Entrepreneurship in Action Who Bears the Loss for a Shipment of Missing Watches?
ID: 334528 • Letter: E
Question
Entrepreneurship in Action
Who Bears the Loss for a Shipment of Missing Watches?
On March 4, Pedro Pestana, a resident of Chetumal, Mexico, entered into a contract in which he agreed to purchase from the Karinol Corporation, a company based in Miami, Florida, 64 watches for $6,006. An employee of Karinol Corporation wrote the contract in Spanish, and at the bottom of the agreement was a notation that said, “Please send the merchandise in cardboard boxes duly strapped with metal bands via air parcel post to Chetumal. Documents to Banco de Commercio De Quintano Roo S.A.” The contract contained no provisions for allocating the risk of loss on the goods sold while they were in transit; it also did not include any specific shipping terms (such as F.O.B., F.A.S., C.I.F., or others). Pestana paid Karinol a 25 percent deposit on the watches prior to their shipment.
On April 11, a Karinol employee took the watches, which were packaged in two cardboard cartons, to the freight forwarding company that Karinol typically used to make international shipments, American International Freight Forwarders. Karinol also purchased insurance on the watches from the Fidelity & Casualty Company of New York. An employee of American International Freight Forwarders put metal straps on the two cartons of watches and delivered the packages to TACA International Airlines for shipment to Belize City, Belize, where Bernard Smith, an agent for Pestana, was to pick them up and take them to Pestana in Chetumal.
On April 15, the packages arrived in Belize City. TACA International Airlines placed them in storage in a customs warehouse and notified Smith that the packages were available for pickup. On May 2, Smith picked up the packages, which were still bound by the metal straps specified in the original contract, but when he opened them for customs officials to inspect, the watches were missing. Pestana contacted Karinol Corporation about the missing watches, but a manager at Karinol told Pestana that Karinol had no liability for the lost watches and that Pestana must bear the loss and requested payment of the remaining $4,504 balance due. Pestana filed a lawsuit against Karinol Corporation, claiming that the watches were lost or stolen while the packages were in Karinol’s care. He also cited the notation at the bottom of the contract that required Karinol to ship the watches “to Chetumal,” which Karinol failed to do. Therefore, Pestana claimed, Karinol Corporation should bear the loss of the watches.
Directions: Read “Entrepreneurship in Action: Who Bears the Loss for a Shipment of Missing Watches,” in Chapter 19 on page 663. Answer the following questions:
What mistakes did Karinol Corporation and Pedro Pestana make when they created the contract for the sale of the watches?
In the absence of an agreement on risk of loss and specific shipping terms in the parties’ contract, what kind of contract will the court rule this is?
Who will prevail in this case?
What could the losing party have done to protect against the loss or theft of the watches?
Write a 1-2 page paper detailing the above questions, and be sure to cite your references.
Explanation / Answer
1. When they created the contract for the sale of watches, they did not include the following terms and conditions in the contract:
2. In the absence of an agreement on risk of loss and specific shipping terms in the parties’ contract, the court considers this contract as a destination contract. A destination contract is one in which the seller just has to ensure that the products get delivered to the designated place, as specified by the buyer. The seller is not obligated to risk of loss or risk of damage to goods, in transport as well as in transit.
Risk of loss will happen in this case, if the seller is not able to deliver the goods to the designated place of buyer.
3. In this case, the seller would prevail as he performed his duty correctly as was specified in the agreement. The agreement stated to send the watches to Chetumal via air parcel post. The agreement did not specify the conditions in which the watches need to be during delivery time, as well as the care to be taken while handling products in transit. This clause is specified under UCC 2-509, entitled “Risk of Loss in the Absence of Breach”.
4. The losing party needed to thoroughly analyze all sale angles before signing the contract. If they had included risk of loss and risk of damage clauses in the contract, the onus would have been on the buyer in this case.
http://barnespc.com/news-risk-loss-shipments-governed-ucc.php
https://saylordotorg.github.io/text_advanced-business-law-and-the-legal-environment/s12-03-risk-of-loss.html
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