Business Law 1 Final Preparation Chapter 19 - Title to Goods and Risk of Loss

What is a shipment contract?

A contract that requires a seller to ship the goods to the buyer via a common carrier. requires the seller to ship the goods to the buyer via a common carrier. The seller is required to (1) make proper shipping arrangements and (2) deliver the goods into the carrier's hands. Title passes to the buyer at the time and place of shipment

What is C.I.F. (cost, insurance, and freight)?

A pricing term that means the price of goods includes the cost of the goods and the costs of insurance and freight.

What is a conditional sale?

A sale of goods that is subject to a condition of sale.

What is No-arrival, no-sale contract?

A shipping term that requires the seller of goods to bear the expense and risk of loss of the goods during transportation.

What is F.O.B point of shipment?

A shipping term that requires the seller to arrange to ship the goods and put the goods in the carrier's possession. requires the seller to arrange to ship the goods and put the goods in the carrier's possession. The buyer bears the shipping expense and risk of loss while the goods are in transit

What is F.O.B. (free on board) place of destination?

A shipping term that requires the seller to bear the expense and risk of loss of goods until the goods are tendered to the buyer at the place of destination.

What is ex-ship (from the carrying vessel)?

A shipping term that requires the seller to bear the expense and risk of loss until the goods are unloaded from the ship at its port of destination.

What is F.A.S. (free alongside ship) port of shipment or F.A.S. (vessel) port of shipment?

A shipping term that requires the seller to deliver and tender the goods alongside the named vessel or on the dock designated and provided by the buyer. requires the seller to deliver and tender the goods alongside the named vessel or on the dock designated and provided by the buyer. The seller bears the expense and risk of loss until this is done [UCC 2-319(2)(a)]. The buyer bears shipping costs and the risk of loss during transport.

What determines the passage of title in sales contracts?

Article 2 of the Uniform Commercial Code (UCC)

What happens in sale of stolen goods?

In a case in which a buyer purchases goods or a lessee leases goods from a thief who has stolen them, the purchaser does not acquire title to the goods, and the lessee does not acquire any leasehold interest in the goods. The real owner can reclaim the goods from the purchaser or lessee [UCC 2-403(1)]. This is called void title or void leasehold interest.

What is title to goods?

Legal, tangible evidence of ownership of goods, real property, or other property.

Absent any indication to the contrary, sales contracts are presumed to be what type of contract?

shipment contracts rather than destination contracts.

What are the ways destination contracts are made?

The first method requires the use of the term destination contract. The alternative method requires the use of the following delivery terms: F.O.B. place of destination, ex-ship, or no-arrival, no-sale contract.

What was the common law view on risk of loss?

Under the common law of contracts, the risk of loss of goods is placed on the party who holds title to the goods.

What happens in a sale or return contract?

A contract in which the seller delivers goods to a buyer with the understanding that the buyer may return them if they are not used or resold within a stated or reasonable period of time. the seller delivers goods to a buyer with the understanding that the buyer may return them if they are not used or resold within a stated period of time (or within a reasonable time, if no specific time is stated). The sale is considered final if the buyer fails to return the goods within the specified time or within a reasonable time, if no time is specified. The buyer has the option of returning all the goods or any commercial unit of the goods. In a sale or return contract, the risk of loss and title to the goods passes to the buyer when the buyer takes possession of the goods [UCC 2-327(2)]. Goods sold pursuant to a sale or return contract are subject to the claims of the buyer's creditors while the goods are in the buyer's possession.

What is a bailee?

A holder of goods who is not a seller or a buyer (e.g., warehouse, common carrier).

When does a buyer breach contract?

if he or she (1) refuses to take delivery of conforming goods, (2) repudiates the contract, or (3) otherwise breaches the contract. A buyer who breaches a sales contract before the risk of loss would normally pass to him or her bears the risk of loss of any goods identified to the contract. The risk of loss rests on the buyer for only a commercially reasonable time. The buyer is liable only for any loss in excess of insurance recovered by the seller.

What is a destination contract?

A contract that requires the seller to deliver the goods either to the buyer's place of business or to another destination specified in the sales contract. requires the seller to deliver the goods either to the buyer's place of business or to another destination specified in the sales contract. Title passes to the buyer when the seller tenders delivery of the goods at the specified destination

What is a document of title and when is it needed?

A document, such as a warehouse receipt or bill of lading, that is required in some transactions of pickup and delivery. In other words, the buyer might be required to pick up goods from the seller. In such situations, the time and place of the passage of title depends on whether the seller is to deliver a document of title (i.e., a warehouse receipt or bill of lading) to the buyer. If a document of title is required, title passes when and where the seller delivers the document to the buyer

What is the entrustment rule?

A rule that states that if the owner of goods entrusts the possession of these goods to a merchant who deals in goods of that kind (e.g., for repair or consignment), the merchant has the power to transfer all rights (including title) in the goods to a buyer in the ordinary course of business. The real owner cannot reclaim the goods from this buyer. The entrustment rule also applies to leases. If a lessor entrusts the possession of goods to a lessee who is a merchant who deals in goods of that kind, the merchant-lessee has the power to transfer all the lessor's and lessee's rights in the goods to a buyer or sublessee in the ordinary course of business [UCC 2A-305(2)].

What happens in sale of fraudulently obtained goods?

A seller or lessor has voidable title or voidable leasehold interest to goods if he or she obtained the goods through fraud, if the check for the payment of the goods or lease is dishonored, or if the seller or lessor impersonated another person. A person with voidable title to goods can transfer good title to a good faith purchaser for value or a good leasehold interest to a good faith subsequent lessee. A good faith purchaser or lessee for value is someone who pays sufficient consideration or rent for the goods to the person he or she honestly believes has good title to or leasehold interest in those goods [UCC 2-201(1), 1-201(44)(d)]. The real owner cannot reclaim goods from such a purchaser or lessee [UCC 2-403(1)].

What happens in a sale on approval?

A type of sale in which there is no actual sale unless and until the buyer accepts the goods. A sale on approval occurs when a merchant allows a customer to take the goods for a specified period of time to see if they fit the customer's needs. The prospective buyer may use the goods to try them out during this time. Acceptance of the goods occurs if the buyer (1) expressly indicates acceptance, (2) fails to notify the seller of rejection of the goods within the agreed-on trial period (or, if no time is agreed on, a reasonable time), or (3) uses the goods inconsistently with the purpose of the trial (e.g., a customer resells a computer to another person). In a sale on approval, the risk of loss and title to the goods remain with the seller. They do not pass to the buyer until acceptance [UCC 2-327(1)]. The goods are not subject to the claims of the buyer's creditors until the buyer accepts them.

When is identification of goods required?

Already existing goods are identified when a contract is made and names the specific goods sold or leased. Goods that are part of a larger mass of goods are identified when the specific merchandise is designated. Future goods are goods not yet in existence.

What happens in a consignment?

An arrangement in which a seller (the consignor) delivers goods to a buyer (the consignee) to sell. The consignee is paid a fee if it sells the goods on behalf of the consignor. A consignment is treated as a sale or return under the UCC; that is, title and risk of loss of the goods pass to the consignee when the consignee takes possession of the goods. Whether goods are subject to the claims of a buyer's creditors usually depends on whether the seller files a financing statement, as required by Article 9 of the UCC. If the seller files a financing statement, the goods are subject to the claims of the seller's creditors. If the seller fails to file such a statement, the goods are subject to the claims of the buyer's creditors

When is title passed at the time and place of contracting?

If (1) no document of title is needed and (2) the goods are identified at the time of contracting

What is identification of goods?

It means distinguishing the goods named in a contract from the seller's or lessor's other goods. The seller or lessor retains the risk of loss of the goods until he or she identifies them in a sales or lease contract. Further, UCC 2-401(1) and 2-501 prevent title to goods from passing from the seller to the buyer unless the goods are identified to the sales contract. In a lease transaction, title to the leased goods remains with the lessor or a third party. It does not pass to the lessee.

Who bears the risk of loss if the goods are destroyed or stolen after the contract date but before the buyer picks up the goods from the seller?

Merchant-seller. If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received. In other words, a merchant-seller bears the risk of loss between the time of contracting and the time the buyer picks up the goods. Nonmerchant-seller. Nonmerchant-sellers pass the risk of loss to the buyer on "tender of delivery" of the goods. Tender of delivery occurs when the seller (1) places or holds the goods available for the buyer to take delivery and (2) notifies the buyer of this fact.

What is the risk of loss in lease contracts?

The parties to a lease contract are the party who leases the goods (the lessor) and the party who receives the goods (the lessee). The lessor and the lessee may agree about who will bear the risk of loss of the goods if they are lost or destroyed. If the parties do not agree, the UCC provides the following risk of loss rules: In the case of an ordinary lease, if the lessor is a merchant, the risk of loss passes to the lessee on the receipt of the goods [UCC 2A-219]. If the lease is a finance lease and the supplier is a merchant, the risk of loss passes to the lessee on the receipt of the goods [UCC 2A-219]. A finance lease is a three-party transaction consisting of a lessor, a lessee, and a supplier (or vendor). If a tender of delivery of goods fails to conform to the lease contract, the risk of loss remains with the lessor or supplier until cure or acceptance [UCC 2A-220(1)(a)].

Who has the risk of loss in a destination contract?

The risk of loss in a destination contract is on the seller while the goods are in transport. Thus, except in the case of a no-arrival, no-sale contract, the seller is required to replace any goods lost in transit. The buyer does not have to pay for destroyed goods. The risk of loss does not pass until the goods are tendered to the buyer at the specified destination

Who has the risk of loss in a shipment contract?

The risk of loss in a shipment contract passes to the buyer when the seller delivers the conforming goods to the carrier. The buyer bears the risk of loss of the goods during transportation [UCC 2-509(1)(a)]. Shipment contracts are created in two ways. The first method requires the use of the term shipment contract. The second requires the use of one of the following delivery terms: F.O.B. point of shipment, F.A.S., C.I.F., or C.&F.

Lindholm v. Brant

The trial court held that Brant was a buyer in the ordinary course of business who obtained ownership to Red Elvis when he purchased the stolen Red Elvis from Malmberg. Lindholm appealed the decision of the trial court to the supreme court of Connecticut, which affirmed the decision of the trial court and awarded the Red Elvis to Brant. A court in Sweden convicted Malmberg of criminal fraud and sentenced him to 3 years in prison. A Swedish court awarded Lindholm $4.6 million in damages against Malmberg.

When does a seller breach contract?

if he or she tenders or delivers nonconforming goods to the buyer. If the goods are so nonconforming that the buyer has the right to reject them, the risk of loss remains on the seller until (1) the defect or nonconformity is cured or (2) the buyer accepts the nonconforming goods.

If such goods are to be delivered to the buyer without the seller moving them, who has the risk of loss?

the risk of loss passes to the buyer when (1) the buyer receives a negotiable document of title (e.g., warehouse receipt, bill of lading) covering the goods, (2) the bailee acknowledges the buyer's right to possession of the goods, or (3) the buyer receives a nonnegotiable document of title or other written direction to deliver and has a reasonable time to present the document or direction to the bailee and demand the goods. If the bailee refuses to honor the document or direction, the risk of loss remains on the seller