Comprehensive Volume, 18 th Edition Chapter 26: Passage of Title and Risk of Loss: Rights of Parties

Potential Problems Problems in sales transactions often involve damage to the goods, the claims of creditors, and insurance. In the absence of an agreement, the solution to these problems depends on the type of the transaction and its terms.

Nature of Goods Sales transactions may be classified according to the nature of the goods and the terms of the transactions. Existing goods are physically in existence and owned by the seller. Future goods are not yet owned by the seller or are not yet in existence. Fungible goods are those which, when mixed with other same-type goods, are indistiguishable (such as corn or wheat).

Existing Goods The title to existing goods identified at the time of the contract passes to the buyer at the time the parties agree to the transaction. Once the goods are identified, both buyer and seller have an insurable interest in the goods. A merchant seller bears any loss occurring after the agreement, up until the time the buyer receives the goods. If the seller is not a merchant, the risk of loss passes to the buyer when the goods are tendered or made available to the buyer.

Future and Fungible Goods Future goods cannot be identified until they are in existence. Future goods are identified when they are shipped, marked or otherwise designated for that particular buyer. Upon identification, the buyer has an insurable interest and holds the title to the goods. Fungible goods are identified when the specified quantity has been set apart and designated for the particular buyer.

Passage of Title Under Article 2 At time of contract When Shipped, Marked; or Otherwise Designed Existing Future Fungible Goods Identified? Yes FOB DestinationFOB Shipment Title passes upon tender Title Passes upon Delivery of Goods to Carrier No Document of Title? YesNo Title Passes at Time of Contracting Title Passes upon Delivery of Title Document Yes Title Cannot PassDelivery? No

Passage of Title In a contract for goods represented by a document of title, the buyer has an insurable interest and title when the buyer has the negotiable document in hand. In a non-shipment contract (seller only has to make goods available, does not deliver), title and risk of loss pass when contract is entered. In a shipment contract, title and risk of loss pass at the time and place of shipment. In a destination contract, title and risk pass when the goods are made available at the destination.

Shipment Terms A contract that requires delivery may use acronyms and abbreviations for the various options in shipping. CF Lump sum, price includes cost and freight Risk-buyer upon delivery to carrier Title-buyer upon delivery to carrier Expense-seller includes cost of freight in contract price CIF Lump sum, price includes cost, insurance, and freight Risk-buyer upon delivery to carrier Title-buyer upon delivery to carrier Expense-included in contract price (seller buys insurance in buyer’s name, and pays freight) FOBFree on Board – indicates that the seller will ship the goods. FASFree Alongside Ship (FOB for boats)

Delivery Terms A contract may specify a delivery term which will affect the passage of title. Place of Shipment A contract might read “FOB Place of Shipment,” meaning that the seller will ship the item and title will pass to the buyer as soon as the item is delivered to a carrier. Place of Delivery A contract might read “FOB Place of Delivery,” meaning that the seller will ship the item and title will pass to the buyer when the item is delivered to the destination and tendered to the buyer.

Duties Under Particular Terms Buyer pays the seller costs of goods and freight to a specified location. Risk of loss and title pass to buyer after goods delivered to the carrier. Buyer pays the seller for costs of goods, insurance, and freight. Risk of loss and title pass to buyer after goods delivered to the carrier. C.I.F. Cost, Insurance, Freight C.F. Cost, Freight F.O.B. Free on Board F.A.S. Free Alongside Named Vessel Seller obligated to put the goods on board named vessel, truck, or carrier or make tender at a named point (place). Risk of loss and title pass to buyer at the F.O.B. point. Seller pays costs to point, buyer from point. Seller must deliver goods alongside vessel at own expense and risk. Risk of loss and title pass to buyer at the shipping point.

Special Situations In cases where the risk of loss would ordinarily pass to the buyer, the risk remains with the seller if the goods do not conform to the contract. Even when the goods do conform to the contract, the buyer and seller could have agreed in their contract that the goods may be returned. The nature of the agreement, such as a sale on approval, sale or return, or consignment sale, determines who has title and bears risk of loss.

Security Interests and Title The reservation of a security interest in goods does not affect the question of whether title or risk of loss has passed to the buyer. Ordinarily, sellers cannot pass any better title than they possess. In some cases, however, the law permits a greater title to be transferred. These exceptions protect good-faith purchasers.

Risk of Loss IdentificationShipment FOB Shipment FOB Destination Passes to Buyer upon Delivery to Carrier Passes to Buyer upon Tender Non-Shipment Merchant Non- Merchant Passes to Buyer upon Receipt Passes to Buyer upon Tender Warehouse (Third Party) No Document Document of Title Other Document Passes to Buyer upon Receipt of Document Passes to Buyer When Buyer is Notified Goods Are Available Sale on Approval Passes to Buyer when Buyer Accepts Goods Sale or Return Passes to Buyer Under Same Rule as Ordinary Sale