Title and Risk of Loss

I. Title to Goods in a Sales Contract Under common law, title had great

significance, because most of the problems relating to risks, insurable interests in goods, remedies were determined on the basis of who was the technical title owner at the particular moment the right or liability arose.

Under the UCC, title and risk of loss do not always go hand in hand. Which party bears risk of loss does not depend on _____but rather______.

(passage of title, time of delivery)

1. Identification

Title to goods cannot pass from the seller to the buyer until the goods are identified to the contract.

2. Passage of title

When will title pass from the seller to the buyer?

(1). Agreement:

(2). No agreement---- at the time and the place the seller performs the physical delivery of the goods, that is, the seller completes his obligations as to delivery of the goods.

If the contract requires the seller to “ship” the goods to the buyer, then title passes to the buyer when ____________________.

(the seller delivers conforming goods to the carrier)

If the contract requires the seller to “deliver” the goods to the buyer, then title does not pass to the buyer until __________________.

(the goods are delivered to the buyer and tendered to him)

If delivery is to be made without moving the goods, then title passes _________________. An exception is made if title to the goods is

represented by a document of title such as a warehouse receipt; then title passes when and where ____________________.

(at the time and place of contracting; the document of title is delivered to the buyer)

II. Title and third parties1. Obtaining good title A fundamental rule of property law is

that a buyer cannot receive better title to goods than the seller had.

Case: If Thief steals a TV set from John and sells to Brown, does Brown get title to the set? And what can John do?

----Brown does not get good title to the set, because Thief had no title (void title) to it . John would have the right to recover the set from Brown.

Similarly, if Brown sold the set to Carroll, does Carroll get title to the set? And what can John do?

----No. Carroll could get no better title to it than Brown had. John would have the right to recover the set from Carroll.

2. Under the Code, there are several exceptions to this general rule. The most important exceptions include the following: (1) a person who has a voidable title to goods can pass good title to a bona fide purchaser for value; (2) a person who buys goods in the regular course of a retailer’s business takes free of any interests in the goods that the retailer has given to others. (3) a person who buys goods in the ordinary course of a dealer’s business takes free of any claim of a person who entrusted those goods to the dealer.

(1) Transfers of Voidable Title Under what circumstances, does the seller have

a voidable title of goods? Case Jones goes to the ABC Appliance Store,

convinces the clerk that he is really Clark, who is good customer of ABC, and leaves with a stereo charged to Clark’s account. If Jones sells the stereo to Davis, who gives Jones value for it and has no knowledge of the fraud. Then who gets good title to the stereo, Davis or ABC? And can ABC recover the stereo from Davis?

----Davis gets good title to the stereo. ABC cannot recover the stereo ; instead, it must look for Jones, the person who deceived it. In this situation, both ABC and Davis were innocent of wrongdoing, but the law considers Davis to be the more worthy of its protection because ABC was in a better position to have prevented the wrongdoing by Jones and because Davis bought the goods in good faith and for value.

(2) Buyers in the Ordinary Course of Business

(3) Entrusting of Goods

Blake takes an expensive grandfather clock to Harvey’s Clock Shop to be repaired. Harvey’s specializes in the repair and restoration of old clocks. If an uninformed sales clerk at Harvey’s sells Blake’s clock to Arnold before Blake can come to pick it up, which of the following is true?

a. Arnald will be required to return the clock to Blake.

b. Blake can sue Harvey’s for fraud.

c. Unfair as it may seem, Blake entrusted the clock to Harvey’s and now can do nothing.

d. Though Arnold now has a legal right to the clock, Blake can sue Harvey’s for recovery of the value of the clock.

RISK OF LOSS The common law placed the risk on the

party who had the title at the time of the loss.

The UCC rejects this approach and provides specific rules governing risk of loss. Risk of loss under the UCC depends on (1) the terms of parties’ agreement, or (2) on the moment the loss occurs, or (3) on whether one of the parties was in breach of contract when the loss occurred.

Read the following cases and decide which party should bear the risk of loss and what is the applicable rule.

(1) A Chicago-based seller contracts to sell a quantity of shirts to a buyer FOB Phoenix, the buyer’s place of business. The shirts are destroyed en route when the truck carrying the shirts is involved in an accident.

(2) In the above case , if the contract has called for delivery FOB the seller’s manufacturing plant, then who bears the risk of loss of shirts?

((1) The risk of loss is on the seller and the buyer is not obligated to pay for them. The seller may have the right to recover from the trucking company. (2) The risk of loss is on the buyer. The buyer has to pay for the shirts and then pursue any claims that he has against the trucking company.)

(3) If Farmer sells Miller a quantity of grain currently stored at Grain Elevator, when will the risk of loss of the grain shift from Farmer to Miller?

(If the goods are in the possession of a bailee and are to be delivered without being moved, then (a). when a negotiable warehouse receipt for the grain is delivered to Miller or (b). when Grain Elevator notifies Miller that it is holding the grain for Miller. )

(4) If Jones bought a TV set from ABC Appliance on Monday, intending to pick it up on Thursday, and the set was stolen on Wednesday, who bears the risk of loss ? If Jones had purchased the set from his next-door neighbor and could have taken delivery of the set on Monday (i.e., delivery was tendered then), who bears the risk?

(a. The risk of loss remained with ABC b. The risk of loss was Jones.) (5) If Adler bought a new Buick from Brown Buick

that he later returned to Brown because of serious defects in it and if through no fault of Adler’s automobile was damaged while in his possession, then who should bear the risk of loss?

(The risk of loss would be with Brown. However, if Adler had insurance on the automobile covering damage to it and recovered from the insurance company, Adler would have to turn the insurance proceeds over to Brown or use them to fix the car before returning it to Brown.)

(6) Cannery contracts to buy Farmer’s entire crop of peaches. Farmer picks, crates them, tenders delivery to Cannery, and stores them in his barn for Cannery. Cannery then tells Farmer that it does not intend to honor the contract. Shortly thereafter, but before Farmer has a chance to find another buyer, the peaches are spoiled by a fire, who should bear the risk of loss?

( When a buyer repudiates a contract for goods and those goods have already been set aside by the seller, the risk of loss stays with the buyer for a commercially reasonable time after the repudiation.)

INSURABLE INTEREST: Buyers and Sellers What is insurable interest?

----the right to purchase insurance on goods to protect one’s property rights and interest in the goods

The buyer gains an insurable interest when the goods are identified to the contract.

The seller has an insurable interest for as long as he or she retains title to the goods.

Output, Inc., purchases 200 personal personal computers from an overseas manufacturer through a telephone transaction. The manufacturer, upon discovering that the model Output had requested is not in stock, substitutes a comparable but slightly different model computer at the same wholesale cost. At this point, does Output , Inc., have an insurable interest in the personal computers?

a. yes, definitely– even though, technically, they are nonconforming goods.

b. No; given the substitution, Output has no insurable interest.

(A buyer gains an insurable interest from the moment goods are identified to the contract, even if those goods are nonconforming. After all, Output may well decide to keep the computers, and it has a right to protect its interests during shipment.)