The Sales Contract: Transfer of Title and Risk of Loss CHAPTER SIXTEEN The Sales Contract: Transfer of Title and Risk of Loss

Present Sale vs. Contract to Sell Present sale: title passes from the buyer to the seller at the time the parties make the contract. Most of what we purchase in our daily lives is a present sale. Title passes immediately because the goods are in existence and identifiable. Contract to sell: the seller promises to sell future goods and to transfer title at a later time. Future goods are goods not yet in existence and not yet identified. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss When the seller and buyer have not specified in their contract what happens in the event of goods being lost, destroyed, stolen, etc., the Uniform Commercial Code (UCC) places the loss on the party who is most likely to insure the goods as they are transported or on the party best able to prevent a loss. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss (continued) Sale By Merchant at the Merchant’s Place of Business: - Risk of loss passes to the buyer when the buyer takes possession of the goods. - Until the buyer takes physical possession of the goods, the risk of loss is with the merchant. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss (continued) Sale by Nonmerchant at Nonmerchant’s Location: - When the seller is a nonmerchant, risk of loss passes to the buyer on the seller’s tender of delivery. - Proper tender consists of the seller notifying the buyer that the goods are available as well as how and when to take delivery. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss (continued) Free-On-Board (FOB) Sales: When the seller is required to ship the goods to the buyer. Risk of loss passes at one of two points: FOB shipping point: the risk of loss passes to the buyer when the seller places the goods in the hands of third party carrier. FOB destination: the risk of losses passes when the goods arrive at the buyer’s place of business. Copyright © Houghton Mifflin Company. All rights reserved.

Sales on Approval or Return Sale on approval: seller allows the buyer to use the goods for a stated period of time to examine the goods before purchasing them. Buyer may return the goods without making a purchase if goods do not meet his/her needs or expectations. Copyright © Houghton Mifflin Company. All rights reserved.

Sale on Approval or Return (continued) Title and risk of loss remain with the seller (and no sale occurs) until the buyer approves or accepts the goods. Approval can be given by words or conduct of the buyer. Normally this type of sales arises if good are purchased primarily for use (i.e. delivered to an ultimate customer). Copyright © Houghton Mifflin Company. All rights reserved.

Sale on Approval or Return (continued) A sale or return is considered a present sale of goods. Title and risk of loss pass at the time of sale. Normally, this situation arises when the buyer is purchasing the goods primarily for resale (i.e. merchant selling to a merchant). The buyer does have the option of returning all or any unused part of the goods after a specified or reasonable time. Copyright © Houghton Mifflin Company. All rights reserved.

COD Sales COD stands for collect on delivery, or cash on delivery. Unless the seller has extended credit to the buyer, payment is due when the buyer receives the goods. In a COD sale, the carrier will not give possession of the goods to the buyer until the buyer pays both for the goods and any transportation charges due. This allows the seller to retain possession of the goods until the cash is received. Copyright © Houghton Mifflin Company. All rights reserved.

Sale or Lease by Nonowners When a person has possession of goods but not title (ownership), what happens when this person tries to sell the goods? The UCC states a buyer can obtain only the title the seller had. Thus, a buyer, even one without knowledge that the seller did not have a title, can be forced to forfeit goods to the true owner. This is true even where the seller supplies a forged bill of sale to the buyer as evidence of title. The above represent instances of void title. Copyright © Houghton Mifflin Company. All rights reserved.

Sale or Lease by Nonowners (continued) There are two exceptions to the UCC rule that the buyer obtains only the title the seller had. A buyer with a voidable title can transfer a good title to a third party who: Took the goods for value given to the seller, and Did so in good faith. A buyer in the ordinary course of business obtains a valid title when he or she purchases goods from a seller who normally deals in that type of good (merchant). This arises where the merchant is given temporary possession of the goods (e.g., where the seller is holding the goods for repair). Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss When There Is a Breach of Contract The UCC places the risk of loss on the party responsible for the breach of contract. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss When There Is a Breach of Contract (continued) If the seller delivers nonconforming goods, risk of loss remains with the seller. The risk will remain with the seller until the seller cures the breach. A buyer who receives a large shipment and later discovers a portion of the shipment is non-conforming will bear risk up to the level of the buyer’s insurance coverage. Also note that for nonconforming goods, the buyer make revoke his or her acceptance within a reasonable time. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Loss When There Is a Breach of Contract (continued) If the buyer breaches the contract by rejecting goods once they have been identified, but before taking delivery: The risk of loss is still with the seller. However, because the buyer is in breach of contract, the UCC will hold the buyer liable for any loss beyond the seller’s insurance coverage. Copyright © Houghton Mifflin Company. All rights reserved.