Cook Specialty Co. v. Schrlock
772 F. Supp. 1532 (1991)
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Rule of Law:
Under a shipment contract designated F.O.B. the seller's location, the seller's duty under UCC § 2-504 to make a 'reasonable' contract for transportation does not require the seller to investigate or ensure the adequacy of the carrier's insurance coverage. The risk of loss passes to the buyer upon the seller's due delivery of the goods to the carrier.
Facts:
- Plaintiff entered into a contract with Machinery Systems, Inc. (MSI) to purchase a Dries & Krump Hydraulic Press Brake for $28,000.
- The contract terms were F.O.B. MSI's warehouse in Schaumburg, Illinois.
- MSI hired a carrier, R.T.L. (Randy’s Truck Lines), to transport the machine to the plaintiff in Pennsylvania.
- MSI obtained a certificate of insurance from the carrier with a stated face value of $100,000.
- On October 20, 1989, the carrier took possession of the machine at MSI's warehouse.
- While in transit, the machine fell from the carrier's truck and was damaged.
- Plaintiff was only able to recover $5,000 from the carrier's insurer due to a specific policy limit applicable to the incident.
Procedural Posture:
- Plaintiff sued defendant Machinery Systems, Inc. (MSI) and the carrier, R.T.L., in U.S. District Court to recover for the loss of the machine.
- Plaintiff filed a Motion for Summary Judgment.
- Defendant MSI filed a Cross-Motion for Summary Judgment.
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Issue:
In a contract for sale of goods designated F.O.B. seller's warehouse, does a seller's failure to ensure the carrier has adequate insurance to cover the full value of the goods constitute a breach of its duty to make a reasonable contract for shipment under UCC § 2-504, thereby preventing the risk of loss from passing to the buyer?
Opinions:
Majority - Waldman, District Judge.
No. The seller's failure to ensure the carrier's insurance was adequate does not breach the duty to make a reasonable shipment contract, and thus the risk of loss passed to the buyer when the goods were delivered to the carrier. The contract was F.O.B. the seller's warehouse, which under UCC §§ 2-319 and 2-509, shifts the risk of loss to the buyer once the seller duly delivers the goods to the carrier. For a delivery to be 'duly made,' the seller must make a 'reasonable' shipment contract under UCC § 2-504. The court found that the reasonableness requirement of § 2-504 pertains to the mode of transportation in relation to the nature of the goods (e.g., using refrigeration for perishables), not to investigating the carrier's insurance coverage. The seller's duty is breached if it affirmatively limits the buyer's right to recover from the carrier, such as by agreeing to an artificially low valuation, but merely failing to verify sufficient insurance does not constitute such a breach. Because the risk of loss was on the plaintiff buyer during transit, the buyer was the party responsible for obtaining any desired insurance.
Analysis:
This decision clarifies the scope of the seller's duty to make a 'reasonable' shipping contract under UCC § 2-504. It establishes that the reasonableness standard focuses on the physical transportation arrangements suitable for the goods, not the financial details of the carrier's insurance. The ruling reinforces the UCC's clear allocation of risk in F.O.B. shipment contracts, placing the burden on the buyer, who bears the risk of loss in transit, to secure adequate insurance. This precedent narrows the grounds for a buyer to shift the loss back to the seller, requiring more than a simple failure to verify insurance; a buyer would likely need to show the seller's shipping arrangement was 'egregious' or affirmatively impaired the buyer's rights against the carrier.
