Title, Risk of Loss, and Insurable Interest

Chapter 22Title, Risk of Loss, and Insurable InterestCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.22-2Categories of TitleGood Title: Acquired from someone who already owns the goods “free and clear”Void Title: Not true titleExample: Purchase of stolen goodsVoidable Title: Occurs in certain situations in which contract between original parties would be void, but goods have already been sold to third party22-3UCC Article 2 Rules Regarding Title AcquisitionGood Title: Acquired from someone who has rightful ownershipVoid Title: Results when someone acquires possession of stolen goodsVoidable Title results when:Buyer deceived seller regarding his/her identityBuyer wrote bad checkBuyer committed criminal fraud in securing goodsBuyer and seller agreed title would not transfer until later timeBuyer is a minorAcquiring Good TitleGeneral Rule: If “third party purchaser” makes “good-faith” purchase for value, he/she gets good title (not void/voidable title)22-4Acquiring Good TitleGeneral Rule: If owner entrusts possession of goods to merchant who deals in goods of that kind, merchant can transfer all rights in the goods to a buyer in the “ordinary course of business”22-522-6UCC Terminology Regarding Transfer of Title“Ownership”—Transfer of Title“Encumbrance”—Goods used as collateral for debt“Loss”—Refers to which party has “risk of loss” when goods damaged/destroyed“Insurable Interest”—Right to insure goods against any risk exposure22-7Types of Sales Contracts“Simple Delivery” (Definition): Buyer and seller contract, buyer leaves with goodsTitle transfers to buyer when contract executedRisk of loss transfers to buyer when buyer takes possessionBuyer has insurable interest upon receiving title22-8Types of Sales Contracts “Common Carrier Delivery” (Definition): Buyer and seller contract, seller then places goods with common carrier“Shipment” Contract: Title transfers to buyer at time and place of shipment; buyer bears risk of loss while goods in transit“Destination” Contract: Seller bears risk of loss until seller delivers goods to stipulated destination22-9Exhibit 22-2: Shipping Terms Specifying Requirements For Delivery(Term and Explanation)FOB (“Free on Board”): Selling price includes transportation costs, and seller has risk of loss to either place of shipment, or place of destinationFAS (“Free Alongside”): Seller, at seller’s expense, delivers goods alongside ship before risk transferred to buyerCIF or CF (“Cost, Insurance, and Freight”; “Cost and Freight”): Seller places goods in possession of carrier before risk passes to buyerDelivery “Ex-Ship” (Delivery From Carrying Vessel): Risk of loss passes to buyer when goods leave ship22-10Types of Sales Contracts“Goods-In-Bailment” (Definition): Identifies goods in storageRules regarding passage of title, risk of loss, and insurable interest vary, depending on whether seller has negotiable title22-11Types of Sales Contracts“Conditional Sales”“Sale-On-Approval”: Title and risk of loss with seller until buyer notifies seller of approval“Sale-Or-Return”: Buyer has insurable interest once goods identified in contract; title and risk of loss transfer depend on whether goods in bailment, delivered by common carrier, or delivered by seller22-12Risk of Loss Upon Breach of ContractSeller in Breach (by failing to deliver goods):Buyer may accept nonconforming goods “as is”, or reject goods (subject to seller’s right to “cure”)Risk of loss remains with seller until buyer accepts goods, or deficiencies correctedBuyer in Breach (buyer refuses to accept conforming goods, goods later lost or damaged):Risk of loss depends on type of contract between buyer and seller