Chapter 22Title, Risk of Loss, and Insurable Interest

Hypothetical

Fine Furniture, Inc. is a furniture manufacturer located in Norfolk, Virginia. Fine enters into a contract with Jaguar Interiors, L. L. C. in Jacksonville, Florida, agreeing to sell Jaguar Interiors 1,000 dining room chairs at a total contract price of $100,000. The contract’s shipping term designates “F. O. B. Destination,” and stipulates that Darnell, Uecker, and Irvin (“D.U.I.”) Shipping, International will transport the furniture from Norfolk to Jacksonville.

D. U. I. Shipping has retained the services of a ship steward, Joe Birchtree, to captain the ship en route to Jacksonville. Birchtree has history of alcohol abuse, but his professional record is clear of any mishaps.

On a clear day, with calm waters, blue skies and the absence of wind, Birchtree runs his ship aground, and all cargo is ruined as a result of water damage. Evidence indicates that Birchtree was intoxicated at the time of the accident. As between Fine Furniture and Jaguar Interiors, who held title to the chairs when the ship ran aground? As between Fine Furniture and Jaguar Interiors, who bears the loss of the chairs? Ultimately, does D. U. I. Shipping bear legal responsibility for the chairs?

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Title, Risk, and Insurable Interest

o Sale of goods requires different rules than real property transactions: risk should not always pass with title.

o UCC replaces title with identification, risk, and insurable interest.

Categories of Title

o Good Title: Acquired from someone who already owns the goods “free and clear”

o Void Title: Not true title

o Example: Purchase of stolen goods

o Voidable Title: Occurs in certain situations in which contract between original parties would be void, but goods have already been sold to third party

UCC Article 2 Rules Regarding Title Acquisition

o Good Title: Acquired from someone who has rightful ownership

o Void Title: Results when someone acquires possession of stolen goods

o Voidable Title results when:

o Buyer deceived seller regarding his/her identity

o Buyer wrote bad checko Buyer committed criminal fraud in securing

goodso Buyer is a minoro Buyer and seller agreed title would not

transfer until later time

Acquiring Good Title

o General Rule: If “third party purchaser” makes “good-faith” purchase for value, he/she gets good title (not void/voidable title)

o General Rule: If owner entrusts possession of goods to merchant who deals in goods of that kind, merchant can transfer all rights in the goods to a buyer in the “ordinary course of business”

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UCC Terminology Regarding Transfer of Title

o “Ownership”—Transfer of Title

o “Encumbrance”—Goods used as collateral for debt

o “Loss”—Refers to which party has “risk of loss” when goods damaged/destroyed

o “Insurable Interest”—Right to insure goods against any risk exposure

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Identification

For any interest to pass to buyer, goods must be:o In existence.o 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).

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Identification [2]

o Gives the buyer the right:o To obtain insurance on the goods.o To recover from third parties who

damage the good.

o Identification occurs:o If goods are designated when

contract is made. If goods are not designated when contract is made, then identified at time of designation.

Types of Sales Contracts

“Simple Delivery” (Definition): Buyer and seller contract, buyer leaves with goods

o Title transfers to buyer when contract executed

o Risk of loss transfers to buyer when buyer takes possession

o Buyer has insurable interest upon receiving title

o You purchase a sofa at a yard sale for $50. You tell the seller that you’ll come back with a truck to pick up the sofa. When you come back after 1 hour, you discover that the sofa has been damaged by a freak thunderstorm. Who has the ROL?

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Common-Carrier Delivery Contract: When Title Passes

o Title can pass:o Upon physical delivery, oro When agreed to by the parties, oro If no agreement, depends on whether

contract is shipment or destination contract: o Shipment: title passes at time and place of

shipment.o Destination: title passes when goods are

tendered at the destination.

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Delivery Without Movement of Goods

o Title passes when agreed by the parties, or

o With document of title: when and where document delivered.

o Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.

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Risk of Loss

o ROL is important because of insurance concerns.

o ROL does not necessarily pass with title.

o Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods.

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ROL: Delivery With Movement

o Shipment Contracts.o ROL passes to Buyer when tendered to

Carrier. If goods damaged in transit, Buyer’s loss.

o Destination Contracts.o ROL passes to Buyer when goods

tendered at particular Destination.o E.g. You purchase a sofa from Pottery

Barn and pay for delivery to your home. On the way to your home, the Pottery Barn truck is involved in an accident and the sofa is damaged. Who bears the risk of loss?

o You have title. Merchant has ROL under the UCC.

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ROL: Shipping Terms

Term DefinitionF.O.B. Free on Board. Sales price includes shipping to specific place

in contract. Seller has ROL to either place of shipment or place of destination. Example: FOB Chicago.

F.A.S. Free Along Side. Requires seller to deliver goods alongside the ship before ROL passes to buyer.

C.I.F. Cost, Insurance and Freight. Seller puts the goods in possession of a carrier before risk passes to buyer.

Delivery Ex-Ship

Deliver from Carrying shipping vessel. ROL passes to buyer when goods leave the ship or unloaded.

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Title: Goods-in-Bailment Contract

o Bailment: Goods that are in storage

o Goods Held by Seller:o Document of Title is generally

not used. Title passes when goods are identified to the contract and the contract is executed.

o If there is a Document of Title: Title passes when the document of title (warehouse receipt or bill of lading) is endorsed or signed over to buyer

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ROL: Delivery Without Movement of Goods

o Goods Held by Bailee (Warehouse). ROL passes when:o Buyer receives document of title;

bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up.

Types of Sales Contracts“Conditional Sales”

o “Sale-On-Approval”: Title and risk of loss with seller until buyer notifies seller of approval

o “Sale-Or-Return”: Buyer has insurable interest once goods identified in contract; title and risk of loss transfer depend on whether goods in bailment, delivered by common carrier, or delivered by seller

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ROL in Breach of Contract

o Generally breaching party bears ROL.o Seller’s Breach.

o Rejection - risk stays with seller.o Revocation of acceptance - risk passes back

to seller to the extent that buyer’s insurance does not cover the loss.

o Buyer’s Breach. o Goods have to be identifiedo Risk passes to buyer for a reasonable

amount of time after seller learns of the breach

o Buyer liable to the extent that seller’s insurance does not cover loss.