TITLE, RISK AND INSURABLE INTEREST
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).
• 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
• 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
• 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
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.
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
• Destination Contract: Risk of loss passes
to the buyer at the time when the goods are made
available at the designated destination.
FOB
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.
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.
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.