Performance, breach, and discharge - Other performance matte...

Learning Outcomes

This article explains contract performance, breach, and discharge in UCC sales of goods, including:

• Distinguishing the UCC perfect tender rule from the common‑law substantial performance doctrine and spotting which regime governs a fact pattern.
• Determining when a seller has a right to cure a nonconforming tender, both before and after the contract time for performance has expired.
• Identifying when goods have been “identified” to the contract and why identification matters for insurable interest, specific performance, and casualty to identified goods.
• Applying the UCC’s notice rules for rejection, revocation of acceptance, and post‑acceptance breach to preserve or bar remedies.
• Allocating risk of loss between buyer and seller in shipment, destination, and non‑shipment contracts, and recognizing how shipment terms (e.g., F.O.B., C.I.F., C.O.D.) alter the default rules.
• Evaluating how breach by either party interacts with risk‑of‑loss allocation, security interests, and the availability of resale or price actions.
• Using the buyer’s rights of inspection, rejection, acceptance, and revocation in single‑delivery and installment‑contract scenarios, with attention to the “substantial impairment” standard.
• Comparing casualty rules for identified goods with the general risk‑of‑loss framework when goods are destroyed, damaged, or deteriorate without fault.
• Translating these doctrines into a step‑by‑step approach suitable for rapid MBE analysis, from classifying the contract through selecting the correct remedy.

MBE Syllabus

For the MBE, you are required to understand the rules governing performance, breach, and discharge of contracts, especially under UCC Article 2, with a focus on the following syllabus points:

• Perfect tender, substantial performance, and when cure is available.
• Identification of goods, insurable interest, and casualty to identified goods.
• Buyer’s rights of inspection, rejection, acceptance, and revocation of acceptance.
• Notice requirements for rejection, revocation, and breach.
• Allocation and transfer of risk of loss in shipment, destination, and non‑shipment contracts.
• Effect of breach (by either party) on risk of loss and remedies.
• Special rules for installment contracts and C.O.D. or “pay against documents” terms.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. A seller ships nonconforming goods on June 1 under a contract requiring delivery “by June 10.” The buyer rightfully rejects on June 2. When can the seller cure as of right under the UCC?
   1. At any time before the buyer cancels the contract.
   2. Only if the seller had reasonable grounds to believe the goods would be acceptable.
   3. Any time before June 10 if the seller seasonably notifies the buyer of an intent to cure and makes a conforming tender.
   4. Only if the defect is minor and the buyer is not a merchant.
2. In a contract for the sale of a particular painting hanging in a gallery, when are the goods “identified” for UCC purposes?
   1. Only when the buyer pays the full price.
   2. When the parties sign a written contract describing the painting.
   3. When the painting is physically delivered to the buyer.
   4. When the gallery marks the painting “sold” and sets it aside for the buyer.
3. A merchant seller agrees to sell a specific batch of lumber stored in its warehouse to a non‑merchant buyer. The seller tells the buyer the lumber is ready for pickup. Before the buyer arrives, a fire destroys the warehouse without fault of either party. Who bears the risk of loss?
   1. The seller, because the seller is a merchant and the buyer had not yet received the goods.
   2. The buyer, because risk passed when the seller tendered the goods for pickup.
   3. The seller, because the contract was a shipment contract.
   4. The buyer, because identification always transfers risk of loss to the buyer.

Introduction

Performance, breach, and discharge are central topics in contract law and are heavily tested on the MBE. In the UCC sales context, performance issues often turn not on whether a contract exists, but on more detailed questions:

• Was the tender conforming under the perfect tender rule?
• Could the seller cure, and on what timetable?
• When did risk of loss pass, and did any breach shift it?
• Did the buyer give proper notice of rejection, revocation, or breach?
• Were the goods “identified” at the time of a casualty?

These doctrines interact constantly. A buyer’s failure to give seasonable notice can convert what would have been a clear right to reject into an acceptance with limited remedies. A seller’s right to cure can postpone the buyer’s remedies and also affect risk‑of‑loss allocation. Identification gives the buyer an insurable interest even before risk passes. On the MBE, fact patterns are often built to test several of these ideas at once.

Key Term: Perfect Tender Rule
Under the UCC, a seller must make a tender that perfectly conforms to the contract as to goods and delivery; any nonconformity gives the buyer a right to reject.

Key Term: Substantial Performance
At common law (primarily for service and construction contracts), performance that fulfills the essential purpose of the contract is enough; minor defects give rise to damages, not a right to terminate.

Because Article 2 follows the perfect tender rule while the common law uses substantial performance, the first step in any MBE performance question is to classify the contract:

• Goods contract → UCC → perfect tender (subject to limits).
• Services or real estate → common law → substantial performance.

Once you know you are in the UCC universe, the next steps are:

• Determine whether the tender was conforming.
• If not, identify whether the buyer rejected, accepted, or revoked acceptance.
• Check whether the seller had a right to cure.
• Work out who bore the risk of loss at the time of any casualty.
• Check whether the buyer gave the notices required to preserve remedies.

The rest of this article develops each of those components and shows how they fit together in risk‑of‑loss and remedy analysis.

The Perfect Tender Rule and Substantial Performance

Under UCC Article 2, the buyer is entitled to a perfect tender. Goods and the manner of delivery must conform in every respect to the contract—quantity, quality, assortment, timing, packaging, and method of shipment. If the tender fails in any respect, the buyer may:

• Reject the entire shipment,
• Accept the entire shipment, or
• Accept any commercial units and reject the rest.

Key Term: Commercial Unit
A unit of goods that by commercial usage is treated as a single whole for purposes of sale (e.g., a machine, a bale, a case, or an entire set).

This is much stricter than substantial performance at common law. For example:

• A construction contractor who substantially completes a building with minor defects is entitled to the contract price minus the cost to cure.
• A seller of goods who ships 98 conforming widgets and 2 nonconforming widgets has made an imperfect tender; the buyer can reject the whole lot (subject to cure and other limits).

On the MBE, be sure to:

• Identify whether the contract is for goods (UCC) or services/real estate (common law).
• Apply perfect tender only in goods contracts, unless the parties have modified it by agreement (e.g., “substantial conformity is acceptable” or specific tolerance clauses).

Key Term: Tender of Delivery
The seller’s placement of conforming goods at the buyer’s disposal, together with any notice reasonably necessary to enable the buyer to take delivery.

Even in the UCC world, perfect tender is not absolute. It is limited by:

• The seller’s right to cure.
• Installment‑contract rules (substantial impairment standard).
• The parties’ agreement (e.g., clauses allowing minor variances or agreed quality ranges).
• The buyer’s duties of reasonable inspection and timely notice.

The perfect tender rule operates at the point of tender of delivery—that moment when the seller has completed whatever acts the contract and the UCC require to place the goods at the buyer’s disposal. Once the buyer has accepted the goods, the perfect tender rule no longer governs; the buyer’s remedies shift to damages or, in exceptional cases, revocation of acceptance.

Also remember the UCC’s overarching duty of good faith. A party cannot use trivial deviations in performance as a pretext for opportunistic rejection if that would contradict the parties’ course of dealing, trade usage, or course of performance, especially in installment contracts.

Rejection, Acceptance, and Revocation of Acceptance

The buyer’s choice among rejection, acceptance, and revocation drives many performance questions.

Key Term: Rejection
The buyer’s refusal to accept a tender of goods that fail to conform to the contract, exercised within a reasonable time after delivery and with seasonable notice to the seller.

Key Term: Acceptance
The buyer’s expression of assent to the goods, which can occur by stating they are conforming, failing to effectively reject after an opportunity to inspect, or acting inconsistently with the seller’s ownership (e.g., reselling or substantially using the goods).

Key Term: Revocation of Acceptance
The buyer’s cancellation of a prior acceptance when a nonconformity substantially impairs the value of the goods, and specific conditions are satisfied.

Rejection

Key points on rejection:

• Rejection is available if the tender fails in any respect to conform, but the buyer:
  • Must reject within a reasonable time, and
  • Must seasonably notify the seller.
• Rejection must be clear and unambiguous. Simply complaining about defects without stating that the goods are rejected may be treated as acceptance plus notice of breach.
• The buyer may:
  • Reject the whole,
  • Accept the whole, or
  • Accept any commercial unit(s) and reject the rest.

If the buyer fails to reject within a reasonable time or fails to give seasonable notice, the buyer will be deemed to have accepted.

A buyer’s wrongful rejection of conforming goods is itself a breach. That matters for:

• The seller’s remedies (e.g., resale damages), and
• Allocation of risk of loss (as discussed below, risk can shift to a breaching buyer).

Acceptance

The buyer accepts goods when:

• After a reasonable opportunity to inspect, the buyer indicates that the goods are conforming or that they will be retained despite their nonconformity, or
• The buyer fails to make an effective rejection after a reasonable time to inspect, or
• The buyer acts inconsistently with the seller’s ownership (e.g., reselling or using the goods in a way that assumes ownership).

Effects of acceptance:

• The buyer loses the right to reject for that nonconformity.
• The buyer must pay the price according to the contract.
• The buyer retains the right to sue for damages for any nonconformity that is not seasonably cured.
• The buyer may still revoke acceptance in limited circumstances (see below).

On the MBE, be careful to distinguish:

• Acceptance of an offer (which creates the contract), from
• Acceptance of goods (which affects remedies and risk of loss after the contract exists).

Revocation of Acceptance

Revocation of acceptance is much narrower than rejection. The buyer may revoke only if:

• The nonconformity substantially impairs the value of the goods to that buyer, and
• One of the following is true:
  • The buyer accepted on the reasonable assumption that the seller would cure, and cure has not occurred, or
  • The defect was difficult to discover at the time of acceptance or the buyer reasonably relied on the seller’s assurances; and
• Revocation occurs within a reasonable time after the buyer discovers or should have discovered the grounds, and before any substantial change in the goods not caused by their own defects; and
• The buyer seasonably notifies the seller.

“Substantial impairment” is a higher bar than mere nonconformity. Think of defects that defeat the main purpose of the purchase, not cosmetic or easily repairable flaws.

Once revocation is effective, the legal effect is the same as if the buyer had rejected from the outset:

• The buyer can return the goods and recover any price paid.
• The seller regains rights to the goods and, subject to breach rules, the risk of loss.

Revocation can be especially important where the defect could not reasonably be discovered before use (e.g., hidden mechanical problems, latent structural defects) and where the buyer relied on the seller’s skill or assurances.

Seller’s Right to Cure

A buyer’s right to reject nonconforming goods is counterbalanced by the seller’s right to cure in certain circumstances.

Key Term: Cure
The seller’s right to correct a nonconforming tender by making a conforming tender within the contract time, or within a further reasonable time if specific conditions are met.

Key Term: Seasonably
Within the time that is reasonable under the circumstances; a seasonable notice is given at or within such time.

There are two main cure situations.

1. Time for performance has not yet expired (timely cure)

If the seller tenders early and the tender is nonconforming, the seller:

• May seasonably notify the buyer of intent to cure, and
• Then make a conforming tender within the contract time.

In this case:

• The buyer must allow cure and cannot treat the contract as terminated if a proper cure is made on time.
• The early nonconforming shipment is not a final breach; it is an opportunity to cure.

This is often tested with a seller shipping goods a few days early that turn out to be defective; if there is still time under the contract, the seller gets a second chance.

2. Time has expired, but seller had reasonable grounds to believe tender would be acceptable (late cure)

Even after the contract date, the seller may have a limited right to cure if:

• The seller reasonably believed the nonconforming tender would be acceptable (perhaps with a price allowance), and
• The seller seasonably notifies the buyer of intent to cure, and
• The cure is made within a reasonable time.

Reasonable grounds can arise from:

• Past dealings (the buyer has accepted similar nonconforming goods before),
• Trade usage (custom in the industry that certain minor defects are tolerable), or
• Prior acceptance of goods with minor defects, especially where the buyer previously accepted with a price adjustment.

This “late cure” is more constrained:

• The seller must show both reasonable grounds and prompt action.
• The buyer cannot refuse a proper cure timely offered in these circumstances, even though the original tender was defective.

Once the buyer has finally accepted the goods (without reserving rights based on a promised cure), the seller’s right to cure is significantly narrower. At that point, the buyer’s options are to:

• Seek damages for nonconformity, or
• Revoke acceptance if the stringent revocation requirements are met.

Worked Example 1.1

A seller contracts to deliver 100 widgets to a buyer by July 31. On July 29, the seller delivers 100 widgets, but 10 are defective. The buyer rejects the shipment. The seller notifies the buyer on July 30 that conforming widgets will be delivered by July 31.

Answer:
The seller has the right to cure. The tender was made before the contract deadline, and the seller seasonably notified the buyer of an intent to cure, then proposed to make a conforming tender by July 31. If the seller delivers conforming widgets by July 31, the buyer must accept them and cannot treat the original nonconforming tender as a final breach.

Buyer’s Duties After Rejection or Revocation

Once a buyer rightfully rejects or revokes acceptance, the buyer has duties regarding the goods:

• The buyer must hold the goods with reasonable care for a time sufficient to permit the seller to remove them.
• The buyer must not act inconsistently with the seller’s ownership (e.g., reselling or using the goods) except as permitted by the UCC.
• A merchant buyer has additional duties:
  • Must follow any reasonable instructions from the seller.
  • If the goods are perishable or threaten to decline in value quickly, and the seller gives no instructions, the merchant buyer must make reasonable efforts to resell the goods for the seller’s account.

If the buyer has paid part or all of the price and has possession of the goods after rightful rejection or revocation, the buyer obtains a security interest in the goods to secure repayment. The buyer may, in some circumstances, resell the goods and offset the proceeds against the price paid.

These duties are frequently tested in questions where a buyer rejects nonconforming goods but then uses or resells them, raising issues about whether the buyer has effectively accepted and what remedies remain. Using the goods for an extended period after purported rejection often looks like acceptance; brief or necessary use (e.g., to prevent spoilage or to test the goods) may not.

Identification of Goods and Insurable Interest

Identification is the point at which specific goods are tied to the contract. It matters because it gives the buyer a special property interest, including an insurable interest, and controls the effect of casualty to the goods.

Key Term: Identification
The designation of specific goods as those to which the contract refers; it gives the buyer a special property interest in those goods.

Key Term: Insurable Interest
A legally recognized interest in goods that allows a party to obtain insurance on them and recover if they are damaged or destroyed.

Unless the parties agree otherwise, identification occurs:

• For existing, specific goods: when the contract is made, if the goods are already identified as the ones to be sold.
  • Example: a particular painting, a specific machine with a serial number, or “the 2018 Toyota Camry VIN X” in the seller’s possession.
• For future goods (goods not yet existing or not yet identified at the time of contract):
  • Unborn young of animals: when they are conceived.
  • Growing crops: when they are planted or otherwise become growing crops.
  • Other future goods: when goods are shipped, marked, or otherwise designated by the seller as the contract goods (e.g., tagged with the buyer’s name or set aside on a separate pallet).
• For fungible goods (e.g., grain in a silo, oil in a tank):
  • Identification can occur when the goods are identified as part of an undivided bulk (the buyer becomes an owner in common of the bulk), or by any other method that clearly earmarks the buyer’s share.

Once identified, the buyer acquires a special property and insurable interest, even if:

• The buyer does not yet have possession, and
• Risk of loss has not yet passed.

The seller also typically retains an insurable interest so long as the seller retains title or a security interest. Both parties can therefore insure the same goods; if both are insured, ordinary insurance principles (e.g., subrogation) govern how recovery is allocated.

Identification is also significant because:

• It may determine whether the seller can substitute other goods if the ones at issue are destroyed.
• It is a prerequisite for certain remedies like replevin (recovery of the goods themselves) when cover is unavailable.

Casualty to Identified Goods

Key Term: Casualty to Identified Goods
Destruction or deterioration of specific goods identified to the contract, where neither party is at fault.

If the goods are totally destroyed before risk passes and neither party is at fault (UCC § 2‑613):

• The contract is avoided; neither party has to perform.
• The buyer does not have to pay; the seller does not have to deliver.
• Any price already paid is recoverable.

If the loss is only partial, or the goods have deteriorated:

• The buyer may:
  • Avoid the contract, or
  • Accept the damaged goods with a reasonable price reduction.

These rules apply only to identified goods that are the specific subject of the contract. If the contract is for generic, unascertained goods (e.g., “100 widgets of seller’s standard grade”), and the seller’s stock is destroyed, the seller’s inability to perform is usually not a casualty to identified goods; the seller must still procure conforming goods or be in breach, unless excused by doctrines like impracticability.

Worked Example 1.2

A buyer contracts to purchase a specific painting from a gallery. The painting is already hanging in the gallery, and the parties sign a contract describing that painting. Before delivery, the painting is destroyed in a fire, and risk of loss has not passed to the buyer.

Answer:
The painting was identified when the contract was made because it was an existing, specific item. However, risk of loss had not yet passed to the buyer. Because the identified goods were destroyed without fault before risk passed, the contract is avoided. The seller bears the loss, and the buyer does not have to pay.

Tender of Delivery, Shipment and Destination Contracts, and Inspection

Tender of delivery is the seller’s performance obligation; its nature depends on whether the contract is a shipment or destination contract, or a non‑carrier case.

Key Term: Shipment Contract
A contract in which the seller’s obligation is to get the goods to a carrier, make a reasonable contract for shipment, and notify the buyer; risk of loss passes to the buyer when the goods are delivered to the carrier.

Key Term: Destination Contract
A contract in which the seller must deliver the goods to a particular destination (usually the buyer’s place of business) and tender them there; risk of loss passes when the seller tenders at the destination.

Key Term: Right to Inspect
Unless otherwise agreed, the buyer may inspect the goods at any reasonable time and place and in any reasonable manner before payment or acceptance.

Non‑carrier cases (pickup at seller’s place of business)

If the goods are to be tendered at the seller’s place of business:

• The seller must put and hold conforming goods at the buyer’s disposition,
• At a reasonable hour and for a time reasonably necessary to enable the buyer to take possession, and
• Give the buyer any notice reasonably necessary to enable the buyer to do so.

If the goods are located at a place other than the seller’s place of business (e.g., a warehouse), tender occurs at that location, and may require the seller to obtain and tender any document of title needed for the buyer to obtain the goods.

In these non‑carrier cases, the seller’s tender is usually simultaneous with the buyer’s duty to pay, unless the contract provides for credit terms.

Carrier cases: shipment vs destination

Contracts often use “F.O.B.” (free on board) terms:

• “F.O.B. seller’s city” → shipment contract.
• “F.O.B. buyer’s city” → destination contract.

Common shipping terms on the exam:

• F.O.B. [place of shipment] → shipment contract.
• F.O.B. [place of destination] → destination contract.
• C.I.F. (cost, insurance, and freight) → usually shipment contract, price includes these elements.
• C.&F. (cost and freight) → shipment contract.

For a shipment contract, the seller must:

• Put the goods into the hands of a reasonable carrier,
• Make a reasonable contract for their transportation (including appropriate routing and protection),
• Promptly notify the buyer of the shipment, and
• Tender any required documents so the buyer can obtain the goods (e.g., a bill of lading).

For a destination contract, the seller must:

• Deliver the goods to the named destination,
• Put and hold conforming goods at the buyer’s disposal there, and
• Tender any required documents (often through usual banking channels).

If the contract is silent and uses only a term like “C.I.F. [seller’s city]” or otherwise simply calls for shipment, Article 2 presumes a shipment contract unless there is clear contrary language. This presumption is heavily tested: “shipment” is the default in doubt.

Buyer’s right of inspection and payment obligations

Generally:

• The buyer does not have to pay until given a reasonable opportunity to inspect.
• Inspection can be at any reasonable time, place, and manner.
• Inspection costs are borne by the buyer but are recoverable from the seller if the goods are rejected as nonconforming.

Important exam exceptions:

Key Term: C.O.D. (Cash on Delivery)
A delivery term under which the carrier will not release the goods to the buyer until the buyer pays; under the UCC, the buyer must pay before inspecting, but does not waive any rights regarding conformity.

• C.O.D. (cash on delivery) or similar terms:

  • The buyer must pay before inspection.
  • This does not waive the buyer’s right to perfect tender; it only affects timing.
  • If the goods later prove nonconforming, the buyer can still recover damages or revoke acceptance, but must initially pay as promised.

• Documents against payment:

  • Where payment is due against delivery of shipping documents (e.g., in a letter‑of‑credit transaction), the buyer must pay upon tender of documents, even before seeing the goods.
  • Again, this affects timing, not the substantive right to conforming goods.

If the buyer unreasonably refuses to inspect when offered the chance, that may be treated as acceptance.

Installment Contracts

Key Term: Installment Contract
A contract that authorizes or requires delivery of goods in separate lots to be separately accepted, rather than in a single shipment.

The perfect tender rule applies differently in installment contracts (UCC § 2‑612). Because parties to installment contracts typically expect some ongoing relationship and repeated deliveries, the UCC moderates the strictness of perfect tender.

• The buyer may reject an individual installment only if:
  • The nonconformity substantially impairs the value of that installment, and
  • It cannot be cured.

Even then, if the seller gives adequate assurances of cure, the buyer may be required to accept that installment.

• The buyer may treat the whole contract as breached only if:
  • The nonconformity in one or more installments substantially impairs the value of the whole contract.

Examples of substantial impairment of the whole contract might include repeated serious defects, or a nonconformity that undermines the very purpose of the contract (e.g., consistently late deliveries of goods needed for a very time‑sensitive project).

This “substantial impairment” standard is much more forgiving to the seller than strict perfect tender and is a frequent MBE trap. In an installment setting, do not automatically give the buyer the right to reject the entire contract for a small defect in a single installment.

Worked Example 1.3

A seller in New York agrees to ship “500 widgets, F.O.B. Seller’s warehouse, New York” to a buyer in Chicago. The seller delivers conforming goods to a carrier, properly contracts for shipment, and notifies the buyer. While in transit, the truck overturns in a storm, destroying the goods without fault of either party.

Answer:
“F.O.B. Seller’s warehouse, New York” creates a shipment contract. The seller’s delivery obligation was satisfied when the goods were delivered to the carrier with proper arrangements and notice. In a shipment contract, risk of loss passes to the buyer when the seller delivers the goods to the carrier. Therefore, the buyer bears the loss and must pay the price.

Notice Requirements: Rejection, Revocation, and Breach

Notice is critical under the UCC. Without timely notice, a buyer can unintentionally convert a perfect tender situation into an acceptance, losing important remedies.

Key Term: Notice
A communication that informs the other party of rejection, revocation, or breach; it must be given within a reasonable time to preserve UCC remedies.

Key notice rules:

Notice of rejection

• Must occur within a reasonable time after tender or delivery.
• Buyer must seasonably notify the seller.
• Buyer must hold the goods with reasonable care for a time sufficient to permit the seller to remove them.
• Merchant buyers must also:
  • Follow any reasonable instructions from the seller, and
  • If no instructions and the goods are perishable or threaten to decline rapidly, make reasonable efforts to resell.

Failure to give seasonable notice of rejection generally results in acceptance. The buyer will then be limited to damages or, if conditions are met, revocation.

Notice of revocation of acceptance

• Revocation is ineffective until the buyer notifies the seller.
• Notice must be within a reasonable time after the buyer discovers or should have discovered the grounds.
• After revocation, the buyer has the same rights and duties with respect to the goods as if he had rejected them.

Notice of breach after acceptance (UCC § 2‑607(3))

A buyer who has accepted goods must, within a reasonable time after discovering any breach, notify the seller that the transaction is claimed to involve a breach. Otherwise:

• The buyer is barred from any remedy as to that breach.

This is a frequent MBE trap:

• A buyer who quietly uses defective goods for months and only later complains may lose all UCC remedies.
• The notice need not be detailed; it only has to inform the seller that the buyer considers the transaction to involve a breach.

Worked Example 1.4

A merchant seller tenders goods to a merchant buyer. The buyer discovers a defect but continues to use the goods and fails to notify the seller for several weeks.

Answer:
The buyer’s conduct looks like acceptance (using the goods and not effectively rejecting). Because the buyer failed to give timely notice of breach after discovering the defect, the buyer may be barred from any remedy under UCC § 2‑607(3). On the exam, look for the “reasonable time” and whether the buyer promptly informed the seller.

Risk of Loss

Risk of loss determines who bears the economic loss when goods are damaged or destroyed before the buyer receives them. Article 2 uses a stepwise approach.

Key Term: Risk of Loss
The allocation of responsibility for loss or damage to goods between seller and buyer before the buyer receives them.

Key Term: Merchant
A person who deals in goods of the kind or otherwise holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction.

Key Term: Nonmerchant
A seller who is not a merchant with respect to the goods at issue (e.g., an ordinary consumer selling used items).

Risk‑of‑loss analysis proceeds in four steps.

Step 1: Check the contract

If the contract expressly allocates risk of loss, that agreement controls. The parties can, by contract, place risk on either party at any time, as long as their allocation is clear.

Common exam language:

• “Risk of loss passes to the buyer upon delivery to the carrier” (reinforcing shipment‑contract rules).
• “Risk of loss remains on seller until buyer’s receipt of the goods” (overriding default rules).

Step 2: Check for breach

If either party breaches (even in a way unrelated to the casualty), the breaching party bears the risk of any uninsured loss while the breach remains uncured.

Examples:

• Seller ships nonconforming goods that buyer rightfully rejects:
  • Risk remains with the seller until cure or acceptance.
• Buyer wrongfully rejects conforming goods or wrongfully revokes acceptance:
  • Risk may shift to the buyer to the extent of any deficiency in the seller’s insurance coverage, for a commercially reasonable time.

This rule frequently interacts with cure and rejection. A buyer who wrongfully rejects conforming goods may end up bearing risk of loss even while the goods are in the seller’s possession, to the extent the seller’s insurance is insufficient.

Step 3: Shipment vs destination contracts (no breach)

If there is no breach and the goods are shipped, determine:

• Shipment contract → risk passes to the buyer when goods are delivered to the carrier.
• Destination contract → risk passes when the goods are tendered at the destination (made available to the buyer there).

If the seller is required to tender documents of title at the destination, risk does not pass until that tender occurs.

Step 4: All other cases (no shipment)

If there is no breach and no shipment, risk allocation depends on whether the seller is a merchant.

• If the seller is a merchant:

  • Risk passes to the buyer only when the buyer receives the goods (i.e., takes physical possession).

• If the seller is a nonmerchant:

  • Risk passes to the buyer when the seller tenders the goods (i.e., makes them available and notifies the buyer).

This merchant/nonmerchant distinction is heavily tested.

Worked Example 1.5

A clothing store (merchant) sells 100 shirts stored in its stockroom to a buyer. The store calls the buyer and says, “Your shirts are ready; you can pick them up any time.” Before the buyer arrives, a fire destroys the store and the shirts, without fault of either party.

Answer:
This is a non‑shipment case with a merchant seller. Under the UCC, when the seller is a merchant, risk of loss passes to the buyer only upon receipt of the goods. The buyer had not yet received the shirts when the fire occurred. Therefore, the store bears the risk of loss and cannot recover the price.

Worked Example 1.6

Professor sells 10 used casebooks to the campus bookstore. Professor is not in the business of selling books. He leaves the books outside his office door and emails the bookstore manager that the books are ready for pickup. Before the manager arrives, students steal and destroy the books.

Answer:
Professor is a nonmerchant seller. In a non‑shipment case with a nonmerchant seller, risk of loss passes when the seller tenders the goods—that is, when the goods are made available and the buyer is notified. Once Professor left the books and notified the bookstore, tender occurred and risk of loss shifted to the buyer. The bookstore must pay the contract price despite the loss.

Special Risk‑of‑Loss Situations: Goods in Bailee’s Possession and Approval/Return Sales

Key Term: Bailee
A third party who holds goods on behalf of another, such as a warehouseman or carrier, without owning them.

When goods are in the possession of a bailee (e.g., stored in a warehouse), risk of loss passes to the buyer when:

• The buyer receives a negotiable document of title (like a negotiable warehouse receipt), or
• The bailee acknowledges the buyer’s right to possession, or
• The buyer receives a non‑negotiable document of title or other written direction to the bailee, and has a reasonable time to pick up the goods.

UCC also distinguishes two “conditional” sale types:

Key Term: Sale on Approval
A transaction in which goods are delivered primarily for the buyer’s use, and the buyer has the right to return them even if they conform; risk of loss stays with the seller until acceptance.

Key Term: Sale or Return
A transaction in which goods are delivered primarily for resale, but the buyer may return unsold goods; risk of loss is on the buyer while goods are in the buyer’s possession.

• Sale on approval:

  • Title and risk stay with the seller until the buyer accepts.
  • Approval is typically shown by the buyer’s signifying that the goods are satisfactory, or by failure to timely return them.
  • Use of the goods in a manner consistent with trial (e.g., testing machinery) does not equal acceptance; using them in a way inconsistent with the seller’s ownership (e.g., reselling) does.

• Sale or return:

  • Title and risk pass to the buyer, subject to the buyer’s power to return the goods.
  • Creditors of the buyer can reach the goods while in the buyer’s possession.
  • Returns are effectively separate shipments back to the seller; the buyer bears the risk while making the return.

These structures are favorite MBE testing grounds because they flip the usual risk allocation.

Worked Example 1.7

A manufacturer delivers a specialized machine to a customer “on approval” so the customer can test it for 30 days. Ten days later, a fire (without fault of either party) destroys the machine in the customer’s facility before the customer decides whether to keep it.

Answer:
This is a sale on approval. Risk of loss stays with the seller until the buyer accepts. The customer had not yet accepted the machine, so the seller bears the loss and cannot recover the price.

Worked Example 1.8

A wholesaler sells 500 jackets to a retailer “for resale, with the right to return unsold goods by the end of the season.” The retailer takes delivery. Before the season ends, and before any return, a flood destroys the jackets in the retailer’s warehouse without fault of either party.

Answer:
This is a sale or return transaction. Risk of loss is on the buyer (retailer) while the goods are in the buyer’s possession, even though the buyer has a right to return unsold goods. The retailer bears the loss and must pay the contract price.

Worked Example 1.9

A seller stores grain in a public elevator operated by a bailee. The seller sells “10,000 bushels out of the 100,000 bushels of Grade A wheat in Elevator X” to a buyer. The warehouse issues a negotiable warehouse receipt to the buyer for 10,000 bushels. Before any physical movement, lightning strikes Elevator X and destroys all the grain.

Answer:
The grain is fungible, and the buyer’s share was identified as part of an undivided bulk. When the buyer received a negotiable warehouse receipt, the bailee’s document effectively acknowledged the buyer’s right to possession, and risk of loss passed to the buyer (assuming no breach). Because the loss occurred after risk passed, the buyer bears the loss and must still pay or cannot recover the price if already paid.

Worked Example 1.10

A seller ships conforming goods under a shipment contract. Before the goods arrive, the buyer, without justification, repudiates the contract and instructs the seller not to deliver. While the goods are in transit, they are destroyed in an accident without fault.

Answer:
Under the shipment contract, risk of loss would normally pass to the buyer at the time of delivery to the carrier. Here, the buyer repudiated after shipment, and the seller did not breach. Under UCC risk‑of‑loss rules, the buyer’s breach does not shift risk back to the seller. The buyer bears the loss and remains liable for the price, subject to any set‑off for salvage or insurance.

Exam Warning

On the MBE, it is easy to conflate:

• The seller’s right to cure (timing and reasonable belief), and
• The buyer’s rights of rejection, acceptance, and revocation.

Keep straight:

• A buyer’s right to reject is lost by acceptance or by failing to give timely notice of rejection.
• A seller’s right to cure exists only if:
  • There is still time left in the contract, or
  • The seller had reasonable grounds to believe the nonconforming tender would be acceptable.

A buyer who keeps defective goods without giving timely notice may be stuck with them and limited to damages, or even barred from any remedy if notice of breach is unreasonably delayed.

Similarly, in risk‑of‑loss problems:

• Always ask whether anyone has breached; if so, that party usually bears the risk.
• Determine whether the contract is shipment or destination.
• Distinguish between merchant and nonmerchant sellers in non‑shipment cases.
• Watch out for special formats like sale on approval and sale or return.
• Check whether the goods were in a bailee’s possession and whether documents of title were involved.

Revision Tip

When analyzing performance, breach, and risk‑of‑loss questions:

• Classify the contract: UCC or common law.
• If UCC, ask:
  • Shipment vs destination vs non‑shipment?
  • Merchant vs nonmerchant seller?
  • Single delivery or installment contract?
• Determine:
  • Whether tender was conforming,
  • Whether the buyer rejected, accepted, or revoked, and
  • Whether the seller had a right to cure.
• Then allocate risk of loss:
  • Contract allocation → breach → shipment/destination → merchant/nonmerchant → bailee/special forms.

These classifications often decide the outcome of risk‑of‑loss and cure questions with only a few key facts.

Key Point Checklist

This article has covered the following key knowledge points:

• Under the UCC, the perfect tender rule allows buyers to reject for any nonconformity in goods or delivery, subject to cure and installment‑contract limitations.
• At common law, substantial performance is sufficient; minor defects do not permit termination but do allow damages.
• A buyer’s options upon nonconforming tender are rejection, acceptance, or acceptance with later revocation when statutory conditions are satisfied.
• Sellers may cure nonconforming tenders if they seasonably notify the buyer and either the contract time has not expired, or they had reasonable grounds to believe the tender would be acceptable.
• Identification of goods gives the buyer a special property and insurable interest, and controls the effect of casualty to identified goods.
• Casualty to identified goods without fault generally avoids the contract if the loss is total, or allows the buyer to accept with a price reduction if the loss is partial.
• Buyers must give timely notice of rejection, revocation, or breach to preserve UCC remedies; delayed notice after acceptance can bar recovery.
• Tender of delivery differs in shipment, destination, and non‑shipment contracts, and interacts with the buyer’s right to inspect and duty to pay.
• Installment contracts use a “substantial impairment” standard, not strict perfect tender, for rejecting installments and canceling the whole contract.
• Risk of loss is determined first by agreement, then by breach, then by shipment/destination terms, and finally by whether the seller is a merchant or nonmerchant in non‑shipment cases.
• Shipment contracts place risk on the buyer once goods are delivered to the carrier; destination contracts place risk on the buyer only upon tender at the destination.
• In non‑shipment cases, risk passes on receipt when the seller is a merchant, and on tender when the seller is a nonmerchant.
• Special rules apply when goods are in a bailee’s possession, or where the transaction is a sale on approval or sale or return.
• The buyer’s right to inspect before paying is a key performance protection, modified only by specific contract terms such as C.O.D. or documents‑against‑payment arrangements.
• A careful sequence—tender → conformity → rejection/acceptance → cure → notice → risk of loss—helps resolve most MBE questions in this area.

Key Terms and Concepts

• Perfect Tender Rule
• Substantial Performance
• Cure
• Rejection
• Acceptance
• Revocation of Acceptance
• Identification
• Insurable Interest
• Tender of Delivery
• Commercial Unit
• Seasonably
• Shipment Contract
• Destination Contract
• Installment Contract
• Merchant
• Nonmerchant
• Right to Inspect
• Risk of Loss
• Bailee
• Casualty to Identified Goods
• Sale on Approval
• Sale or Return
• Notice
• C.O.D. (Cash on Delivery)