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