place, even though used only in connection with the stated price, is a deliver term under which ¶ (a) [w]hen the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this division (Section 2504) and bear the expense and risk of putting them into the possession of the carrier; or ¶ (b) [w]hen the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this division (Section 2503). . . .”

If there is a contract where the term “F.O.B. place of shipment” is specified, the risk of loss passes to buyer when the seller ships the goods, while the risk of loss passes to buyer when the term “F.O.B. place of destination” is specified.

Each business and business entity is unique. To understand the different options and which direction will be best for your situation, you need to consult with an experienced corporate attorney. Michael Leonard, Esq. of San Diego Corporate Law, named “Best of the Bar” by the San Diego Business Journal in 2016, has the expertise to guide you through everything from forming your business, to creating buy-sell agreements, to executing contracts, and anything in between. To schedule a consultation to discuss any business-related matter, please contact Mr. Leonard by visiting San Diego Corporate Law or by telephone at (858) 483-9200.