Business Law Chapter 21: Title, Risk, and Insurable Interest

If a buyer unknowingly purchases goods from a seller who is not the owner of the goods or a lessee unknowingly acquires a good from a lessor with no leasehold interest what can the real owner/lessee do?

Reclaim the goods from the buyer

What does a buyer's insurable interest in a good allow for?

Allows the buyer to obtain the necessary insurance coverage for those goods even before risk of loss has passed.

If the contract does not involve the movement of goods and the goods are held by a merchant seller when does risk of loss pass?

When the buyer actually takes physical possession of the goods

In a shipping contract when does the risk of loss pass to the buyer?

When the goods are delivered to the carrier

When are goods part of a larger mass identified?

When the goods are marked, shipped, or somehow designated by the seller or lessor as the particular goods to pass under the contract.

In a destination contract when does the risk of loss pass to the buyer?

When the goods are tendered to the buyer at the specified destination

When would a void title occur?

If a buyer unknowingly purchases goods from a seller who is not the owner of the goods

When does a seller have in insurable interest in goods?

-A seller has an insurable interest in goods if they retain title to the goods -Even after title passes to a buyer, a seller who has a security interest in the goods still has an insurable interest.

Under the UCC, a person is a buyer in the ordinary course of business if:

-She/he buys goods in good faith (honestly). -The goods are purchased without knowledge that the sale violates the rights of another person in the goods. -Goods are purchased in the ordinary course from a merchant (other than a pawnbroker) in the business of selling goods of that kind. -The sale to that person comports with the usual or customary practices in the kind of business in which the seller is engaged

Under what conditions would a seller have voidable title to goods?

-The goods were obtained by fraud. -The goods were paid for with a check that was later dishonored. -The goods were purchased on credit when the seller was insolvent under federal bankruptcy law

What does entrusting include

-Turning over goods to the merchant -Leaving purchased goods with the merchant for later delivery or pickup

If the contract does not involve the movement of goods and the goods are held by a bailee when does risk of loss pass?

1. The buyer receives a negotiable document of title for the goods 2. The bailee acknowledges the buyer's right to possess the goods 3. The buyer receives a nonnegotiable document of title, and the buyer has had a reasonable time to present the document to the bailee and demand the goods. If the bailee refuses to honor the document, the risk of loss remains with the seller.

What conditions must be met before any interest in goods can pass from the seller or lessor to the buyer or lessee?

1. The goods must be in existence 2. The goods must be identified to the contract

When does a buyer have in insurable interest in goods?

A buyer has an insurable interest in identified goods -- the moment the contract goods are identified by the seller, the buyer has a property interest in them.

Good Faith Purchaser

A buyer without knowledge of circumstances that would make an ordinary person inquire about the validity of the seller's title to the goods.

Bailee

A party who, by a bill of lading, warehouse receipt, or other document of title, acknowledges possession of goods or contracts to deliver them.

How do owners of fungible goods typically hold title?

As tenants in common (owners with an undivided share of the whole)

When does identification take place for existing goods?

At the time the contract is made

If a contract involves movement of the goods via a common carrier but does not specify when risk of loss passes and does not specify specific delivery terms, what do courts then look to?

Determine whether the contract is a shipping contract or a destination contract

Negotiable document of title

Document representing transfer of title in which a party can transfer the rights by signing and delivering, or in some situations simply delivering, the document.

Non-negotiable document of title

Document representing transfer of title in which the transferee obtains only the rights that the party transferring it had, subject to any prior claims

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 buyer in the ordinary course of business

When a buyer acquires a good from someone who had imperfect title what is the extent of the title passed?

Generally, a buyer acquires at least whatever title the seller has to the goods sold.

Fungible goods

Goods that are alike by physical nature, by agreement, or by trade usage (e.g., grains of wheat).

Under what circumstance can a buyer revoke acceptance of an offer?

If a buyer accepts a shipment of goods and later discovers a defect

Difference between void title and voidable title

If a seller with void title sells the good to a buyer, then the buyer has no title in said good. However, a seller with voidable title has the power to transfer good title to a good faith purchaser for value. The original owner normally cannot recover goods from a good faith purchaser for value

How could a seller and buy simultaneously have an insurable interest in a good?

If the buyer claims title to the good while the seller has a security interest in the good

When the contract does not call for the seller to ship/deliver the goods and a title document is not required, when does the passage of title occur?

If the goods are identified to the contract, title passes at the time and place that the sales contract was made. If they have not been identified, title does not pass until identification occurs.

If a seller breaches a contract where does the risk of loss fall?

If the goods are so nonconforming that the buyer has the right to reject them, the risk of loss does not pass to the buyer until either: 1. The defects are cured (that is, the goods are repaired, replaced, or discounted in price by the seller) 2. The buyer accepts the goods in spite of their defects (thus waiving the right to reject)

Rules for identifying future goods

In a sale or lease of any other future goods, identification occurs when the seller or lessor ships, marks, or otherwise designates the goods as those to which the contract refers.

What does the entrustment rule allow for?

Innocent buyers to obtain legitimate title to goods purchased from merchants even if the merchants do not have good title

What right does a lessee acquire and how is that right passed from the lessor to the lessee?

Leasehold interest, a lessee acquires whatever leasehold interest the lessor has or has the power to transfer, subject to the lease contract

When a buyer breaches a contract where does risk of loss fall?

Risk of loss immediately shifts to the buyer, with the exception of three limitations 1. The seller or lessor must already have identified the contract goods. 2. The buyer or lessee bears the risk for only a commercially reasonable time after the seller or lessor has learned of the breach 3. The buyer or lessee is liable only to the extent of any deficiency in the seller's or lessor's insurance coverage.

If the contract does not involve the movement of goods and the goods are held by a nonmerchant seller when does risk of loss pass?

Risk of loss to goods held by the seller passes to the buyer on tender of delivery -- seller bears risk of loss until they make the goods available to the buyer and notify the buyer that the goods are ready to be picked up

Shipment Contract

Seller is required (or authorized) to ship goods by carrier, the seller is required only to deliver the goods into the hands of the carrier, and title passes to the buyer at the time and place of shipment

Destination Contract

Seller is required to deliver the goods to a particular destination. Title passes to the buyer when the goods are tendered at that destination

If nothing to the contrary is stated in the contract, then is it assumed to be shipment or destination?

Shipment

If a contract involves movement of the goods via a common carrier but does not specify when risk of loss passes, where do the courts look first in determining which party the risk of loss falls upon?

Specific delivery terms in the contract (i.e. FOB, FAS, CIF)

Identification takes place when

Specific goods are designated as the subject matter of a sales or lease contract

Bailment

Temporary delivery of personal property, without passage of title, into the care of another

If a buyer revokes an offer where does the risk of loss fall?

The revocation allows the buyer to pass the risk of loss back to the seller, to the extent that the buyer's insurance does not cover the loss

When the contract does not call for the seller to ship/deliver the goods and a title document is required, when does the passage of title occur?

Title passes to the buyer when and where the document is delivered when a title document is required.

If the contract does not involve the movement goods, what is the first thing courts will look to when determining when risk of loss passes?

Whether the goods are held by the seller or whether they are held by a bailee?

If the contract does not involve the movement of goods and the goods are held by a seller what does the court look to in determining when risk of loss passes?

Whether the seller is a merchant or a nonmerchant

When the contract does not call for the seller to ship/deliver the goods, what does passage of title depend on?

Whether the seller must give the buyer a document of title such as a bill of lading or a warehouse receipt.

At what point does title pass to the buyer?

Without an explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods.