TITLE, RISK AND INSURABLE INTEREST



 

 

IDENTIFICATION OF GOODS

 

 

Definition: title- the right of ownership.

 

Concept: transfer of title from one party to another.

 

        Before any interest in specific goods can pass from seller to buyer or from lessor to lessee (but here title remains with the lessor), two conditions must be met:

 

(1)   the goods must be in existence, and

 (2) the goods must be identified as the specific goods designated in the contract.

 

        Identification is significant because it permits the buyer or lessee to insure the goods and to recover from third parties who damage the goods (in transit or otherwise). (more on this later)

 

        If the contract calls for the sale or lease of goods that already exist in their final form, then identification occurs at the time the contract is made.

 

        If the contract calls for the sale or lease of goods that have yet to be completed or modified in accordance with the contract, or for the sale of fungible goods, identification occurs when the goods are shipped, marked, or otherwise designated by the seller or lessor for delivery to the buyer or lessee.

 

        Fungible Goods: Goods that are alike by physical nature, by agreement, or by trade usage (e.g., grains of wheat, barrels of like-grade oil).

 

 



PASSAGE OF TITLE

 

 

        The U.C.C. provides that, unless a contrary agreement is explicitly made, title passes to the buyer at the time the goods are physically delivered to the buyer. [4735] Think about it, you go to the bookstore, buy a book, and you then “own” it.

 


           Shipment Contract: A contract for which (i) requires the seller to ship buyer via carrier and (ii) relieves the seller of liability for the goods once they have been delivered to the carrier. Title passes to the buyer once the goods are given to the carrier.  For example, FOB Huntsville and shipped to Dallas.

 


 

 

        Destination Contract: A contract for the sale of goods which (i) requires the seller to ship the goods via carrier, (ii) to a particular destination, and (iii) relieves the seller of liability for the goods once they have been delivered to the designated destination. In this case, title passes to the buyer at the time when the goods are made available at the designated destination.  For example, FOB Dallas in the above example.

 

        Non-Delivery Contract: When a contract provides that the buyer will take possession of the designated goods without delivery by the seller, title passes to the buyer at the time and place the contract is made, unless the seller is required to provide a document of title, in which case title passes when the seller delivers the title document.  For example, a warehouse receipt.

 

 


IMPERFECT (defective) TITLE 4722

 

 

RECALL  Perfect title” is good and valid title to the goods.

 

 

   Imperfect Title?

 

   In other words, sales or leases by non-owners in a strict or technical view:

 

        Void Title: If a buyer unknowingly purchases goods from a seller who is not the owner of the goods, the buyer’s title to the goods is void, as was the seller’s title before the sale.

 

           Voidable Title: But, a seller has voidable title if the goods he or she is selling were

(i)                obtained by fraud,

(ii)              paid for with a dishonored check,

(iii)            purchased from a minor, or

(iv)    purchased on credit when the seller was insolvent.

 

Notice: in a voidable title situation, it appears some effort to obtain the original property was at least somewhat “legitimate” or resulted from error.

 

                                      VERY VERY VERY IMPORTANT:

 

        Unlike a seller whose title is void, a seller whose title is voidable has the power to transfer valid title to a good faith purchaser.

 

        Good Faith Purchaser: A purchaser who buys without notice of any circumstances that would make a person of ordinary prudence inquire whether the seller’s title to the goods being sold was valid. The “real” owner of the goods cannot recover them from a good faith purchaser.

 

For example, I buy a TV from a major company, who had paid for the shipment of TV’s with a bad check (honestly or otherwise).  How was I to know?

 

Contrast: I buy a TV from a dude selling a few “off of his truck” in a shady lane in downtown Houston.  I don’t think I am a good faith purchaser here!

 

 

 


RISK OF LOSS: ENTRUSTMENT (4723+)

 

        The Entrustment Rule : Entrusting goods to a merchant who deals in goods of that kind gives the merchant the power to transfer all rights to a good faith purchaser in the ordinary course of business.

 

 

 

 

RISK OF LOSS: DELIVERY OR TENDER (4724)

 

Normally under the UCC, risk of loss does NOT necessarily pass with title.

 

It is usually determined by contract terms.  If it doesn’t pass via contract terms, then other rules tend to follow:

 

        Transported Goods: The risk of loss for goods sold under a shipment or destination contract is as follows:

 

        Shipment Contract: Risk of loss passes to the buyer at the time and place the goods are delivered to the carrier.  FOB Huntsville

 

        Destination Contract: Risk of loss passes to the buyer at the time when the goods are made available at the designated destination.  FOB Dallas

 

Goods Held by the Seller: If the seller is a merchant, risk of loss passes to the buyer at the time he or she takes physical possession of the goods.

 

          If the seller is a non-merchant, risk of loss passes to the buyer when the seller tenders the goods to the buyer.

 

Goods Held by a Bailee: Risk of loss passes to the buyer when

 

                   (i) the buyer receives the title document from the seller,

 

                   (ii) the bailee (warehouseman) acknowledges the buyer’s right of possession, or

 

                   (iii) the buyer receives a nonnegotiable title document and has had a reasonable period of time to demand the goods from the bailee.

 



RISK OF LOSS: CONDITIONAL SALES (4728-9)

 

Sometimes a sales contract is developed where it is conditioned on the buyers approval of the goods or the buyers resale of the goods.

 

       Sale or Return: A conditional sale where title, possession, and risk of loss pass from the seller to the buyer; however, the buyer retains the option to return some or all of the goods, at the buyer’s expense and risk of loss, during the specified period even though the goods conform to the contract.

 

        Consignment Sale: A transaction in which the owner of the goods (the consignor) delivers the goods to another (the consignee) for the consignee to sell. The consignee pays the consignor for the goods when they are sold by the consignee. Prior to sale by the consignee, the consignor holds title to the consignor’s goods and the consignor bears the risk of loss.  For example, taking some kids’ clothes to a kids slightly used clothes store and the store selling it for us.

 

        Sale on Approval: A conditional sale where the buyer may take possession of the goods on a trial basis. The sale becomes final only when the buyer approves of the goods being offered. Title and risk of loss remain with the seller until the buyer accepts or approves the offered goods. If the buyer does not accept, the goods will be returned at the seller’s expense and risk of loss.

 


RISK OF LOSS: BREACH

 

        Breach by the Seller or Lessor [4740]: Usually Non-Conforming Goods: When the seller or lessor provides the buyer or lessee with goods that are sufficiently non­conforming as to entitle the buyer or lessee to reject them, risk of loss does not pass to the buyer until

(1)     the seller or lessor cures the breach, by providing conforming replacement goods, or

(2)     the buyer accepts the goods, despite their defects.

 

NOTE:       Revocation: If a buyer accepts and then discovers the defect, the buyer may revoke his or her acceptance, and pass the risk of loss back to the seller.

 

        Breach by the Buyer or Lessee 4738: When a buyer or lessee breaches a contract for sale or lease of goods, the risk of loss immediately shifts to the buyer or lessee, but only if the seller or lessor has already identified the goods.

 

        In such a case, the buyer or lessee

(i)                only bears the risk of loss for a commercially reasonable time after the seller has learned of the breach, and

(ii)             is liable only to the extent that the seller’s or lessor’s insurance does not cover the loss.

 

 


INSURABLE INTERESTS [4726]

 

 

Obviously, parties to a contract want to protect their property and “investments”, so they often obtain insurance to protect themselves.  But the party must have an insurable interest to obtain such insurance.

 

        Insurable Interest: A property interest in sold or leased goods that is sufficiently substantial to permit a party to insure against damage to the goods identified with the sale or lease contract.

 

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

 

        A buyer obtains an insurable interest when he or she takes title to the goods.

 

        Even after title has passed, if the seller retains a security interest in the goods for payment still due, the seller can insure the goods to the extent of that interest.

 

 

 

BULK TRANSFERS

 

 

Consider: assume the SHSU bookstore changes hands.  The seller does not wish to move all the books.  The new owner is willing to obtain the books.  This is an example of a  bulk transfer.

 

        Bulk Transfer: Any transfer, not made in the ordinary course of the transferor’s business, of a major part of the transferor’s material, supplies, merchandise, or inventory. In order for a buyer to acquire title free and clear of all claims from the seller’s creditors:

 

(1)     The seller must furnish the buyer with a sworn list of the seller’s creditors, including the names, business address, and amounts owed, including amounts in dispute;

 

(2)     The buyer and seller must prepare a schedule of the property to be transferred;

 

(3)     The buyer must preserve the seller’s list of creditors and the property schedule for up to six months and must (a) permit inspection of the list by any of the seller’s creditors or (b) must file the list and schedule with the appropriate recording agency; and

 

(4)       The buyer must give notice of the proposed bulk transfer to the seller’s creditors at least ten (10) days before taking possession or making payment, whichever comes first.