Contract risk and insureble interst

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Title, Risk and Insurable Interest

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Introduction

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

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

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§1: Identification

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

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

good.

Identification occurs: If goods are designated when contract is made. If

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

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§2: When Title Passes

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

shipment or destination contract: Shipment: title passes at time and place of shipment. Destination: title passes when goods are tendered at

the destination.

Case 20.1: In re Stewart (2002).

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Delivery Without Movement of Goods

Title passes when agreed by the parties, or With document of title: when and where

document delivered. 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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Sales or Leases By Non-Owners

Void Title: true owner gets goods back. Voidable Title: good faith purchaser keeps

goods. Case 20.2: Memphis Hardwood v. Daniel (2000).

Entrustment rule: good faith purchaser keeps goods.

Seller’s Retention of Sold Goods: good faith purchaser wins. Sham transactions or preferential transfers.

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§3: Risk of Loss

ROL does not necessarily pass with title. ROL is important because of insurance concerns.

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

Shipment Contracts. ROL passes to Buyer when tendered to Carrier. If

goods damaged in transit, Buyer’s loss.

Destination Contracts. ROL passes to Buyer when goods tendered at

particular Destination.

Case 20.3: Windows Inc. v. Jordan Panel System Corp. (1999).

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ROL: Shipping Terms

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

contract. 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.

Delivery Ex-Ship

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

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ROL: Delivery Without Movement of Goods

Goods Held by Seller: Document of Title is generally not used. If Seller is a merchant, ROL passes when buyer

takes physical possession of goods. Goods Held by Bailee (Warehouse). ROL

passes when: Buyer receives document of title; bailee

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

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ROL: Conditional Sales

Sale on Approval. ROL passes when buyer approves expressly or

implicitly.

Sale or Return. (Consignment is sale or return unless it complies with Art. 9.) ROL passes to buyer with possession.

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ROL: Breach of Contract

Generally breaching party bears ROL. Seller’s Breach.

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

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

Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.

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§4: Insurable Interest

Buyer has an insurable interest in goods that have been identified.

Seller has an insurable interest in goods as long as they retain title or a security interest.

Both buyers and sellers can have an insurable interest at the same time.

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§5: Bulk Transfers

Covered by Article 6 of the Uniform. Commercial Code.

A bulk transfer is defined as: Major part of seller’s inventory. Not made in the usual course of business.

UCC 6 is becoming obsolete and has been repealed by many states.