19 - Title of Goods and Risk of Loss

When there is a breach in the sales contract

A seller breaches a sales 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.

Goods that are part of a larger mass of goods are identified when the specific merchandise is designated.

Example If a food processor contracts to purchase 150 cases of oranges from a farmer who has 1,000 cases of oranges, the buyer's goods are identified when the seller explicitly separates or tags the 150 cases for that buyer.

Already existing goods are identified when a contract is made and names the specific goods sold or leased.

Examples A piece of farm machinery, a car, or a boat is identified when its serial number is listed on a sales or lease contract.

Future goods are goods not yet in existence.

Examples Unborn young animals (such as unborn cattle) are identified when the young are conceived. Crops to be harvested are identified when the crops are planted or otherwise become growing crops. Future goods other than crops and unborn young are identified when the goods are shipped, marked, or otherwise designated by the seller or lessor as the goods to which the contract refers.

Goods sold by a seller to a buyer are sometimes in the possession of a bailee (e.g., a warehouse).

If such goods are to be delivered to the buyer without the seller moving them, 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 [UCC 2-509(2)].

Identification of Goods

It means distinguishing the goods named in a contract from the seller's or lessor's other goods.

Non carrier moment: no movement of 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.

Under the common law

the rights and obligations of the buyer and sellers are determined by who was the first to have the titleUnder common law, the rights and obligations of the buyer, the seller, and third parties are determined based on who held technical title to the goods.

Rules on the passage of titles

Under UCC 2-401(1), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties. If the parties do not agree to a specific time, title passes to the buyer when and where the seller's performance with reference to the physical delivery is completed. This point in time is determined by applying the rules discussed in the following paragraphs [UCC 2-401(2)].

When a buyer breaches a sales contract

A buyer breaches a sales contract if he or she (1) refuses to take delivery of conforming goods, (2) repudiates the contract, or (3) otherwise breaches the contract.

When a buyer breaches a sales 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.

Common law nd title to goods

Common law placed the risk of loss to goods on the party who held title to the goods.

Seller in Breach of a Sales Contract

Example A buyer orders 1,000 talking dolls from a seller. The contract is a shipment contract, which normally places the risk of loss during transportation on the buyer. However, the seller ships to the buyer totally nonconforming dolls that cannot talk. This switches the risk of loss to the seller during transit. The goods are destroyed in transit. The seller bears the risk of loss because he breached the contract by shipping nonconforming goods.

If (1) no document of title is needed and (2) the goods are identified at the time of contracting, title passes at the time and place of contracting [UCC 2-401(3)(b)].

Example If a buyer signs a sales contract to purchase bricks from a seller and the contract stipulates that the buyer will pick up the bricks at the seller's place of business, title passes when the contract is signed by both parties. This situation is true even if the bricks are not picked up until a later date.

Delivery of goods wo seeing them

Example If the goods named in a sales contract are located at a warehouse, title passes when the seller delivers to the buyer a warehouse receipt representing the goods.

The identification of goods:

Identification of goods can be made at any time and in any manner explicitly agreed to by the parties of a contract. In the absence of such an agreement, the UCC mandates when identification occurs [UCC 2-501(1), 2A-217]: 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.

The passage of the title of goods

Once the goods that are the subject of a contract exist and have been identified, title to the goods may be transferred from the seller to the buyer. Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts. (As mentioned earlier, lessees do not acquire title to the goods they lease.) Under UCC 2-401(1), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties. If the parties do not agree to a specific time, title passes to the buyer when and where the seller's performance with reference to the physical delivery is completed. This point in time is determined by applying the rules discussed in the following paragraphs [UCC 2-401(2)].

Deliveru of goods wo seeing them

Sometimes a sales contract authorizes goods to be delivered without requiring the seller to move them. 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 [UCC 2-401(3)(a)]. If (1) no document of title is needed and (2) the goods are identified at the time of contracting, title passes at the time and place of contracting [UCC 2-401(3)(b)]. The following feature discusses commonly used shipping terms.

Non carrier moment: no movement of goods

Sometimes a sales contract stipulates that the buyer is to pick up the goods at either the seller's place of business or another specified location. This type of arrangement raises a question: 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? The UCC provides two different rules for this situation. One applies to merchant-sellers and the other to nonmerchant-sellers [UCC 2-509(3)]: 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.

The first step is clearly defining the goods stated in the agreement

The identification of goods is rather simple. 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.

A shipment contract 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 [UCC 2-401(2)(a)].

Carrier Cases Movement of Goods

Unless otherwise agreed, goods that are shipped via carrier (e.g., railroad, ship, truck) are considered to be sent pursuant to a shipment contract or a destination contract. Absent any indication to the contrary, sales contracts are presumed to be shipment contracts rather than destination contracts. A destination contract requires the seller to deliver conforming goods to a specific destination. 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 [UCC 2-509(1)(b)]. Unless otherwise agreed, destination contracts are created in two ways. 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.

Bailee

Warehouse

Article 2 of the UCC

Xrejects this notion and adopts concise rules for risk of loss that are not tied to title. It also gives the parties to a sales contract the right to insure the goods against loss if they have an "insurable interest" in the goods. Agreement makes law.

A destination 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 [UCC 2-401(2)(b)].

Article 2 of the Uniform Commercial Code (UCC)

establishes precise rules for determining the passage of title in sales contracts. Other provisions of Article 2 apply, irrespective of title, except as otherwise provided [UCC 2-401].

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.

Article 2 of the UCC

rejects this notion and allows the parties to a sales contract to agree among them who will bear the risk of loss if the goods subject to the contract are lost or destroyed. If the parties do not have a specific agreement concerning the assessment of the risk of loss, the UCC mandates who will bear the risk.