1. Title and Risk of Loss in Sales of Goods
Chapter 17
Title and Risk of Loss in
Sales of Goods
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives Contrast voidable title with void title.
Discuss the rights of the parties when goods that are entrusted to merchants are sold to others in the ordinary course of business.
Determine, in a given case, when title to goods passes from the seller to the buyer.
Decide, in different situations, whether the buyer or the seller of goods must bear the risk of loss.
Compare a sale on approval with a sale or return.
Describe when buyers and sellers of goods have insurable interests in those goods.

3. Question? What is the right of ownership to goods? Bill of sale Title
Designation
Lien
The correct answer is “B” – title. See next slide.

4. Void and Voidable Title
the right of ownership to goods
Bill of sale
a written statement evidencing the transfer of personal property from one person to another
Title is the right of ownership to goods. People who own goods have title to them. Sellers
sometimes give a bill of sale to a buyer as evidence that the sale took place. A bill of sale is
a written statement evidencing the transfer of personal property from one person to another.
It does not prove, however, that the seller had perfect title to the goods. The goods may have
been stolen, obtained by fraud, purchased from a minor or incompetent person, or entrusted
with the seller by the true owner and sold by mistake. The question that arises in such cases
is whether an innocent purchaser for value receives good title to the goods. The answer to
this question depends on whether the seller’s title to the goods was void or voidable and
whether the goods had been entrusted to a merchant.

5. Voidable Title Voidable title
title that may be voided if the injured party elects to do so
Also received when goods are bought from a minor or a person who is mentally impaired
Teaching Tips Clarify for students the difference between void and voidable title. A void title is no title.
If Marco buys a car from Corinne, who has void title, Marco has no title to the car, even though he paid for
it, because Corinne had no title to give. A voidable title is a title that can be voided.
If Tran buys a mountain bike from Jaleel, who has a voidable title to the bike, Tran acquires good title to
the bike because, at the moment of sale, Jaleel’s title to the bike was voidable but not void.

6. Entrusting Goods to a Merchant
People often entrust goods that belong to them to merchants
When this occurs, if the merchant sells the goods in the ordinary course of business to a third party who has no knowledge of the real owner’s rights, the third party receives good title to them.
The reason for this rule of law is to give confidence to people who buy in the marketplace.
People can be assured that they will receive good title to property (except stolen property)
that they buy from a merchant who deals in goods of that kind in the ordinary course of
business.

7. The Passage of Title and Risk of Loss
Identified goods
specific goods that have been selected as the subject matter of the contract.
Once goods are identified, title passes to the buyer when the seller does whatever is required under the contract to deliver the goods.
It is not unusual for goods to be stolen, damaged, or destroyed while they are awaiting
shipment, are being shipped, or are awaiting pickup after a sales contract has been entered.
When something happens to the goods, it becomes necessary to determine who must suffer
the loss: the seller or the buyer. The rules for determining the risk of loss are contained in
the UCC. Except when goods are to be picked up by the buyer and
in a few other cases, whoever has title to the goods bears the risk
of loss.

8. Shipment Contracts Shipment contract f.o.b.
one in which the seller turns the goods over to a carrier for delivery to the buyer
f.o.b.
“free on board.”
The seller has no responsibility for seeing that the goods reach their destination.
In a shipment contract, both title and risk of loss pass to the buyer when the goods
are given to the carrier.

9. Shipment Contracts
When goods are sent f.o.b. the place of shipment, they will be delivered free to the place of shipment.
The buyer must pay all shipping charges from there to the place of destination.
Getting Students Involved
Have students work in teams to create lists of common situations in which property is transferred into
the temporary possession of another. Have students discuss each situation on their lists in light of title.
Could title ever be transferred (e.g., in the case of the death in a hospital of a person with no will and no
relatives)? In each situation, would title be void or voidable?

10. Abbreviations

11. Question?
___________ means an offer to turn the goods over to the buyer.
Tender
Salesmanship
Vending
Barter
The correct answer is “A” – tender. See next slide.

12. Destination Contracts
the contract requires the seller to deliver goods to a destination
Tender
to offer to turn the goods over to the buyer.
If the contract requires the seller to deliver goods to a destination, it is called a destination
contract. Both title and risk of loss pass to the buyer when the seller tenders the goods at
the place of destination. Tender means to offer to turn the goods over to the buyer.
Destination contracts are often designated by f.o.b. the place of destination (such as
f.o.b. Tampa); goods shipped under such terms belong to the seller until they have been
delivered to the destination shown on the contract.

13. Destination Contracts
With contracts designated by f.o.b. the place of destination goods shipped belong to the seller until they have been delivered to the destination shown on the contract
Similarly, the risk of loss remains with the seller until the goods are tendered at destination.
Tender at destination requires that the
goods arrive at the place named in the contract, the buyer is given notice of their arrival,
and a reasonable time is allowed for the buyer to pick up the goods from the carrier.
When terms of shipment do not specify shipping point or destination, it is assumed to
be a shipment contract.

14. Destination Contracts
c.o.d. (collect on delivery)
instructs the carrier to retain possession until the carrier has collected the cost of the goods
c.i.f. (cost, insurance, and freight)
instructs the carrier to collect all charges and fees in one lump sum
f.a.s. vessel (free alongside vessel)
requires sellers to deliver the goods, at their own risk, alongside the vessel or at a dock designated by the buyer
c.f. - insurance is not included in the sum
Teaching Tips Help students remember the meanings of c.f., c.i.f., c.o.d., f.a.s. vessel, f.o.b. the
place of destination, and f.o.b. the place of shipment by having them work in pairs to come up with ways
to communicate the meaning of one term to the other students. The pairs might, for example, draw cartoons
illustrating the meaning of a term, act out the meaning of a term, or come up with a play on words for a
term’s abbreviation to help classmates remember what the term means.

15. Passage of Title and Risk of Loss

16. Question?
What are “goods of which any unit is, by nature or usage of trade, the equivalent of any like unit”?
Tangible goods
Intangible goods
Dynamic goods
Fungible goods
The correct answer is “D” – Fungible goods. See next slide.

17. Fungible Goods Fungible Goods
“goods of which any unit is, by nature or usage of trade, the equivalent of any like unit.”
Terms The root word fungi refers to function, which relates to the broader definition of fungible
as interchangeable. One unit of something fungible can function the same as any other unit.

18. Question?
A _____________ is a paper giving the person who possesses it the right to receive the goods named in the document.
Document of ownership
Document of title
Vendor document
Document of possession
The correct answer is “B” – Document of title. See next slide.

19. Documents of Title Document of title
A paper giving the person who possesses it the right to receive the goods named in the document
Bills of lading, warehouse receipts
Sometimes, when people buy goods, they receive a document of title to the goods
rather than the goods themselves. They then give the document of title to the warehouse or
carrier that is holding the goods and receive possession of them.
When a document of title is used in a sales transaction, both title and risk of loss pass
to the buyer when the document is delivered to the buyer.

20. Agreement of the Parties
The parties may, if they wish, enter into an agreement setting forth the time that title and risk of loss pass from the seller to the buyer
With one exception, title and risk of loss will pass at the time and place agreed upon
If the agreement allows the seller to retain title after
the goods are shipped, title will pass to the buyer at the time of shipment, regardless of the
agreement, and the seller will have a security interest in the goods rather than title. A security
interest gives the seller a right to have the property sold in the event that the buyer fails
to pay money owed to the seller

21. Revesting of Title in Seller
Buyers, after entering into sales contracts, sometimes refuse to accept the goods that are delivered or are otherwise made available to them
In all such cases, title to the goods returns to the seller
This reversion is true whether or not the buyer’s rejection of the goods is justified.
Similarly, title to goods returns to the seller when the buyer accepts the goods and then for a
justifiable reason decides to revoke the acceptance. A justifiable reason for revoking an acceptance
would be the discovery of a defect in the goods after having inspected them.

22. Question?
What type of sale allows goods to be returned even though they conform to the contract when the goods are primarily for the buyer’s use?
Sale on return
Sale on arrival
Sale on disproval
Sale on approval
The correct answer is “D” – sale on approval. See next slide.

23. Sales with Right of Return
Sale on approval
sale that allows goods to be returned even though they conform to the contract when the goods are primarily for the buyer’s use.
When goods are sold on approval, they remain the property of the seller until the buyer’s approval has been expressed.
The approval may be indicated by the oral or written consent of the buyer or by
the buyer’s act of retaining the goods for more than a reasonable time. Using the goods in
a reasonable and expected manner on a trial basis does not imply an acceptance.

24. Sale or Return Sale or return
sale that allows goods to be returned even though they conform to the contract when the goods are delivered primarily for resale
Teaching Tips Ask students if they ever returned merchandise that they ordered from a catalog. Have any students who had this
experience explain what the seller required him or her to do to return the merchandise.
Next ask students what would have happened if the merchandise had been lost in the mail on its way back to the seller.

25. Question?
What is the financial interest that an insured party has in the insured property?
Insurable interest
Lien interest
Factored interest
Quantum interest
The correct answer is “A” – insurable interest. See next slide.

26. Insurable Interest Insurable interest
the financial interest that an insured party has in the insured property
Buyers may place insurance on goods the moment a contract is made and the goods are
identified to the contract. At this point, buyers receive an insurable interest in the goods
they buy. They obtain an insurable interest even though they might later reject or return the
goods to the seller. Notwithstanding the buyer’s right to insure the goods, sellers retain an
insurable interest in the goods as long as they have title to them.