Chapter 22Chapter 22Title, Risk of Loss, Title, Risk of Loss,

and Insurable and Insurable InterestInterest

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Categories of TitleCategories of Title

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

Void Title: Not true titleVoid Title: Not true title

Example: Purchase of stolen goodsExample: Purchase of stolen goods

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

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UCC Article 2 Rules Regarding Title UCC Article 2 Rules Regarding Title AcquisitionAcquisition

Good Title: Acquired from someone who has rightful Good Title: Acquired from someone who has rightful ownershipownership

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

Voidable Title results when:Voidable Title results when:

Buyer deceived seller regarding his/her identityBuyer deceived seller regarding his/her identity Buyer wrote bad checkBuyer wrote bad check Buyer committed criminal fraud in securing goodsBuyer committed criminal fraud in securing goods Buyer and seller agreed title would not transfer until Buyer and seller agreed title would not transfer until

later timelater time Buyer is a minorBuyer is a minor

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Acquiring Good TitleAcquiring Good Title

General Rule: If “third party General Rule: If “third party purchaser” makes “good-faith” purchaser” makes “good-faith”

purchase for value, he/she gets good purchase for value, he/she gets good title (not void/voidable title)title (not void/voidable title)

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Acquiring Good Acquiring Good TitleTitle

General Rule: If owner entrusts General Rule: If owner entrusts possession of goods to merchant who possession of goods to merchant who deals in goods of that kind, merchant deals in goods of that kind, merchant

can transfer all rights in the goods to a can transfer all rights in the goods to a buyer in the “ordinary course of buyer in the “ordinary course of

business”business”

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UCC Terminology Regarding Transfer of UCC Terminology Regarding Transfer of TitleTitle

““Ownership”—Transfer of TitleOwnership”—Transfer of Title

““Encumbrance”—Goods used as collateral for Encumbrance”—Goods used as collateral for debtdebt

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

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

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Types of Sales ContractsTypes of Sales Contracts

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

Title transfers to buyer when contract Title transfers to buyer when contract executedexecuted

Risk of loss transfers to buyer when buyer Risk of loss transfers to buyer when buyer takes possessiontakes possession

Buyer has insurable interest upon receiving Buyer has insurable interest upon receiving titletitle

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Types of Sales ContractsTypes of Sales Contracts

““Common Carrier Delivery” (Definition): Buyer Common Carrier Delivery” (Definition): Buyer and seller contract, seller then places goods with and seller contract, seller then places goods with

common carriercommon carrier

““Shipment” Contract: Title transfers to buyer Shipment” Contract: Title transfers to buyer at time and place of shipment; buyer bears at time and place of shipment; buyer bears risk of loss while goods in transitrisk of loss while goods in transit

““Destination” Contract: Seller bears risk of Destination” Contract: Seller bears risk of loss until seller delivers goods to stipulated loss until seller delivers goods to stipulated destinationdestination

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Exhibit 22-2: Shipping Terms Specifying Exhibit 22-2: Shipping Terms Specifying Requirements For DeliveryRequirements For Delivery

(Term and Explanation)(Term and Explanation)

FOB (“Free on Board”): Selling price includes transportation FOB (“Free on Board”): Selling price includes transportation costs, and seller has risk of loss to either place of shipment, or costs, and seller has risk of loss to either place of shipment, or place of destinationplace of destination

FAS (“Free Alongside”): Seller, at seller’s expense, delivers goods FAS (“Free Alongside”): Seller, at seller’s expense, delivers goods alongside ship before risk transferred to buyeralongside ship before risk transferred to buyer

CIF or CF (“Cost, Insurance, and Freight”; “Cost and Freight”): CIF or CF (“Cost, Insurance, and Freight”; “Cost and Freight”): Seller places goods in possession of carrier before risk passes to Seller places goods in possession of carrier before risk passes to buyerbuyer

Delivery “Ex-Ship” (Delivery From Carrying Vessel): Risk of loss Delivery “Ex-Ship” (Delivery From Carrying Vessel): Risk of loss passes to buyer when goods leave shippasses to buyer when goods leave ship

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Types of Sales ContractsTypes of Sales Contracts

““Goods-In-Bailment” (Definition): Identifies goods Goods-In-Bailment” (Definition): Identifies goods in storagein storage

Rules regarding passage of title, risk of loss, Rules regarding passage of title, risk of loss, and insurable interest vary, depending on and insurable interest vary, depending on whether seller has negotiable titlewhether seller has negotiable title

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Types of Sales ContractsTypes of Sales Contracts

““Conditional Sales”Conditional Sales”

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

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

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Risk of Loss Upon Breach of ContractRisk of Loss Upon Breach of Contract

Seller in Breach (by failing to deliver goods):Seller in Breach (by failing to deliver goods):

Buyer may accept nonconforming goods “as is”, or Buyer may accept nonconforming goods “as is”, or reject goods (subject to seller’s right to “cure”)reject goods (subject to seller’s right to “cure”)

Risk of loss remains with seller until buyer accepts Risk of loss remains with seller until buyer accepts goods, or deficiencies correctedgoods, or deficiencies corrected

Buyer in Breach (buyer refuses to accept conforming Buyer in Breach (buyer refuses to accept conforming goods, goods later lost or damaged):goods, goods later lost or damaged):

Risk of loss depends on type of contract between buyer Risk of loss depends on type of contract between buyer and sellerand seller

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