CHAPTER 21 Ownership and Risk

“Great deeds are usually wrought at great risk.” Quote of the Day “Great deeds are usually wrought at great risk.” Herodotus, Greek historian

Who Owns It?? The Code must sometimes determine the rightful owner when more than one person claims to own something. Existence and Identification Goods must exist before title can pass. Goods must be identified to the contract before title can pass. The parties may agree in their contract how and when they will identify the goods.

Who Owns It?? Passing of Title Title may pass in any manner on which the parties agree. Insurable Interest: a legal right in something A buyer obtains an insurable interest when the goods are identified to the contract. The seller retains an insurable interest in goods as long as she has either title to the goods or a security interest in them.

When the Seller Has Imperfect Title Bona Fide Purchaser A void title is no title at all. A voidable title gives limited rights in the goods, inferior to those of the owner. A person with voidable title has power to transfer valid title for value to a good faith purchaser, generally called a bona fide purchaser or BFP.

Entrustment Entrusting means delivering goods to a merchant or permitting the merchant to retain them. Entrusting to a merchant who deals in goods of that kind gives him power to transfer all rights to a buyer in the ordinary course of business. The entrusting provision protects the innocent buyer, who buys goods ONLY of the type normally sold by that merchant, not knowing that they belong to someone else.

Creditor’s Rights Ordinary Sales A buyer in the ordinary course of business may take the goods free and clear of the security interest. Bulk Sales: one that includes most or all of the inventory in a store Article 6 requires that: The seller supply the buyer with a complete list of his creditors, and the buyer notify all creditors of the bulk sale before it takes place, so that the creditors may protect their security interest.

Returnable Goods Sale on Approval Sale or Return When a buyer takes goods intending to use them herself but has the right to return. In a sale on approval, the goods are not subject to the buyer’s creditors until the buyer accepts them. Sale or Return When a buyer takes goods intending to resell them, but has the right to return them. The goods are subject to the claims of the buyer’s creditors.

Risk of Loss The parties may allocate the risk of loss any way they wish. Many merchants specify who bears the risk of loss by using common shipping terms such as those on the next slide. If Parties Fail to Allocate the Risk: When neither party has breached, the risk of loss generally passes from seller to buyer when the seller has transported the goods as far as he is obligated to. When a party has breached, the risk of loss generally lies with that party.

Shipping Terms FOB place of shipment (seller is at risk until goods are in carrier’s hands) FOB place of destination (seller is at risk until goods are at the destination) FAS a named vessel (seller is at risk until goods are delivered to that vessel) CIF (cost includes insurance and shipping) C&F (cost does not include insurance) Proposed Article 2 revisions will eliminate the standard definitions of these terms.

Bailment Bailment means that one person or company is legally holding goods for the benefit of another. If the contract requires a bailee to hold the goods for the buyer, the risk passes when the buyer obtains documents entitling her to possession, or when the bailee acknowledges her right to the goods.

When One Party Breaches Seller Breaches and Buyer Rejects The risk remains with the seller until he cures the defect or the buyer accepts the goods. Seller Breaches and Buyer Accepts, but Then Revokes Acceptance The risk remains with the seller to the extent the buyer’s insurance will not cover the loss. Buyer Breaches Buyer assumes the risk of loss to the extent the seller’s insurance is deficient.

“The Code has reduced the importance of abstract terms, such as title, and replaced them with practical rules designed to enable business people to anticipate risk and protect against it.”