© 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 15 Title and Risk of Loss

© 2007 West Legal Studies in Business, A Division of Thomson Learning 2 What is the significance of identifying goods to a contract? If the parties do not expressly agree on when title to goods passes, what determines when title passes? Risk of loss does not necessarily pass with title. If the parties to a contract do not expressly agree when risk passes and the goods are to be delivered without movement by the seller, when does risk pass? Under what circumstances will the seller’s title to goods being sold be void? Under what circumstances will a seller have voidable title? What is the legal effect on a good faith purchaser of the goods when the seller has a void title versus a voidable title? At what point does the buyer acquire an insurable interest in goods subject to a sales contract? Can both the buyer and the seller have an insurable interest in the goods simultaneously? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Introduction Sale of goods requires different rules than real property transactions: risk should not always pass with title. UCC replaces title with identification, risk, and insurable interest.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Identification For any interest to pass to buyer, goods must be: –In existence. –Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others. Except for fungible goods which do not need separation).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 5 Identification Gives the buyer the right: –To obtain insurance on the goods. –To recover from third parties who damage the good. Identification occurs: –If goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Passage of Title Unless there is an agreement to the contrary, title passes to the Buyer at the time and place the Seller physically delivers the goods. CASE 15.1 In re Stewart (2002).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Title passes when agreed to by the parties. If no agreement, depends on whether the contract is a shipment or destination contract: –Shipment: title passes at time and place of shipment. –Destination: title passes when goods are tendered at the destination. Shipment and Destination Contracts

© 2007 West Legal Studies in Business, A Division of Thomson Learning 8 Title passes when agreed by the parties. If no agreement, title passes: –With document of title: when and where document delivered. –Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified. Delivery Without Movement of the Goods

© 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Void Title: true owner gets goods back. Voidable Title: good faith purchaser keeps goods. –CASE 15.2 Memphis Hardwood Flooring Co. v. Daniel (2000). Entrustment rule: good faith purchaser keeps goods. Sales or Leases by NonOwners

© 2007 West Legal Studies in Business, A Division of Thomson Learning 10 In a shipment contract, ROL passes when seller tenders goods to carrier. In a destination contract, ROL passes when goods tendered at destination. Risk of Loss

© 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Risk of Loss: Delivery Without Movement of Goods Goods Held by Seller: –Document of Title is generally not used. –If Seller is a merchant, ROL passes when buyer takes physical possession of goods. –CASE 15.3 Ganno v. Lanoga Corp. (2003). Goods Held by Bailee (Warehouse). ROL passes when: –Buyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Conditional Sales Sale on Approval. –ROL passes when buyer approves expressly or implicitly. Sale or Return. (Consignment is sale or return unless it complies with Article 9.) –ROL passes to buyer with possession.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 13 ROL: Seller’s Breach of Contract Generally breaching party bears ROL. Seller’s Breach. –Rejection - risk stays with seller. –Revocation of acceptance - risk passes back to seller to the extent that buyer’s insurance does not cover the loss.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss. ROL: Buyer’s Breach of Contract

© 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Insurable Interest Buyer has an insurable interest in goods that have been identified. Seller has an insurable interest in goods as long as they retain title or a security interest. Both buyers and sellers can have an insurable interest at the same time.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 16 Bulk Transfers Covered by Article 6 of the Uniform. Commercial Code. A bulk transfer is defined as: –Major part of seller’s inventory. –Not made in the usual course of business. UCC 6 is becoming obsolete and has been repealed by many states.