Risk of loss is a term used in the law of contracts to determine which party should bear the burden

of risk for damage occurring to goods after the sale has been completed, but before delivery has
occurred. Such considerations generally come into play after the contract is formed but before buyer
receives goods, something bad happens.
Under the Uniform Commercial Code (UCC), there are four risk of loss rules, in order of application:

1. Agreement - the agreement of the parties controls

2. Breach - the breaching party is liable for any uninsured loss even though breach is unrelated
to the problem. Hence, if the breach is the time of delivery, and the goods show up broken,
then the breaching rule applies risk of loss on the seller.
3. Delivery by common carrier other than by seller.
1. Risk of loss shifts from seller to buyer at the time that seller completes its delivery
obligations
2. If it is a destination contract (FOB (buyer's city)), then risk of loss is on the seller.
3. If it is a delivery contract (standard, or FOB (seller's city)), then the risk of loss is on
the buyer.
4. In cases not covered by the foregoing rules, if the seller is a merchant, then the risk of loss
shifts to the buyer upon buyer's "receipt" of the goods. If the buyer never takes possession,
then the seller still has the risk of loss. [1]
In bankruptcy law, the risk of loss rule under a contract can be abrogated by a secured interest.[2]

The parties to a sales contract do not always specify in the contract when title and risk of loss
are to pass from seller to buyer. In such cases, rules set down under Article 2A of the UCC apply.

Under the Code, the rules for shifting risk of loss are more important than the rules for deciding
when title passes. Although significant in many respects, title has lost some of its importance.
Deciding who suffers risk of loss depends on whether a sales contract has been breached at the
time of the loss. This chapter dealt with risk of loss mostly in situations in which no breach of
contract had taken place.

In a sale by a merchant to a consumer at the merchant's place of business, risk of loss passes to
the buyer when the buyer takes physical possession of the goods. If the seller is not a merchant,
the risk of loss passes when the seller has tendered delivery.

If the seller is to ship the goods (FOB shipping point), risk of loss passes from seller to buyer on
proper delivery to an independent (for-hire) carrier. If the seller is to deliver the goods (FOB
destination), risk of loss passes a reasonable time after the buyer has been given notice that the
goods are available for pickup at the destination point.

In a sale on approval, risk of loss and ownership remain with the seller until the buyer accepts
the goods by approval. This type of sale is made by a merchant to an ultimate consumer. A sale
or return is a present sale in which the buyer accepts risk of loss and ownership of the goods at
the time of the sale; both the risk and title will revert to the seller if the buyer returns the goods.
This type of sale is made by a merchant buying goods primarily for resale,such as a merchant
selling to a merchant.

When one party breaches a sales or lease contract, the Code places the risk of loss on the party
responsible for the breach. The rules of transfer, however, differ depending on whether the seller
or the buyer is responsible for the breach.

Bulk transfer is covered under Article 6 of the UCC. A sale of goods in bulk (bulk sale) is the sale
of all or a major part of the stock of merchandise, materials, supplies, or other inventory at one
time. This sale does not occur in the ordinary course of business. It generally includes the sale of
the entire business. The bulk-sales law protects creditors by giving them the right to void a bulk
sale (within a six-month period) if the bulk sale buyer does not notify them at least ten days
before the sale takes place. A majority of states have repealed Article 6. States still desiring to
continue bulk-sales regulation follow the original version of Article 6 or have adopted a Revised
Article 6, which provides creditors with better protection.

Auction sales involving goods costing $500 or more must be in writing. In a cash-only sale, the
seller may retain possession of the goods until they are paid for by sending them to the buyer
COD (collect on delivery).

As a general rule, a buyer obtains only such title to goods that the seller had. A person who has
no title cannot pass a title on. Thus, a thief cannot pass legal title on to a purchaser. The UCC,
however, allows at least two exceptions to this general rule: (1) a buyer with a voidable title can
legally transfer a valid title to a third party who obtained the goods for value and in good faith
and (2) any merchant who is given temporary possession of goods can legally transfer a valid
title to those goods to a buyer in the ordinary course of business.