6 Va. J.L. &
Tech. 15 (2001), at http://www.vjolt.net
© 2001 Virginia Journal of Law and Technology Association
VIRGINIA JOURNAL of LAW and TECHNOLOGY
|
UNIVERSITY OF VIRGINIA |
FALL 2001 |
6 VA. J.L. & TECH. 15 |
The Risk of Loss in Electronic Transactions:
Vintage Law for 21st Century Consumers
Seth
Gardenswartz*
Thesis:
The U.C.C. fails to allocate
the risk of loss consistently with the policies underlying U.C.C. section 2-509
when consumers receive goods via carrier.
I. Introduction
II. The Definition and History of Risk of Loss:
III. Summary of the U.C.C. Risk of Loss Provisions
IV. Analysis Of U.C.C. § 2-509 Regarding
Electronic Transactions
A. Goods Delivered via Carrier U.C.C. § 2-509(1)
1. Electronic Purchases by Consumers
2. Electronic Transactions between Businesses
a) Electronic Data Interchange
B. Goods Held by a Bailee U.C.C. § 2-509(2)
C. The Residual Cases U.C.C. § 2-509(3)
D. Agreement of the parties; U.C.C. § 2-509(4)
1. A Brief Survey Of E-tailers And Internet
Auction Sites
a) E-tailers
b) Auctions
1. This paper will examine how the
current Uniform Commercial Code (U.C.C.) provisions allocate the risk of loss
to parties involved in electronic transactions. It will briefly summarize the
evolution of the U.C.C.’s treatment of the subject and explain the legal
theories on which the current law is based. After a brief summary of U.C.C.
provisions governing the risk of loss, this paper will explore how the law
operates in common electronic transactions involving both businesses and
consumers. It will conclude that
Article 2 of the U.C.C. does not allocate the risk of loss fairly, clearly, or
consistently with the goals of the U.C.C. in common electronic transactions.
This paper will argue that Internet retailing enables consumers to engage in
transactions that the drafters of the U.C.C. assumed would take place only
between merchants. Consequently, the unrevised U.C.C. demands the use of
commercial terms in consumer transactions that are meaningless and confusing to
most non-merchants. This paper will
also suggest that many on-line retailers, who may believe that they have
shifted the risk of loss to the buyer, may actually retain the risk of loss
until the buyer receives the goods. Finally, this paper will discuss some
practical issues and common business practices that affect consumers ability to
protect themselves against the risk of loss when buying or selling goods via
the Internet. It will conclude by suggesting a few potential changes to U.C.C.
Article 2 that, if adopted by the drafting committee, will address the issues
created by the modern electronic marketplace.
2. Between the time a contract is
made and the time it is fully performed, goods identified to the contract[1]
may be lost, stolen, damaged, or destroyed. Risk of loss law determines whether
the buyer or seller is financially responsible for the loss.[2]
From the Middle Ages until the middle of the twentieth century, the risk of
loss was born by the party who held title to the goods.[3] This ancient doctrine was preserved by the
Uniform Sales Act (U.S.A.), which regulated the sale of goods before the U.C.C.
was enacted.[4]
One of the U.C.C.’s most radical differences from the U.S.A. is the separation
of title from the risk of loss.[5]
Karl Llewellyn, the architect of the U.C.C.,[6]
felt that it was senseless to shift risk of loss with title.[7] He argued that sales are a “complex
structure[] of certain part-way stages.”[8]
Llewellyn felt that using title to determine who should bear the risk of loss
was arbitrary, confusing, and out of touch with evolving commercial practices.[9] As a result, the U.C.C. adopted a system
that allocates the risk of loss based on which party has control of the goods,
which party is more likely to insure the goods, and whether a party has
breached the contract.[10]
3. The main risk of loss
provisions can be found in U.C.C. sections 2-509 and 2-510. Section 2-509
covers the risk of loss when neither party has breached the contract.[11] Without breach, section 2-509 allocates the
risk of loss by determining which party is in the best position to protect the
goods, usually by insuring them.[12] Section 2-509 is divided into three
subsections; each designed to address a distinct mode of delivery from seller
to buyer.[13]
The first subsection allocates the risk of loss in contracts where carriers[14]
deliver goods (carriage contracts).[15] It contemplates two types of carriage
contracts, shipment contracts and delivery contracts. [16] A “shipment” contract only requires the
seller to deliver the goods to a carrier.[17]
A “delivery” contract requires tender of the goods to the buyer.[18]
In a shipment contract, the risk of loss passes when the goods are delivered to
a carrier.[19]
In a delivery contract the risk of loss passes to the buyer only when the buyer
receives the goods.[20]
The theory behind this subsection is that the party most likely to insure
should bear the risk of loss.[21]
4. U.C.C. section 2-509(2) handles risk of loss
when goods are held by a bailee[22]
to be delivered from buyer to seller without being physically moved. In these cases, the risk of loss transfers
from seller to buyer when the buyer receives either documents (negotiable or
non-negotiable) of title, an acknowledgement of the buyer’s right to possession
of the goods, or written delivery instructions.[23] Section 2-509(2) places the risk of loss on
the party who has control of the
goods in the sense that the risk of loss is borne by the party to whom the
bailee will turn over the goods upon demand.[24]
5. U.C.C. section 2-509(3) covers
goods that are delivered from buyer to seller without use of a carrier or a
bailee.[25]
Risk of loss under this section depends on the seller’s status as a merchant.[26] If the seller is a merchant, the risk of
loss passes only when the buyer receives
the goods.[27] Receipt is defined by article 2 as “actual
physical possession.”[28] Non-merchant sellers need only tender delivery of the goods to the
buyer in order to pass the risk of loss.[29]
Tender of delivery merely requires the seller to make conforming goods
available to the buyer, and give notice “reasonably necessary” for the buyer to
take delivery.[30]
The policy behind this subsection is that, in transactions involving a
merchant, a merchant seller is the most likely party to insure goods until the
buyer has physical possession (or control) of them.[31]
6. U.C.C. section 2-509(4)
explicitly states that the first three subsections are merely default
provisions for use when parties themselves have not negotiated a “contrary
agreement” of who will bear the risk of loss.[32] The comments note that a “contrary
agreement” may include trade usage or practice, course of dealing or
performance, or other “circumstances of the case.”[33]
7. U.C.C. section 2-510 deals with
risk of loss when either party has breached the contract. Since the focus of
this paper is on the risk of loss in electronic transactions without breach, it
will not discuss section 2-510 in any detail.
Suffice it to say that if a party has breached the contract, it may bear
some risk of loss that it otherwise would not.[34]
8. The current version of the U.C.C.
does not allocate the risk of loss clearly or equitably in electronic
transactions where businesses sell goods to consumers. In these “business to consumer” (B2C)
transactions, allocation of the risk of loss is inconsistent with the rationale
behind section 2-509. Section 2-509 was apparently designed with the assumption
that non-merchants rarely become involved in transactions involving carriers.[35]
While that may have been true at the time the U.C.C. was drafted and enacted,
the Internet allows businesses to bypass portions of the traditional supply
chain, and sell directly to consumers. In the past, carriers shipped most goods
from manufacturers to a network of retail stores (merchants) where consumers
purchased and received them in person.[36]
Internet retailers (e-tailers) will alter this pattern by rapidly increasing
the amount of goods shipped from efficient distribution centers directly to
individuals.[37]
Package carriers are expected to deliver most of these goods.[38]
9. The U.C.C. does not adequately
address the needs of consumers who
purchase goods from merchants to be shipped via carrier.[39] It allocates the risk of loss to buyers
based on how they receive their goods
rather than using the U.C.C.’s “underling theory” of putting the risk on the
party in physical control, or who is most likely to insure the goods.[40] This allocation is arbitrary, and frequently
creates an inefficient result.[41]
A merchant retailer can both purchase insurance and pursue an action against
the shipper more efficiently than an individual.[42]
A non-merchant buyer, however, is very unlikely to expect liability for goods
lost or damaged before it receives them.[43] Commentators have noted this gap in the
logic of section 2-509 in the past.[44] While this issue may have represented a “minor
flaw”[45]
for most of the twentieth century, the rapid growth of Internet retailing[46]
may create more frequent and serious issues for Internet consumers who receive
goods via carriers. Although the same issues have existed for mail order
customers since the U.C.C. was enacted, the Internet is a much more flexible
medium for selling than a printed catalog.[47]
E-tailers will sell not only more goods, but different types of goods than have
been traditionally sold via traditional mail order catalogs.[48]
The quantity and nature of goods, shipped to consumers by carrier, could turn
the last century’s “minor flaw” into an important consumer issue for the
twenty-first century.
10. The U.C.C. also relies on
technical commercial terms that are meaningless to most consumers and some
merchants. Therefore, in the arena of electronic sales of goods, U.C.C. section
2-509 fails its principal goal of making sales law clear and certain to
merchants, lawyers and courts.[49] All these shortcomings can be traced to an
apparent presumption that only businesses (merchants) purchase goods that are
to be delivered by carrier.
11. The drafters of the U.C.C. may
have assumed that consumers will handle most transactions in goods without the
need for carriers or bailees. Only
U.C.C. section 2-509(3) considers a party’s merchant status when allocating the
risk of loss.[50] That section refers exclusively to the
merchant status of sellers.[51] When goods are delivered neither by carrier
nor held by a bailee, a merchant seller
bears the risk of loss until the goods are received
by the buyer, but a non-merchant seller
bears the risk only until it tenders
delivery.[52]
The comments explain the theory behind this section. A merchant “who is to make
physical delivery at his own place continues to control the goods and can be expected to insure his interest in them.[53] The buyer, on the other hand, has no control
over the goods, is extremely unlikely
to carry insurance on goods not yet in its possession.”[54]
This comment reveals two of the primary reasons the U.C.C. replaced title as
the deciding factor in shifting the risk of loss: (a) control, and (b)
likelihood to insure.[55] When a non-merchant purchases goods to be
delivered by carrier,[56]
however, section 2-509(1) does not allocate the risk of loss to the party who
controls or is likely to insure the goods.[57]
As a result, when non-merchant buyers make carriage contracts, the risk of loss
passes to consumers in exactly the same fashion as it would if the transaction
were between businesses even though neither buyer or seller is in control[58]
and consumers are unlikely to insure.[59] This is due to the fact that the code fails
to distinguish between merchant and non-merchant buyers.[60]
12. In contracts between merchants,
both parties are likely to understand and insure against the risk of loss.[61]
Non-merchant buyers, however, are
unlikely to understand or insure against the risk of loss.[62] The
merchant seller delivering directly
to the buyer, without use of a carrier or bailee (as in a traditional retail store),
is both in physical control and the most likely to insure.[63] It is logical that such sellers bear the
risk of loss until the buyer controls or becomes likely to insure the goods.[64]
The U.C.C. abandons this logic when consumers buy goods, to be shipped via
carrier, from merchant sellers.[65] When consumers make carriage contracts with
merchants the seller has one of the two factors used to allocate the risk of
loss, the likelihood of insurance, while the buyer has none.[66] Due to this apparent oversight consumers who
buy goods over the Internet (absent contrary agreement) bear the risk of loss
from the time the seller “duly delivers” them to a carrier.[67]
In contrast, consumers whose goods are delivered by the seller, whether in a store or in the
seller’s own truck,[68]
bear no risk of loss until they actually receive the goods.[69]
13. Carriage contracts are classified by the U.C.C. as shipment or
delivery contracts.[70]
When a buyer purchases goods to be delivered by a carrier, the risk of loss
will be born by the buyer unless a “delivery” contract is created, or the
parties explicitly shift the risk to the seller.[71]
The U.C.C. presumes a shipment contract unless the terms require the seller to
deliver[72]
the goods at a “particular destination.”[73] Reading only section 2-509 gives the false
impression that when a seller pays the freight, a delivery contract is created.
Under the Uniform Sales Act, that would have been a correct assumption.[74]
When a seller prepaid freight, title to the good and therefore risk, did not
pass until delivery.[75]
However, the U.C.C. drafters deliberately changed this result.[76]
Section 2-503 comment 5 states that a delivery contract can be created only by a “commercial understanding of the terms used
by the parties contemplate[ing] such delivery.”[77] U.C.C. sections 2-319, 2-320 and 2-321 were
drafted to make a bright line rule for defining the “commercial understanding”
of the parties.[78]
They adopt and give legal meaning to the common trade terms F.O.B., F.A.S.,
C.I.F., and C. & F.[79]
The presence or absence of these terms in a contract determines whether it is a
shipment or delivery contract. [80]
In fact, courts have consistently held that only
the term “F.O.B. buyers place of business” will create a delivery contract.[81]
Even a term as unambiguous as “seller shall pay freight” will not create a
destination contract.[82] Neither a “ship to” term, nor the statement
“seller shall pay freight” will create a destination contract.[83] Only a F.O.B. term or an express allocation
of the risk of loss will give the buyer the benefit of a destination contract.[84]
14. The Internet has facilitated a dramatic increase in consumer
purchases of goods that are delivered via carrier.[85] In these B2C transactions involving
carriers, the current version of section 2-509 fails to follow its policy of
placing the risk of loss on the party in control, or the party most likely to
insure.[86] Absent an agreement to the contrary, the
receipt of goods from a carrier transfers the risk of loss to a consumer buyer
regardless of the fact that it has no more control that the seller[87]
and is less likely to insure.[88]
This result is inconsistent with the policy behind section 2-509.[89] Furthermore, consumers are unlikely to have
any understanding of the risk of loss, or the term F.O.B.[90] These terms reflect pre World War II
commercial practices, which are preserved in the U.C.C. we use today.[91] Consequently, an e-tailer could openly communicate
that all orders are F.O.B. its warehouse or factory, and the buyer would only
be confused. At least two commentators
and one court have noted this discrepancy and argued that all contracts between
merchant sellers and non-merchant buyers should be presumed delivery contracts. [92]
15. Unless revised,[93]
the U.C.C. leaves the non-merchant consumer with few options other than an
action against the carrier.[94] Although the carrier is likely to be
insured,[95]
the buyer bears the burden and expense of collection, which may be greater than
the cost of the item lost.[96] Furthermore, some of the largest carriers of
packages are known to be reluctant to pay claims against them for damage, even
when insurance is purchased through them.[97] A non-merchant consumer in this situation
could be faced with having to pay for an item never received, buying a
replacement item, and incurring the cost and delay of litigation or a
protracted administrative process necessary to recover the cost of the item
lost. Efficiency suggests that a
merchant seller could better handle these costs.[98]
16. Although the code appears to be
unfair to non-merchant consumers, the business practices of some e-tailers may prevent the risk of loss from
shifting to buyers. In the case of a
shipment contract, the risk of loss passes from seller to buyer only when the
goods are “duly delivered” to the carrier.[99]
To meet the “duly delivered” requirement of 2-509(1)(a), the U.C.C. directs us
to section 2-504, which describes “Shipment by Seller.”[100]
Section 2-504 requires a seller to put the goods in the carrier’s possession,
and to make a “reasonable” contract for delivery while considering relevant
circumstances.[101]
The seller also must provide the buyer with any document necessary to take
possession of the goods,[102]
and the seller must give the buyer prompt notice of the shipment.[103] Failure to satisfy any of the conditions of
2-504 may prevent the loss from
shifting to the buyer.[104]
17. The courts have been left to
define the murky concept of what is a “reasonable contract” under 2-504(a). In La Casse v. Blaustein, 403 N.Y.S.2d 440
(1978), the court found the seller did not make a reasonable contract in part
because it failed to insure the cartons for their full value. Under the facts of that case, the buyer had
authorized the seller to insure the goods for their full value at the buyer’s
expense.[105]
The seller failed to insure and mislabeled the package.[106]
The court found that the seller had made an improper contract.[107] As a result, the seller was held liable for
the loss. In a similar case, a seller
mailed gold coins to a buyer, fully insured, without need for further
documents, and gave the buyer personal notice.[108] The court ruled that the contract was reasonable. The risk of loss passed to the buyer upon
the “tender of delivery” so that the seller was not liable.[109]
18. Modern e-tailers may fail to
make an adequate “tender” of goods since they often ship goods and send e-mail
notice on the same day.[110]
A broad reading of section 2-504(c)’s “prompt notice” requirement could protect
consumers who might otherwise bear the risk of loss. In Rheinberg-Kellerer GMBH v. Vineyard Wine Co., 281 S.E.2d 425 (N.C.
Ct. App. 1981), a container of wine was shipped and lost at sea before the
buyer (a commercial distributor of spirits) received notice of the anticipated
departure date. The court held that the notice, received after the shipment was
lost, was not “prompt notice” because it “deprived
the buyer of an opportunity to insure that it otherwise would have taken
advantage of.”[111]
This decision suggests that the
opportunity to insure is a prerequisite for satisfying of section 2-504(c).[112]
19. Cutting-edge fulfillment
practices of leading e-tailers may deprive consumers of the opportunity to
insure. When a buyer clicks on the “submit order” button, the seller can react
virtually instantly. In a highly
automated warehouse the goods can be “picked” from storage, packed, and shipped
within hours of the buyer’s last “click.”[113] Even if the seller sends an e-mail[114]
notice of shipment to the buyer as soon as the order is received, the buyer is
unlikely to have an opportunity to arrange for insurance.
20. How broadly are courts willing
to read section 2-504(c) in terms of
web-based sales? The Rheinberg-Kellerer
court did not provide a clear answer to the issue for two reasons. First, it dealt with a traditional
transaction, conducted by mail, between businesses rather than an Internet sale
from a business to a consumer.[115]
Although the case states that the buyer “must have reasonable opportunity to
guard against these risks by independent arrangements with the carrier,”[116]
and “must have sufficient time to take action,”[117]
the court does not contemplate near simultaneous ordering, shipping, and notice
relative to section 2-504(c)’s requirement of “prompt notice.” Second, the Rheinberg-Kellerer holding limits the
buyer to insurance opportunities that it otherwise
would have taken advantage of.[118]
Several courts have noted that non-merchant consumers are unlikely to insure
goods not in their possession. A
seller, therefore, has an argument that unless the buyer can prove that it
would have insured, the Rheinberg-Kellerer
holding does not prevent the risk of loss from shifting to the buyer.
21. The courts appear inclined to
give merchant sellers the risk of loss in transactions with consumers. Two
courts opined (in dicta) that a mail order merchant does not complete
performance of a contract or shift the risk of loss until the buyer receives
its goods.[119]
These statements may reveal a judicial attempt to rectify the failure of U.C.C.
2-509 to address the interests of consumers who purchase goods shipped by
carrier.[120]
The near simultaneous notice and shipment of goods described above may give courts
the opportunity to decide that such notice “deprived” the consumer of
“reasonable opportunity” to insure, thus preventing the risk of loss from
shifting to the buyer. Professors White and Summers, however, have stated that
it is “not wholly clear” from the Code whether all the requirements of 2-504
can prevent the risk of loss from passing to the buyer, “and the case law has
not yet yielded a definitive answer.”[121]
Until this issue is resolved by case law or a U.C.C. revision, e-tailers
wanting to shift the risk of loss upon delivery to a carrier should consider
providing an insurance option for their customers at the time of purchase or expressly shift the risk of loss to the
buyer in the contract.[122]
22. Businesses have been transacting
electronically long before the World Wide Web was widely used for any
commercial activity.[123]
The first commercial application for electronic transactions was a system
called Electronic Data Interchange (EDI).[124] Traditional EDI transactions are handled by
businesses communicating directly from one computer to the other. Businesses are currently shifting to more
“open” systems where buyers and sellers can use the Internet to transact without
creating a custom network.[125] The current U.C.C. risk of loss provision
will work effectively in either of these situations.
23. EDI users use private networks
over which two computers can send and receive data in a format agreed to by the
parties.[126]
This data is generally sent over “value-added networks” (VANs).[127] VAN networks are customized to accommodate
an established relationship between two existing trading partners.[128]
Most EDI users expressly cover the risk of loss by negotiating “trading partner”
agreements.[129] These agreements are precisely the kind of
“contrary agreement” discussed in U.C.C. section 2-509(4).
24. Many EDI trading partners,
however, do not have a trading partner agreement covering their relationship.[130]
Even without a trading partner agreement, the risk of loss allocation in EDI
transactions is likely to be very straightforward. Most sales of goods will fall under 2-509(1) since they must be
shipped from the vendor to the buyer in some fashion. Since EDI uses a standard
“language”[131]
to communicate standard terms, and the U.C.C. has defined standard shipment
terms (including F.O.B., F.A.S., C.I.F. and C. & F.), the determination of
whether the contract is a shipment or a destination contract should be
relatively simple. If the contract
terms state F.O.B, buyer’s place of business, the risk of loss will pass from
the seller only when the carrier “duly tenders” the goods to the buyer.[132]
Otherwise the risk of loss passes when the goods are “duly delivered” to the
carrier.[133]
The seller’s only concern is that it must comply with section 2-504’s
requirements as discussed above.
25. Most B2B electronic transactions
currently take place over many individual EDI networks, each of which were
built for just two companies to use.[134] Newer technology, like XML, will enable
virtual “open” marketplaces where businesses can communicate electronically
without custom designed networks.[135] This new type of EDI is unlikely to pose
significant problems for the determination of which party bears the risk of
loss.
26. Unlike the customized and rigidly structured EDI environment,
merchants using XML can define “tags” that identify and describe data in a
manner readable to many different applications without predetermining the message
format.[136] Individualized networks or agreements are,
therefore, unnecessary before entering into electronic transactions.[137] If the parties fail to mention risk of loss,
the U.C.C. sections 2-509 and 2-510 will function as default provisions exactly
as they do in paper based transactions. The contract shipping terms, as defined
terms in sections 2-319 and 2-320, will determine whether parties have created
shipment or delivery contracts. If
there is an “F.O.B. buyer’s address” term, there is a delivery contract.[138] Otherwise it is a shipment contract.[139] Whether the seller has satisfied the
delivery requirements for either type of contract will determine whether the
risk of loss actually passed. If the terms are not in standard formats, or
disagree, the Code provides section 2-207 to handle a “battle of the forms.”[140]
27. Auctions can take place between consumers, businesses, or any
combination of the two. They can also
fall into any of the three non-breach categories outlined in U.C.C. section
2-509. The same issues that arise in the other contexts may also present
themselves in auctions.
28. Perhaps the defining difference between most electronic auctions
(for goods) and face-to-face auctions is that the goods, the seller, and the buyer
are generally in the same physical place for auctions of the classic variety.[141] Section 2-509(3) would generally apply to
the classic auctions where the buyer/bidder removes goods from the auction
site.[142] Under 2-509(3), the risk of loss passes from
the seller upon receipt of the goods by the buyer.[143]
In an Internet auction, however, buyer, auctioneer, goods, and seller are
likely to be in different locations. In
many Internet auctions, the goods are shipped directly from the seller or
auction site to the buyer.[144] Thus, section 2-509(1) is likely to control.
If goods are sent to or left with the auctioneer, 2-509(2) may apply until
goods are shipped. With few cases to
provide guidance, the Code as it stands will have to address the risk of loss
for goods purchased via Internet auctions.
29. The Code makes no special rules regarding risk of loss in auction
sales.[145]
As a result, sections 2-509 and 2-510 apply to goods sold by auctions. In face-to-face auctions, section 2-509(3)
allocates the risk of loss without regard for the buyer’s status as a merchant.[146]
Only the seller’s status is determinative.[147]
An auctioneer will generally be classified as a merchant, as will a seller who
employs an auctioneer.[148] The risk of loss in face-to-face auctions
will pass to the buyer in the same fashion as it would from a merchant seller
in a non-auction situation.[149]
30. In modern Internet auctions, where a carrier delivers the goods, the
risk of loss (absent an agreement) will be allocated by section 2-509(1). Since the current version of 2-509(1) fails
to consider the merchant status of either party, the risk of loss passes in
exactly the same way as it would if buyer and seller were sophisticated
commercial parties. [150]
This will be true even if both parties are consumers using a consumer-oriented
website like eBay. Under the current U.C.C. version, a non-merchant buyer will
bear the risk of loss regardless of its ability to control or insure. Consider a hypothetical auction where two
non-merchants are bidding on the same item.
Bidder A is present at the auction house, while bidder B is bidding in
real-time via an Internet connection.[151]
If bidder A wins, U.C.C. section 2-509(3) will apply, and since sellers using auctions
and auctioneers are classified as merchants, the risk of loss will not transfer
from the seller until A receives the goods.
If bidder B wins, she will bear the risk of loss as soon as the goods
are “duly delivered” to the carrier, provided that the seller fully complies
with U.C.C. section 2-504 as discussed above.[152]
This allocation seems to ignore the “control, insurance and breach premises
that underlie the Code’s risk of loss provisions.”[153] One could argue that when goods are
delivered without use of a carrier the seller has physical control of the
goods, but when goods are shipped via carrier the seller loses control when the
goods are delivered to the carrier.
This argument is short-sighted since actual physical control seems to be
the deciding factor only in the bailee scenario, and likelihood of insurance is
the dominant theory underlying both U.C.C. sections 2-509(1) and 2-509(3).[154]
If section 2-509(3) recognizes that non-merchants deserve greater protection in
face to face sales, the same logic should apply to the majority of Internet
purchases by non-merchants.[155]
If control and insurance, rather than an arbitrary measure like title, are the
determinative factors in allocating the risk of loss, the failure to address
the merchant status of buyers using
carriage contracts to purchase goods make the current U.C.C. poorly suited to
consumer transactions.[156] As long as a seller complies with section
2-504, the risk of loss passes to the buyer upon delivery of goods to a
carrier.[157]
31. This section will briefly
discuss two issues presented by bailees in the context of the risk of loss. The
first is whether a seller can be regarded as a bailee after a contract is made.
The second regards whether the buyer can ever be a bailee within an EDI
relationship.
32. Sellers have occasionally tried
to avoid the risk of loss by claiming that it had become a bailee of the buyer
under U.C.C. section 2-509(2).[158]
The courts have overwhelmingly held that a seller cannot be a bailee.[159] Most of these decisions rest on facts making
the seller ineligible for bailee status.[160]
While it may be theoretically possible for a seller to be a bailee,[161]
at least two commentators agree that seller should never be allowed to claim
bailee status.[162] In the unlikely scenario where this issue
could arise, the seller should know that a court is unlikely to accept the
seller as a bailee argument.
33. An issue more germane to
electronic transactions is whether a buyer can ever be considered a bailee. In
some EDI relationships buyers do not pay for their goods until they are used or
sold.[163]
Could these buyers be considered bailees?
At least one case has found a buyer to be a bailee of a vessel
containing goods it had purchased.[164]
There may be an appealing argument that the U.C.C. could permit such an
interpretation using the control theory.[165] A merchant buyer in possession has actual
control over the goods and can reasonably be expected to insure them.[166] The buyer, therefore, has both of the
non-breach factors, control and likelihood of insurance, used by the U.C.C. to
allocate risk of loss. As a practical
matter, in an relationship where a buyer is shipped goods from a seller who is
not expecting payment until they are used or sold, it would be reasonable to
expect the parties to negotiate who will bear the risk of loss under section
2-509(4).[167]
34. In the case where the risk of
loss passes with the transfer of negotiable documents of title,[168]
the risk of loss passes upon the buyer’s receipt of the documents.[169]
At the current time, there is no widespread commercial use of electronic
negotiable documents of title.[170] The parties who appear interested in using
an electronic system appear to be large exporters, traders, and banks.[171]
It is unlikely that these parties would fail to negotiate the risk of loss by
contrary agreement.
35. Due to the relatively small
number of cases involving bailees, and the fact that both parties involved are
likely to be merchants, this author does not see a significant problem with section
2-509(2) regarding electronic transactions.
Most commercial parties using bailees are likely to have insurance and
to negotiate risk of loss issues using section 2-509(4). Section 2-509 will therefore allocate the
risk of loss in a manner consistent with its underlying theory of control and
insurance.
36. Most electronic sales of goods
involve goods shipped by carrier.[172] However, there are some increasingly common electronic
transactions where goods are delivered directly from merchant to consumer. It
is instructive of the shortcomings of section 2-509(1), to examine how
differently section 2-509(3) handles an almost identical transaction.
37. On-line delivery of grocery
items is an example of a growing segment of web based retail.[173] Unlike many other e-tailers, grocery stores
operate locally, delivering goods in their own trucks rather than shipping
nationally from a single distribution center.[174]
Since the U.C.C. does not include a seller’s own truck in its definition of a
carrier,[175]
the risk of loss to online grocers will be governed by U.C.C. section 2-509(3).[176]
Transactions using carriers to deliver goods are covered by U.C.C. section
2-509(1). The following hypothetical
shows how two similarly situated consumers have vastly different risk of loss
liability, depending on who delivers their goods. Absent a contrary agreement,[177]
a consumer ordering a steak from www.omahasteaks.com bears the risk of loss as
soon as it is put in the hands of the carrier even though it is unlikely to
insure[178]
and does not have control of the goods. On the other hand, a consumer
purchasing a steak from www.peapod.com would bear no risk of loss until the
meat is received since peapod.com is a merchant.[179] Section 2-509(3) offers the peapod.com
customer extra protection against the risk of loss due the fact its seller is a
merchant. Section 2-509(1) gives no such protection to the omahasteak.com
customer. This result would be consistent if section 2-509 used only physical
control to justify its allocation of the risk of loss. The factor of insurance, however, is at
least as prominent as a theory for determining who should bear the risk.[180]
This result under the current version of section2-509 seems at least as
arbitrary as shifting risk with title, a result the U.C.C. sought to avoid.[181]
38. Section 2-509 is only the default rule in the absence of an
“contrary agreement by the parties.”[182] Many of the largest and most sophisticated
web-retailers address the issue of risk of loss in the section of their sites
labeled “terms and conditions,” “legal notices” or the equivalent. There is a threshold
question of whether a buyer has assented to the terms and conditions by simply
purchasing from a website.[183] Our increasingly complex technical world has
created novel ways of manifesting assent to contracts. In ProCD Inc. v. Zeidenberg, Judge Easterbrook
held that “shrink-wrap” contracts are enforceable.[184] He noted that “[a] contract for sale of
goods may be made in any manner sufficient to show agreement, including
conduct.”[185] Furthermore a vendor, as “master of the
offer, may invite acceptance by conduct, and may propose limitations on the
kind of conduct that constitutes acceptance.”[186] In what seems to be a less controversial
decision, a New Jersey appellate court has ruled that a party can assent by
clicking “I agree,” or some equivalent action.[187] However, no court has yet decided whether a
“web-wrap” agreement, where the user is bound to all terms and conditions by
use of a website, is enforceable under current Article 2.[188]
In ProCD, Judge Easterbrook noted that ordinary terms do not require any
“special prominence” to bind the consumer.[189]
Other commentators disagree.[190]
They feel that a more definite manifestation of assent is necessary to bind a
consumer.[191] At least one case dealing with the risk of
loss to a consumer held that “[f]ine print in a security agreement” was not
sufficient to shift the risk of loss to a consumer buyer.”[192]
Without further guidance from the courts, this article will assume these
agreements to be binding and examine how a small sample of them may be
interpreted under current Article 2.
39. This section will examine the
effect of risk of loss provisions found on websites of Internet merchants and
auction sites. It provides a few examples of how electronic merchants attempt
to handle risk of loss with an analysis of how these attempts affect consumers.
40. At the bottom of the Amazon.com website, “legal notices” is the very
last of a number of small-type links.[193] Clicking on that link brings a potential
consumer to a list of legal terms, definitions, and disclaimers. The first paragraph states that “Amazon.com
and its affiliates provide their services to you subject to the following
notices, terms, and conditions.”[194]
The seventh paragraph is headed by bold-faced type reading “RISK OF LOSS.” That
paragraph states all purchases made from Amazon.com are to be construed as
“shipment contracts.” The next sentence explains the significance of a shipment
contract by stating that the risk of loss passes “to you upon our delivery to
the carrier.”
41. Amazon’s statement that purchases are shipment contracts may serve
as a polite notice to its customers but it is legally redundant. Without stating that all shipments are
F.O.B. purchases shipping address, the U.C.C. presumes shipment contracts.[195]
However, Amazon.com still must comply with section 2-504 in order to shift the
risk of loss to the buyer upon delivery.
If Amazon.com ships goods whose value is in excess of an amount
guaranteed by the carrier[196]
without providing the buyer meaningful opportunity to insure the goods
themselves, U.C.C. section 2-504 may
prevent the risk of loss from shifting to the buyer.[197]
42. Dell is one of the largest retailers of computer hardware in the
world. The company’s entire business
model is built on using technology to build hardware to order rather than
carrying a large inventory of finished products. Consequently, Dell sells a
significant amount of its products through its website. Dell’s website
addresses risk of loss with the following language:
43. Title; Risk of Loss. Title to products passes from Dell to Customer
on shipment from Dell's facility. Loss or damage that occurs during shipping by
a carrier selected by Dell is Dell's responsibility. Loss or damage that occurs
during shipping by a carrier selected by Customer is Customer's responsibility.
Title to software will remain with the applicable licensor(s). [198]
44. Dell explicitly accepts the risk of loss when it selects the
carrier, while explicitly assigning it to the customer who chooses a carrier
herself. Where a consumer chooses the
carrier herself, she bears the risk of loss.[199] In the unlikely event a customer chooses a
carrier herself, Dell could be liable by failure to comply with section 2-504,
if it does not provide the buyer a meaningful opportunity to insure the goods
herself.[200]
45. Gateway is a computer hardware seller focused on the consumer market
for personal computers (PCs). The company
does most of its business via telephone and Internet sales. Gateway expressly
accepts the risk of loss for goods ordered on the Internet and shipped via
carrier. Gateway’s “Shipment and Title”
section reads: “Title to the Product and Accessories passes to you upon
delivery to the carrier and risk of loss passes to you upon delivery.” [201] According to a strict reading of the U.C.C.
comments and pertinent cases, the fact that the terms are not “F.O.B. buyer
address” means that Gateway has created a shipment contract. It has accepted
the risk of loss by “contrary agreement” as allowed in section 2-509(4).
46. “eBay” bills itself as the “world’s first, biggest, and best online
trading community.”[202] eBay protects its “members,” one must register
as a member to participate in an eBay auction as a buyer or seller,[203]
and itself in several ways. First of
all, eBay tells its users that it is not
a seller. In its website, the section
marked “user agreement” states: “Our site acts as the venue for sellers to list
items (or, as appropriate, solicit offers to buy) and buyers to bid on items.
We are not involved in the actual transaction between buyers and sellers.”[204]
eBay also separates itself from the transaction itself by using a third party
to handle the payment for goods purchased via eBay.[205] Furthermore, shipping is offered directly by
the seller who generally includes a shipping cost in her description of the
item.[206] Finally, eBay offers to insure the cost of
all goods purchased using their site up to $200.[207] Thus eBay (assuming its User Agreement is
binding) has no control over the
goods, and is liable for risk of loss only up to the $200 limit stated in its
contract.[208] Instead, the seller will remain liable until
she has complied with the terms of 2-509(1)(a) by making a reasonable contract
under section 2-504, and “duly delivering” the goods to a carrier in a manner
that will give the buyer the ability to insure the goods.[209]
uBid.com
47. uBid.com is a site that offers goods to both businesses and
consumers. uBid, unlike eBay, takes a
much more active role in merchandising and handling consumer goods sold through
its site. For example, uBid.com ships
many items from its own warehouse and often controls shipping terms.[210] If uBid fails to comply with section 2-509
and 2-504 it could be held liable, as the seller, for losses before receipt by
the customer. Alternatively, section 2-509(2) may apply if uBid acts as a
bailee of the seller.[211]
This author could find no mention of risk of loss anywhere on the uBid
site. With no terms negotiated or used
in a contract, the U.C.C. will presume a shipment contract and the risk of loss
will pass to the buyer if uBid duly delivers the goods to a carrier and
complies with section 2-504 as discussed above.
48. Although this paper suggests
that the U.C.C. may not be adequate in handling consumer transactions, it is
worth noting that there has been very little litigation concerning risk of loss
in mail order or Internet transactions.[212] There are several potential reasons for this
dearth of reported complaints. One is
simply that the average and total value of goods purchased by consumers and
shipped by carriers has been too small to warrant litigation. That situation is likely to change as more
people buy more expensive items that will be shipped by carrier.[213] There are, however, several other tools that
may appear to provide some limited protection to non-merchant Internet consumers.
This section will discuss them briefly and conclude that none of them are
ultimately sufficient to provide reasonable relief to the growing number of
Internet consumers.
49. The use of Credit cards is the
dominant payment process on the Internet.[214] Any purchase made with a credit card gives
the cardholder powerful protections.
The cardholder has the right to “assert against the credit issuer all
claims (other than tort claims) and defenses arising out of the transaction and
relating to the failure to resolve the dispute.”[215]
The cardholder may withhold payment
up to the amount of the disputed transaction. The card issuer will pass the
deficit in payment back to the merchant who shipped the goods.[216]
This is a powerful tool for consumers, but it may not solve the problem. First
of all, if the buyer carried the risk of loss by operation of U.C.C. section
2-509(1), she may not have a valid defense against the merchant.[217]
Second, to be protected by this law, the purchase must be made within 100 miles
of the buyers currently designated address, or within the same state as her
designated address.[218] This raises the unsettled question of where
an online transaction takes place.[219] Third, these protections do not exist at all
for purchasers using debit cards or other forms of electronic payment.[220]
Finally, while credit cards are currently the dominant form of payment on the
Internet, other forms may arise.[221]
50. The use of the most common
carriers [222]
may alleviate some of the risk to sellers. United Postal Service (UPS) carries
over 55% of all goods sold over the World Wide Web.[223] UPS includes $100 of insurance in its
shipping rates.[224]
For transactions over $100, either buyer or seller must purchase insurance in
order to be covered.[225] A shipment with a value over $999 cannot be insured through UPS.[226] Federal Express, which carries about 10% of
the Internet packages,[227]
offers no insurance, but agrees to be liable up to $100 per package.[228] Federal Express will agree to be liable for
a declared value greater than $100 for an additional fee.[229] However, Federal Express clearly states that
it does not provide any insurance,
and will not be held liable for amounts in excess of the declared value of a
package.[230]
Furthermore, it places an absolute limit on its liability at $50,000.[231] The United States Postal Service (U.S.
Mail) offers insurance for an additional fee of about 2% of the value of the
package.[232]
51. Relying on the package delivery
carriers to bear the risk of loss is problematic since the coverage will vary
among them. Internet buyers in over half of all e-commerce transactions have
the benefit of $100 of insurance by virtue of UPS’s automatic insurance and its
55% market share. If the shipment is
worth more than $100, however, the buyer could be left underinsured. Private insurance is the only option for all
goods shipped via Federal Express. A buyer can always sue Federal Express, but
the company has attempted to limit its liability to the declared value of the
shipment.[233]
52. Buyers are often covered for
off-site property by homeowners’ insurance. While this may protect some
non-merchant buyers, the protection will vary from person to person and policy
to policy. Relying on a consumer policy
seems contrary to the U.C.C.’s stated theory that merchants are the party most
likely to insure. Furthermore, since
most policies are unlikely to cover goods until the insured obtains title, this
solution places buyers in the same position they were in before the U.C.C.
divorced title from risk of loss.
53. Over fifty years ago, the U.C.C.
rejected title and adopted instead the factors of control and likelihood of
insurance to determine who should bear the risk of loss absent a breach or contrary
agreement. Through oversight or adherence to the dominant commercial practice
when drafted, the U.C.C. does not follow this policy when non-merchant
consumers purchase goods to be delivered by carrier. Non-merchant buyers, absent contrary agreement, bear the risk of
loss even though they are unlikely to insure and have no control over the goods
while in transit. Although this oversight may have caused few problems in the
past,[234]
the rapid growth of e-commerce is likely to change that situation.
54. The U.C.C.’s requirement of the
commercial term “F.O.B.” is meaningless to most non-merchants and creates more
confusion than clarity to consumers involved in carriage contracts. It is the result of “[t]he freezing of the
meaning of the shipment terms in a statute vintage 1940’s.”[235]
While it may have been designed to create a “bright line” rule for exchanges
between commercial parties, consumers are disadvantaged by terms they are
unlikely to encounter in daily life.[236] The U.C.C. should adopt a more flexible
standard that will permit courts to adapt to rapidly changing commercial
practices.[237]
This author applauds the planned deletion of merchant terms from the U.C.C.[238]
This step alone, however, does not alter the Code’s presumption of a shipment
contract. Without a presumption of a
destination contract for consumer buyers and absent language to the contrary in
the contract, consumers will bear the risk of loss when e-tailers ship goods by
carrier.
55. One could argue that the current
U.C.C. section 2-504’s requirement of a reasonable contract and prompt notice
provides adequate protection to consumers whose goods are damaged or
destroyed. There are several problems
with that argument. First, it is not
clear that failure to comply with a section 2-504 element will always prevent
the risk of loss from shifting.[239]
Second, the case holding that section 2-504(c) requires a reasonable
opportunity to insure was referring to the time
necessary for a commercial buyer to obtain coverage.[240]
The court’s holding in Rheinberg-Kellerer
stated that the notice requirement of 2-504(c) need only give a “buyer the
opportunity to insure that it otherwise
would have taken advantage of.”[241]
The plaintiff in Rheinberg-Kellerer was
a commercial party who would have insured had he known the goods were to be
shipped.[242] This holding is scant protection for the
non-merchant buyer who is, by the U.C.C.’s own admission, “extremely unlikely
to insure.”[243]
Third, even if a consumer did have notice and knowledge to insure, it would
defeat one of the primary benefits of Internet retailing, namely convenience,
to delay shipping long enough for a consumer to figure out how to insure its
goods. A more efficient solution would be to have the merchant absorb the cost
of insurance, and spread it among its customers.[244] Fourth, while we have at least two cases (in
dicta) and two commentators supporting the presumption of a shipment contract
when consumers buy from businesses, there is no definitive holding on point or
support of such a result.[245] Without cases directly on point, or a
revision of the U.C.C., section 2-504(c) is no more than a warning to
e-merchants rather than a protection for consumers.
56. Karl Llewellyn’s objective for
U.C.C. sections 2-509 and 2-510 was to provide a clear framework for shifting
the risk of loss based on who was in control of the goods, who was likely to
insure the goods, and whether a party is in breach.[246] He rejected title as a determinative factor
because he felt it was out of step with new commercial practices.[247] Today the Internet is changing many
commercial practices. If U.C.C. section
2-509 is to serve the needs of consumers purchasing goods over the Internet, it
will have to change again.[248] Specifically, it should presume a
destination contract when a consumer purchases goods from a merchant.[249]
This would be a radical change to the current law only from the prospective
that section 2-509 currently does not consider the buyer’s status as a merchant
at all.[250] If a merchant seller wants to change this
allocation, we should allow them to do so using terms understandable to the
non-merchant buyer with whom it is dealing rather than a F.O.B. term. While determining plain language in an
electronic contract may create interpretive difficulty for a trial court, the
current allocation operates as a “penalty default” rule[251]
favoring sellers.[252]
Transactions between non-merchants need not be affected since neither party is
more likely to insure.[253] Finally, section 2-504(c) should provide
guidance to Internet sellers as to what type of notice a non-merchant buyer
must give in order to shift the risk of loss to a buyer upon delivery to a
carrier. With these minor changes
section 2-509 will continue to serve the needs of merchants and non-merchants buying and selling goods
electronically.
* Seth Gardenswartz received his J.D., cum laude, from the Southern Methodist
University Law School in May of 2000.
He has worked as an associate in the corporate finance and e-commerce
practice groups in the Denver office of Faegre & Benson. In January of 2002, Mr. Gardenswartz will
become the Director of Business Development at Employee Based Systems, a
provider of web based human resources solutions. Prior to attending law school, Mr. Gardenswartz spent over ten
years in the business sector as an owner and operator of two retail business
entities. Seth would like to thank
Professor Jane K. Winn for her assistance and encouragement in preparing this
article, and Professor Roy R. Anderson for his insight into Article 2. Seth can reached at sgardenswartz@getebs.com
or sgardenswartz@hotmail.com.
[1] See
U.C.C. § 2-501 (1998).
[2] The problem of allocation of these risks
has plagued merchants and courts since the first century B.C.E. See Mitchell Stocks, Comment, Risk of Loss Under the Uniform Commercial
Code and the United Nations Convention on Contracts for the International Sale
of Goods: A Comparative Analysis and Proposed Revision of U.C.C. Sections 2-509
and 2-510, 87 Nw. U. L. Rev.
1415, 1455 n.1 (1993).
[3] Robert L. Flores, Risk of Loss in Sales: A Missing Chapter in the History of the U.C.C.:
Through Llewellyn to Williston and a Bit Beyond, 27 Pac.
L.J. 161, 205 (1996).
[4] Id.
[5] Margaret Howard, Allocation of Risk of Loss Under the U.C.C.: A Transactional Evaluation
of Sections 2-509 and 2-510, 15 UCC L.J. 334 (1983).
[6] GRANT GILMORE & CHARLES L. BLACK, JR., THE LAW OF ADMIRALTY 101 (2d ed. 1975).
[7] Karl Llewellyn, Through Title to Contract and a Bit Beyond, 15 N.Y.U.L.Q. Rev. 159,184
(1938) (referring to the function of title as determinative process for
shifting risk of loss as “chasing halos”).
[8] See
Karl Llewellyn, Across Sales on
Horseback, 52 Harv. L. Rev. 725, 730 (1939).
[9] Llewellyn, supra note 7, at 185, 188.
[10] Howard, supra note 5, at
335.
[11] See
U.C.C. § 2-509 (1998).
[12] Howard, supra note 5, at 335.
[13] U.C.C. § 2-509.
[14] The word carrier is not defined by the
U.C.C. but is generally accepted to mean commercial railroads, airlines,
trucking companies, and ships. It does
not include a seller’s own truck or delivery device. See J. WHITE
& R. SUMMERS,
UNIFORM COMMERCIAL CODE § 5-2, at 187 (5th ed. 2000).
[15] U.C.C.
§ 2-509(1).
[16] Id.
[17] Id.
§§ 2-504, 2-509(1)(a).
[18] Id.
§§ 2-503(1)-(3) , 2-509(1)(b), 2-503 cmt. 5.
[19] Id.
§ 2-509(1)(a).
[20] Id.
§ 2-509(1)(b).
[21] See
Howard, supra note 5, at 345.
[22] A bailee is “a person who by warehouse
receipt, bill of lading, or other document of title acknowledges possession of
goods and contracts to transfer them.” BLACK’S LAW DICTIONARY 141 (6th ed. 1990). See also Caudle v. Sherrard Motor Co., 525 S.W.2d 238, 240 (Tex.
Civ. App. Dallas 1975).
[23] U.C.C. § 2-509(2) (1998).
[24] Howard, supra note 5, at 351.
[25] U.C.C. § 2-509(3).
[26] Howard, supra note 5, at 351.
[27] U.C.C. § 2-509(3).
[28] Id.
§ 2-103(1)(c).
[29] Id.
See also Howard, supra note 5, at 353 n. 68.
[30] U.C.C. § 2-503(1).
[31] Id.
§ 2-509 cmt. 3.
[32] Id.
§ 2-509(4).
[33] Id.
§ 2-509 cmt. 4.
[34] For a full discussion of the risk of
loss in breach situations, see
Howard, supra note 5, at 355.
[35] See
GILMORE &
BLACK, supra note 6, at 101 (noting that the
U.C.C. was drafted in the 1940s to conform to commercial practices common in
the 1930s).
[36] Clayton M. Christianson & Richard S.
Tedlow, Patterns of Distribution in
Retailing, Harvard Business Review,
January-February 2000; see also U.S.
Dep’t of Commerce, The Emerging Digital Economy A5-9 (1998), available at http://www.doc.gov/ecommerce/EmergingDig.pdf
(last visited Nov. 18, 2001). Both manufacturers
and retailers would meet the Article 2 definition of a merchant. See U.C.C. § 2-104 (1998).
[37] Malcolm Gladwell, Clicks and Mortar, The New Yorker,
Dec. 6, 1999. Betty Liu, Internet Is a Mixed Blessing for UPS, FINANCIAL TIMES (London), Nov. 10, 1999, § 1, at 38
(noting that 55% of all e-commerce shipments are currently handled by UPS). See also Keith Fulton, The Use of Disclaimers & the Internet’s
World Wide Web, 6 Media L. Pol’y Bull.
1 (1997); U.S. Dep’t of Commerce,
supra note 36, at A5-9 (noting the
relatively low overhead of most e-tailers).
[38] Liu, supra
note 37, at 38.
[39] See
Note, Risk of Loss in Commercial
Transactions: Efficiency Thrown into the Breach, 65 Va. L. Rev.
557, 566 (1979) [hereinafter “Va. Note”].
[40] See
U.C.C. § 2-509 cmt. 3 (1998). See also
Howard, supra note 5, at 338 (noting
that the U.C.C. stresses likelihood of insurance rather than economic
efficiency, and distinguishes it from control).
[41] See
James L. Floorman, Risk of Loss Under
Section 2-509 of the California Uniform Commercial Code, 20 UCLA L. Rev. 1352, 1374 (1973).
[42] Id.
at 1374.
[43] Id.
[44] See
id.; See Howard, supra note 5,
at 335 (stating that section 2-509 is “ill-suited to noncommercial sales
contracts, although clearly applicable to them”); Va. Note, supra note 39, at 566 (calling the
presumption of a destination contract in the context of consumer buyers a
“minor flaw”).
[45] See
Va. Note, supra n. 39, at 566.
[46] See
Liu, supra note 37, at 38.
[47] Walter A. Effross, The Legal Architecture of Virtual Stores: World Wide Websites and the
Uniform Commercial Code, 34 San Diego L. Rev.
1263, 1287 (1997).
[48] Id.
[49] See
WHITE
& SUMMERS,
supra note 14, at 181 (citing and summarizing
Karl Llewellyn’s address to the New York Law Commission). Professors White and Summers believe U.C.C.
section 2-509 is an overwhelming success in making risk of loss law clear. See id.
at 181-182 (noting that the U.C.C. risk of loss provisions have dramatically
reduced the amount of litigation on the subject compared to prior law).
[50] See
U.C.C. § 2-509 (1998).
[51] Id.
§ 2-509(3).
[52] Id.
[53] Id.
§ 2-509 cmt. 3.
[54] Id.
(emphasis added).
[55] Id.
See also Howard, supra note 5, at 336.
[56] See supra note 14.
[57] Howard, supra note 5, at 345.
[58] Id.
at 337.
[59] Id.
at 345-346.
[60] See
id. at 345, 352.
[61] Va. Note, supra note 39, at 566.
[62] Id.
See also Colony Press v. Fleeman, 308
N.E.2d 78, 81 (Ill. App. Ct. 1974); Hayward v. Postma, 188 N.W.2d 31, 33 (Mich.
Ct. App. 1931); Caudle v. Sherrard Motor Co. 525 S.W.2d 238, 242 (Tex. Civ.
App. 1975). All of these cases note that consumers are unlikely to insure.
[63] See
Howard, supra note 5, at 353 (noting
that the buyer’s status as a merchant is not mentioned in section 2-509(3)).
[64] See
Floorman, supra note 41, at 1374.
[65] An e-tailer might argue that it no
longer has any control of the goods once they are delivered to the
carrier. See Howard, supra note 5,
at 334.
[66] When goods are shipped by carrier, neither
party has physical nor indirect control during transit. Id. at 344. The U.C.C. is
merely the default provision allowing parties to determine risk of loss by
agreement. Without such express agreement the seller is directed by section 2-504 to make a reasonable contract
for shipment. Any control the seller had over the carrier is a “present fiction
. . . based on a bygone fact.” Id.
[67] See
U.C.C. § 2-504; infra Part IV.A.1
(explaining why the buyer has no agency argument against the seller for choosing
the carrier).
[68] A seller’s own truck is not considered a
carrier. See WHITE & SUMMERS, supra
note 14, at 186.
[69] U.C.C. § 2-509(3).
[70] Id.
§ 2-509(1).
[71] Eberhard Mfg. Co., v. Brown, 232 N.W.2d
378, 380 (Mich. Ct. App., 1975).
[72] This means paying the carrier to
deliver.
[73] U.C.C. § 2-509(1)(a).
[74] Id.
§ 2-503 cmt. 5; See, e.g.,
Pulkrabek v. Bankers’ Mortg. Corp., 238 P. 347, 349 (Or. 1925).
[75] See
Pulkrabek, 238 P. at 349.
[76] U.C.C. § 2-503 cmt. 5.
[77] Id.
[78] GILMORE & BLACK, supra
note 6, at 108.
[79] F.O.B. stands for “free on board.” If a
contract covering the sale of tennis shoes from a seller located at 1 Bowerman
Drive, Beaverton, OR, to a buyer’s place of business at 2720 San Mateo,
Albuquerque, NM, contains a term “F.O.B. buyers warehouse in Beaverton,” the
contract means that the buyer is responsible for the cost of shipment from
Beaverton to Albuquerque. If instead
the contract read F.O.B. 2720 San Mateo, Albuquerque, NM, it would be a
delivery contract. See U.C.C §§
2-319(a)-(b); WHITE
& SUMMERS, supra note 14, at 118-119.
F.A.S. stands for “free along side.” It differs from F.O.B. mainly by
not requiring the seller to unload the goods. U.C.C. § 2-319(2). F.A.S. is frequently used in maritime
contexts. See id. C.I.F is a term meaning freight and insurance costs are
included in the price of the contract. Id.
§ 2-320(1). C. & F. means that the contract price includes freight but not
insurance. Id.
[80] Id.;
see also Eberhard, 232 N.W.2d at 380.
[81] Morauer v. Deak & Co., Inc., 26 U.C.C.
Rep. Serv. 1142, 1979 WL 30079 (D.C. Super. Ct. 1979); Eberhard, 232 N.W.2d. at 380. Note that the term “Ex-Ship” will
create a delivery contract, but applies only to delivery by vessel and is,
therefore, less applicable to electronic transactions involving consumers.
U.C.C. § 2-322. U.C.C. section 2-319(2)
uses the term F.A.S. which applies only to goods shipped by boat. U.C.C. section 2-320 defines the terms
C.I.F. and C. & F. These terms do not create delivery contracts but they do
shift the risk of loss to the seller. See
id. § 2-320 cmt. 1. Professors White and Summers argue that in order to
create a destination contract, parties must expressly “agree to a destination
contract by using F.O.B. buyer’s place of business or equivalent language.” WHITE & SUMMERS, supra
note 14, at 186.
[82] Eberhard,
232 N.W.2d at 380; Knitwear Corp. v. All-America Export Import Corp., 359 N.E.
2d 342, 347 (N.Y. 1976).
[83] Eberhard,
232 N.W.2d at 380; Electric Regulator Corp. v. Sterling Extruder Corp., 280 F.
Supp. 550, 557-558 (D. Con. 1968).
[84] WHITE & SUMMERS, supra
note 14, at 186; but see Baumgold
Brothers, Inc. v. Allen Fox Co., 375 F. Supp. 807, 815 (N.D. Ohio 1973)
(holding that the term “the merchandise … is delivered to you” coupled with
sellers intent to deliver evidenced by insurance and use of registered mail
created a destination contract).
[85] U.S.
Dep’t of Commerce, supra
note 36, at A5-9.
[86] Howard, supra note 5, at 343, 345.
[87] Absent contrary agreement the seller is
free to choose the shipper. See
U.C.C. § 2-311(2) (1989).
[88] Id.
§ 2-509 cmt. 5.
[89] Id.
[90] See
Howard, supra note 5, at 345 (citing
Caudle v. Sherrard Motor Co., 525 S.W.2d 238 (Tex. Civ. App. 1975) (noting that
use of “mercantile terms” in contracts with non-merchant parties create a “trap
for the unwary”).
[91] GILMORE & BLACK, supra
note 6, at 108.
[92] See
Howard, supra note 5, at 345;
Floorman, supra note 41, at 1378.;
Va. Note, supra note 39, at 566
(calling the oversight a “minor flaw” in section 2-509); Colony Press v.
Fleeman, 308 N.E.2d 78, 81 (1974) (States that the risk of loss in a mail order
contract does not pass to the buyer until the goods are received. Curiously the
court supported its this statement with U.C.C. section 2-509(3), a section that
does not apply unless neither a carrier nor a bailee is used in the
transaction. This could be either an
error or a suggestion that mail order is not conceptually different from a face
to face transaction in a retail store); see
also Hayward v. Postma, 188 N.W.2d 31, 33 (Mich. Ct. App. 1971) (stating
one court’s opinion that shifting the risk of loss to consumer is so unusual
and unexpected that “boiler-plate” language is not sufficient to create an
contrary agreement under U.C.C. section 2-509(4)).
[93] See
REVISION OF UNIFORM COMMERCIAL CODE ARTICLE 2 – SALES § 2-509(a) (Draft March 2000), available
at http://www.law.upenn.edu/bll/ulc/ucc2/2300.htm
(last visited Nov. 20, 2001) [hereinafter “Draft Revision of U.C.C.”] (showing
section 2-509(a) without a modification to address non-merchant buyers
receiving goods via carrier).
[94] Buyer or seller can sue the carrier,
regardless of whether the carrier bore the risk of loss, however, the recovery
will go to the party who bore the risk. U.C.C. § 2-722 (1998). See also Howard, supra note 5, at 346.
[95] The fact that a shipper is likely to be
insured, and in physical control of the goods, provides partial validation for
the insurance premise of allocating the risk of loss to the party in control or
likely to insure. However, section 2-509 is supposed to allocate the risk of
loss between the buyer and seller rather than to third parties. Howard, supra note 5, at 346.
[96] Interview with Brad Ward, Manager, Eagle
Postal Center in Dallas, Tex. 75205. (March 2, 2000).
[97] Id.
[98] Floorman, supra note 41, at 1374.
[99] U.C.C. § 2-509(1).
[100] See
id. §§ 2-503(2), 2-504.
[101] Id.
§ 2-504(a). Note that this section cuts out the “shipper as the seller’s agent”
theory of recovery for the buyer.
[102] Id.
§ 2-504(b).
[103] Id.
§ 2-504(c).
[104] Id.
§ 2-503(2). See also
Rheinberg-Kellerie GMBH v. Vineyard Wine Co., 281 S.E.2d. 425 (N.C. Ct. App.
1981). But see WHITE
& SUMMERS,
supra note 14, § 5-2 (noting that it is
not settled what provisions of section 2-504 may prevent passage of risk to a
buyer).
[105] La Casse v. Blaustein, 403 N.Y.S.2d 440 (N.Y. Civ. Ct. 1978)
[106] Id.
[107] The court relied on U.C.C. section
2-504, comment 3 (1989), which states: “It is an improper contract under
paragraph (a) for the seller to agree with the carrier to a limited valuation
below the true value and thus cut off the buyer’s opportunity to recover from
the carrier in event of loss, when the risk of shipment is on the buyer.” Id.
[108] See
Morauer v. Deak & Co., Inc., 26 UCC Rep. Serv. 1142,1979 WL 30079 (D.C.
Super. Ct. 1979). The fact that all necessary documents have been delivered, and the fact that the seller
gave personal notice to the buyer also satisfied the requirements of section
2-504(c). Id.
[109] Id.
[110] See,
e.g., shipping confirmation from Amazon.com (on file with author) (sent via
email on same day (March 30, 2000) order was placed).
[111] WHITE & SUMMERS, supra
note 14, at 254 (citing Rheinberg-Kellerer GMBH v. Vineyard Wine Co., 281 S.E.2d
425, 428 (N.C. Ct. App. 1981)).
[112] Id.
Another court noted that a contract that shifts the risk of loss from a
merchant seller to a non-merchant buyer before the buyers receives his goods is
“so unusual that a seller who wants to achieve this result must make his intent
very clear to the buyer.” Hayward v. Postma, 188 N.W.2d 31 (Mich. Ct.
App.1971).
[113] See,
e.g., David Maloney, E-conveyers
(Distribution Centers Tailored for Electronic Commerce Companies), 55 MOD. MATERIALS HANDLING 49, Iss. 1, 2000 WL 14170620, (Jan. 31,
2000).
[114] E-mail notice would arguably satisfy
requirement of notice to the buyer. See
YOCHAI BENKLER, Rules of the Road for the Information Superhighway: Electronic Communications and the Law pt. II ch. 4 (West 1995).
[115] Rheinberg-Kellerer GMBH, 281 S.E.2d at 428.
[116] Id.
[117] Id.
[118] Id.
[119] Colony Press v. Fleeman, 308 N.E.2d 78
(Ill. App. Ct. 1974) (applying section 2-509(3) to support its statement);
Electric Regulator Corp. v. Sterling Extruder Corp., 280 F. Supp. 550, 558 (D.
Conn. 1968). Both these cases were jurisdiction cases and the courts made no
decision regarding the risk of loss. See
also Baumgold Brothers, Inc. v. Allen Fox Co., 375 F.Supp. 807, 815 (N.D.
Ohio 1973).
[120] See
Colony Press, 308 N.E.2d at 78;
Hayward v. Postma, 188 N.W.2d 31, 33 (Mich. Ct. App. 1931); Caudle v. Sherrard
Motor Co., 525 S.W.2d 238, 242 (Tex. Civ. App. 1975).
[121] WHITE & SUMMERS, supra
note 14.
[122] See
U.C.C § 2-509(4) (1989). See also infra IV D.
[123] Julian S. Millstien, Jeffery D. Neuburger, &
Jeffery P. Weingart,
Doing Business on the Internet: Forms and Analysis §8 n.8 (1999).
[124] Id.
§ 8.02[2].
[125] See
Jeffery Ritter & J. Keith Harmon, Electronic
Data Interchange: The Foundation Technology for Electronic Commerce, 452
PLI/Pat 467, 469 (Order No.
G4-3988, Sept. 1996). See also INTERNETWEEK, April 5, 1999 Tap XML's Potential Now
XML (referring to XML as “open EDI”).
[126] Ritter, supra note 126, at 469.
[127] U.S.
Dep’t of Commerce, supra
note 36.
[128] Ritter, supra note 126, at 469.
[129] Henry H. Perritt, Jr., President Clinton’s National Information
Infrastructure Initiative: Community Regained, 69 Chi.-Kent L. Rev. 991, 1007 (1994).
[130] Electronic Messaging Services Task Force
under the auspices of the Subcommittee on Electronic Commercial Practices
Uniform Commercial Code Committee, Section of Business Law, of the American Bar
Association, Model Electronic Data
Interchange Trading Partner Agreement and Commentary, 45 Bus. Law. 1717
(1990) [hereinafter “ABA Opinion”].
[131] Ritter, supra note 126, at 469.
[132] See
WHITE
& SUMMERS,
supra note 14, at 186. See also U.C.C. § 2-504 cmt. 5 (1989).
[133] Id.
§ 2-509(1)(a).
[134] U.S.
Dep’t of Commerce, supra
note 36.
[135] See
XML Core Workgroup at http://www.w3.org/XML/Activity - core-wg (last modified
Nov. 26, 2000).
[136] See
W3C, XML in 10 Points at http://www.w3.org/XML/1999/XML-in-10-points
(last visited December 15,
2001).
[137] Contrast this to business to consumer
transactions where the consumer does the work of XML software by “reading”
about the product and terms on a web-site and interpreting the products and
terms offered. XML allows this process
to occur with minimal human interaction. Id.
[138] Morauer v. Deak & Co., Inc., 26 UCC
Rep. Serv. 1142, 1979 WL 30079 (D.C. Super. Ct. 1979); Eberhard Mfg. Co., v.
Brown, 232 N.W.2d.378, (Mich. Ct. App. 1975).
[139] Id.
[140] See
ABA Opinion, supra note 131, § 3 cmt.
7.
[141] See,
e.g., eBay Inc., Company Overview at http://pages.ebay.com/community/aboutebay/overview/index.html
(last modified Nov. 11, 2001) (“Individuals—not big businesses—use eBay to buy
and sell items in more than 4,320 categories . . .”). But see Local Trading at http://pages.ebay.com/regional/hub.html
(last modified Nov. 11, 2001) (for an example of
electronic auctions for goods that would not be shipped; these transactions
would probably be covered by U.C.C.section 2-509(3)).
[142] See,
e.g., Taylor & Martin, Inc., v. Hiland Dairy, Inc., 676 S.W.2d 859, 871
(Mo. Ct. App. 1984). See also 7 Am. Jur.
2d, Auctions and Auctioneers § 51 (1997).
[143] 3A RONALD A. ANDERSON, ANDERSON ON THE UNIFORM COMMERCIAL CODE § 2-328:22 (3d ed. 1981).
[144] See
generally eBay Inc., The World’s Online Marketplace at http://www.ebay.com/
(last visited Dec. 7, 2001).
[145] 7 AM. JUR. 2D Auctions
and Auctioneers § 51 (1997). See also
U.C.C. § 2-328 (1998) (regarding general rules of auction).
[146] Howard, supra note 5, at 352.
[147] Id.
[148] 2A ANDERSON, supra
note 144.
[149] 2A Id.;
see also 2A id. at § 2-328:21.
[150] Id.
at § 2-328:22.
[151] See,
e.g., Dargate Auction Galleries, Instructions at http://www.dargate.com/os/info_page.shtml (last
visited Nov. 19, 2001)(regarding details of how an in-person/Internet hybrid
auction functions).
[152] Section 2-504 requires the seller to
make a reasonable contract, promptly deliver necessary documents, and give the buyer
prompt notice. The notice should provide the buyer a reasonable opportunity to insure the goods if it so
chooses. Rheinberg-Kellerer GMBH v.
Vineyard Wine Co., 281 S.E.2d 425, 428 (N.C. Ct. App. 1981). The case did not
demand the seller inform the buyer of
its need to insure. It only required
that the buyer have sufficient time
to insure if it so desired. Id.
[153] Howard, supra note 5, at 336.
[154] See
id.
[155] See
Floorman, supra note 41, at 1373
(calling for a presumption of a destination contract when consumers purchase
from merchants). Most Internet purchases are shipped by carrier. Liu, supra note 37, at 38.
[156] Howard, supra note 5, at 335.
[157] See
U.C.C. § 2-504 (1998).
[158] See,
e.g., Caudel v. Sherrard Motor Co., 525 S.W.2d 238 (Tex. Civ. App. 1975); Conway
v. Larson Jewlers, Inc., 429 N.Y.S.2d 378 (Civ. Ct. 1980); Martin v. Melland’s
Inc., 283 N.W.2d. 47 (N.D. 1974).
[159] See,
e.g., Silver v. Wycombe, Meyer & Co., 477 N.Y.S.2d 288 (Civ. Ct. 1984),
aff’d, 498 N.Y.S.2d 334 (N.Y. App.
Term 1985). See also Howard, supra note 5, at 348.
[160] Howard, supra note 5 at 348.
[161] See
WHITE
& SUMMERS,
supra note 14, § 5-4, at 188.
[162] See
Howard, supra note 5, at 348 n. 52
(arguing that the U.C.C. section 2-509 is designed to deal with the rights of
buyers and sellers when third parties are involved and the seller as bailee
scenario “the issues are collapsed”); WHITE & SUMMERS, supra
note 14, § 5-4, at 188 (arguing that that the seller-as-bailee concept shifts
the risk of loss in the same manner rejected by the previous code).
[163] See
Bob Ortega, In
Sam
We
Trust:
The
Untold
Story
of
Sam
Walton
and Wal-Mart,
the
World's
Most
Powerful
Retailer (Times Business
1999); U.S. Dep’t of Commerce,
supra note 36.
[164] See
Luria Brothers & Co., Inc. v. Assoc. Metals & Minerals Corp., 343 N.Y.S.2d
152 (N.Y. Civ. Ct. 1972)(holding that a buyer of a barge loaded will goods was
a bailee until the barge owner could recover possession).
[165] See
Howard, supra note 5, at 349.
[166] See
GILMORE
& BLACK,
supra note 6, at 109 (noting that
once goods have been identified to the contract, the buyer has an insurable
interest).
[167] See
Millstein, supra
note 124.
[168] U.C.C. § 2-509(2)(a) (1998).
[169] Id.
[170] See OCBC Bank joins global
e-trade system, The Straits Times,
Mar. 24, 2001, available at http://www.bolero.net./news/inthenews/ (last visited
Nov. 19, 2001).
[171] Balero.net, Balero User Overview, at http://www.bolero.net./overview/who_for/,
(last visited Nov. 19, 2001).
[172] See
Liu, supra note 37, at 38.
[173] Rebecca Mobray, Grocery will open online in Houston, The Houston Chronicle, March 17, 2000, at BUSINESS 1. (“HomeGrocer.com expects to expand
from its six West Coast locations into eight to 10 additional major markets
this year. So far it has announced plans to expand into Dallas, Atlanta, San
Diego, the southern Connecticut-New York City region, Chicago, Washington,
D.C., and San Francisco.”).
[174] “[F]ood is just the beginning. Peapod, which
prefers to call itself an "online home fulfillment business," plans
to add flowers, books, magazines, dry cleaning and the other services that
cause people to run errands.” Id.
[175] See
WHITE
& SUMMERS,
supra note 14, at 186.
[176] See
id.
[177] In reality both retailers used in this
example explicitly accept the risk for spoilage or any dissatisfaction. See Omaha Steaks at http://shop11.omahasteaks.com
(last visited Dec. 7, 2001); Peapod at http://www.peapod.com (last
visited Dec. 7, 2001).
[178] U.C.C. § 2-509 cmt. 3 (1998).
[179] See
id. at § 2-509(3). Note that both of
these retailers explicitly accept the risk for spoilage or any
dissatisfaction). See also Omaha
Steaks, supra note 178, at http://shop11.omahasteaks.com.
[180] Howard, supra note 5, at 348.
[181] See
Floorman, supra note 41, at 1379
(citing Comment, Risk of Loss and The
Uniform Commercial Code: The Unlamented Passing of Title, 13 U. Kan. L. Rev.
565, 565-566 (1965).
[182] U.C.C. § 2-509(4) (1998).
[183] See
id. at § 2-204(1).
[184] ProCD, Inc. v. Zeidenberg, 86 F.3d 1447
(7th Cir. 1996)
[185] Id.
at 1452 (quoting U.C.C. § 2-204(1)).
[186] Id.;
See also Hill v. Gateway, 105 F.3d 1147 (7th Cir. 1997).
[187] Caspi v. Microsoft Network, 732 A.2d 528
(N.J. Super. Ct. App. Div. 1999).
[188] See Effross, supra note 47, at 1263. See also Micro Star v. Formgen Inc., 154
F.3d 1107,1113 (9th Cir. 1998) (refusing to rule on the enforceability of a web-wrap
User License).
[189] See
ProCD, 86 F.3d at 1453 (noting that
while implied warranty disclaimers must be conspicuous, the same is not true of
all contract provisions).
[190] See,
e.g., Christopher L. Pitet, Notes and Comments: The Problem with “Money Now, Terms Later”: ProCD, Inc., v. Zeidenberg
and the Enforceability of “Shrinkwrap” Software Licenses, 31 Loy. L.A. L. Rev.
325 (1997); Mark A. Lemley, Shrinkwraps
In Cyberspace, 35 Jurimetrics
J. 311, 317-320 (1995); Brian Covotta & Pamela Sergeeff, ProCd, Inc. v. Zeidenberg, 13 Berkeley Tech.
L.J. 35, 43 (1998).
[191] A full discussion of the enforceability
of terms and conditions included in web-sites is beyond the scope of this
paper. See generally Randy Sabett, International
Harmonization in Electronic Commerce and Electronic Interchange: A Proposed
First Step Toward Signing on the Digital Dotted Line, 46 Am. U. L. Rev.
511 (1996); Kurt A. Wimmer, E-Litigation:
Clicks and Contracts, 4 Corp. Couns. 1, (1999); B. Keith Fulton, The Use of Disclaimers & the Internet’s
World Wide Web, 6 Media L. & Pol’y 1 (1997).
[192] Hayward v. Postma, 188 N.W.2d 31, 33
(Mich. Ct. App. 1971).
[193] See
Amazon.com, Help / Privacy & Security / Privacy Notice / Conditions at http://www.amazon.com/exec/obidos/tg/browse/-/508088/107-3309310-7278118
(last visited December 15, 2001).
[194] Id.
[195] See
WHITE
& SUMMERS,
supra note 14, at 255.
[196] See
infra IV E 2.
[197] See
Rheinberg-Kellerer GMBH v. Vineyard Wine Co., 281 S.E.2d 425 (N.C. Ct. App.
1981).
[198] Dell Computer Corp., Terms and Conditions of Sale - Home, Home
Office and Small Business Customers, at
http://www.dell.com/us/en/gen/misc/policy_008_policy.htm
(last visited Nov. 18, 2001).
[199] It is worth noting that consumers
(non-business buyers) are not given an option for selecting a carrier. Thus, consumers never bear any risk of loss
when purchasing from Dell.
[200] See
Rheinberg-Kellerer GMBH, 281 S.E.2d
425 (N.C. Ct. App. 1981).
[201] Gateway, Inc., Gateway Consumer Products Limited Warranty and Terms & Conditions
Agreement §1.B., at http://www.gateway.com/about/legal/warranties/20677r1-0.pdf
(Oct. 1, 2001).
[202] See
eBay Inc., Company Overview, at http://pages.ebay.com/community/aboutebay/overview/index.html
(last visited Mar. 23, 2000).
[203] Id.
[204] eBay Inc., User Agreement, at http://pages.ebay.com/help/community/png-user.html
(last visited Mar. 23, 2000).
[205] Compare
Emerald Enterprises, Auction Winner’s
Circle, at http://www.emeraldenterprises.com/winner.html
(last modified Oct. 4, 2001) with George Anders, eBay, Wells Team Up
Web Payments, WALL
ST. J.,
March 1, 2000, at B8 (outlining a plan to let non-merchant sellers accept payment by credit card).
[206] See
generally eBay Inc., supra note 144, at http://www.ebay.com/.
[207] “Every eBay user is covered by insurance
free of charge under the terms of our program. If you paid for an item and
never received it (or if you received the item, but it's less than what you
expected), eBay will reimburse buyers up to $200, less the standard $25
deductible. Visit our Fraud Protection Program page for more details.” eBay Inc., Why eBay is Safe, at http://pages.ebay.com/help/basics/n-is-ebay-safe.html
(last visited Oct. 29, 2001).
[208] Id.
See Howard, supra note 5, at 342, 343 (discussing the control theory on which
section 2-509 is based).
[209] See
discussion of seller’s responsibilities infra
¶¶ 20-21.
[210] uBid, Inc., How long does order processing and delivery take?, at http://www.ubid.com/help/policies_shipping.asp (last
visited Oct. 15, 2001).
[211] See
Caudle v. Sherrard Motor Co., 525 S.W. 2d 238 (Tex. Civ. App. 1975).
[212] Many of the cases deal with how shipping
terms affect personal jurisdiction, and only mention risk of loss in dicta. See, e.g., Electric Regulator Corp. v.
Sterling Extruder Corp., 280 F. Supp 550, 558 (D. Conn. 1968); Colony Press,
Inc. v. Fleeman, 308 N.E.2d 78 (Ill. App. 1974).
[213] See
Effross, supra note 47, at 1287.
[214] U.S.
Dep’t of Commerce,
supra note 36, at A5-9.
[215] 12 C.F.R. § 226.12(c) (2001).
[216] LARRY LAWRENCE, AN INTRODUCTION TO PAYMENT SYSTEMS 523 (Aspen 1997).
[217] Id.
at 525.
[218] 12 C.F.R. § 226.12(c)(3)(ii) (2001). Furthermore,
other limitations apply: The cardholder must make a good faith attempt to
resolve the issue and the charge must be for an amount greater than $50.00. Id.
[219] See
Effross, supra note 47, at 1381.
[220] See
12 C.F.R. § 226.12(c)(3).
[221] See,
e.g., Yahoo! Inc., Yahoo! Plans to Offer Person-to-Person Payment Solution
to Buyers and Sellers, at http//docs.yahoo.com.docs/pr/release496.html
(copy on file with author).
[222] UPS, FedEx, and USPS are probably
considered carriers under U.C.C. section 2-509. See WHITE & SUMMERS, supra
note 14, at 256.
[223] See
Liu, supra note 37.
[224] See
United Parcel Service, Excess Value
Insurance, at https://www.ups.com/using/services/accs/dv-guide.html
(last visited Nov. 18, 2001). UPS insures any package for $100 (U.S.
destinations) or any shipment for $100 (international destinations) at no
additional charge. Additional insurance costs $.35 per $100 of additional
coverage. The maximum declared value of a package is $999. Id.
[225] Id.
[226] Id.
[227] Liu, supra
note 37.
[228] See
Federal Express, Declared Value and
Limits of Liability, at http://www.federalexpress.com/us/services/conditions/domestic/declared_value.html
(last visited Nov. 18, 2001).
[229] Id.
[230] Id.
One should note that a seller’s failure to declare a “true value” will violate section
2-504’s “reasonable contract” requirement. See
U.C.C. § 2-504 cmt. 5 (1998).
[231] “Exposure to and risk of any loss in
excess of the declared value is either assumed by the shipper or transferred by
the shipper to an insurance carrier through the purchase of an insurance
policy. You should contact an insurance agent or broker if insurance coverage
is desired. WE DO NOT PROVIDE INSURANCE COVERAGE OF ANY KIND…[T]he maximum
declared value per package in any FedEx shipment is $50,000.” Federal Express, supra note 230.
[232] United States Postal System, Domestic Rates and Fees (Simplified), at http://www.usps.gov/consumer/rater900.htm
(last visited Oct. 30, 2001).
[233] Buyer or seller can sue the carrier whether
she bore the risk of loss or not.
However, the recovery will go to the party who bore the risk. U.C.C. §
2-722 (1998).
[234] Va. Note, supra note 39, at 566 (referring to the issue as a “minor flaw”).
[235] GILMORE & BLACK, supra
note 6, at 108 (noting that this “freezing” will “pose obvious problems if
changing business practices make it necessary or desirable to reformulate the
mercantile understanding" of shipping terms).
[236] Caudle v. Sherrard Motor Co., 525 S.W.2d
238, 241 (Tex. Civ. App. 1975) (noting that use of “mercantile terms” in
contracts with non-merchant parties create a “trap for the unwary”).
[237] Stocks, supra note 2, at 1423 n.56 (citing Professor Honnold’s assertion
that the CISG deliberately leaves shipping terms undefined to allow for flexibility).
[238] See
Draft Revision of U.C.C., supra note
93, §§ 2-319 to -324 .
[239] WHITE & SUMMERS, supra
note 14, § 2-5.
[240] Rheinberg-Kellerer GMBH v. Vineyard Wine
Co., 281 S.E.2d 425 (N.C. Ct. App. 1981).
[241] Id.
at 428.
[242] Id.
[243] U.C.C. § 2-509, cmt.3 (1989).
[244] See
Va. Note, supra note 39, at 566
(citing R. POSNER,
ECONOMIC ANALYSIS OF THE LAW 75 (2d ed. 1977)).
[245] See
Howard, supra note 5, at 345 n.34. See also Colony Press, Inc. v. Fleeman, 308
N.E.2d 78 (Ill. Ct. App. 1974); Electric Regulator Corp. v. Sterling Extruder
Corp., 280 F. Supp 550, 558 (D. Conn. 1968).
Both of these cases were jurisdiction cases and the courts made no
decision regarding the risk of loss. See also Va. Note, supra note 39; Floorman, supra
note 41.
[246] See
Howard supra note 5, at 345 n.6.
[247] Id.
[248] Edith Resnick Warkentine, Article 2 Revisions: An Opportunity To
Protect Consumers And “Merchant/Consumers” Through Default Provisions, 30 J. Marshall L. Rev.
39, 40 (1996) (noting the blurring of merchant and consumer).
[249] Va. Note, supra note 39, at 572.
[250] See
Warkentine, supra note 250, at 77
(noting the importance placed on the buyer’s status in court decisions under
article 2). See also Howard supra note 4, at 352.
[251] Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An
Economic Theory of Default Rules, 99 Yale L.J.
87 (1989) (arguing that penalty default rules are efficient only where the cost
of negotiation before contracting is less than the cost of the court to
determine the terms).
[252] See
Stocks, supra note 2, at 1452
n.283 (discussing the Ayres &
Gertner article and analyzing why penalty default rules are not effective
between merchants and non-merchants).
While the cost to the parties to negotiate risk of loss is clearly less
than the cost of the courts to adjudicate a conflict, non-merchant buyers are
not likely to know the default rules.
Therefore, they will be unlikely to motivate a non-merchant to negotiate. Furthermore, few electronic contracts are
negotiated at all.
[253] In transactions between consumers, the
seller will be considered a merchant if she used an auction to sell her goods. See 7 AM. JUR. 2D Auctions
§ 51, at 1452 (1997).