Ownership and Risk of Loss in Sales Chapter 13 Ownership and Risk of Loss in Sales

Who May Transfer Ownership? Generally, only the true owner of goods may legally transfer ownership of those goods The buyer of goods receives only the property rights that the seller has in the goods and nothing more Exceptions: Persons authorized to do so may transfer another’s title Buyers in a sale induced by fraud may transfer better title than they have Holders of negotiable documents of title may transfer better title than they have Merchants who keep possession of goods they have sold may transfer better title than they have

Who may transfer ownership? Authorized persons Persons may sell what they do not own if the owner has authorized them to do so Salespeople in stores are so authorized Auctioneers and sheriffs are also authorized when they sell, under court order, stolen or repossessed goods or foreclosed property

Who may transfer ownership Buyers in a Sale Induced by Fraud If an owner of goods is induced by fraud to sell the goods, the transfer of the title is voidable by the seller Upon discovering the fraud, the victimized seller may cancel the contract and recover the goods unless an innocent third party (good faith purchaser) already has given value and acquired rights to them If this is the case, a fraudulent buyer with voidable title may transfer valid title to a good faith purchaser The defrauded seller must seek damages from the original fraudulent buyer

Who may transfer ownership? Buyers in a Sale of Stolen Goods The person who buys stolen goods from a thief receives possession, but not title, because the thief did not have good title to give This is true whether the buyer is innocent or knows that the goods were stolen Stolen goods are seldom recovered If they are recovered, they are often damaged or stripped of parts Even when recovered in good condition, it is often difficult to be identified as property of the victim and therefore are not returned

Who may transfer ownership? Holders of Negotiable Documents of Title Certain documents are often used as a substitute for possession of goods Warehouse receipt Bills of lading (legal document between the shipper of the goods and the carrier) Air bills (legal document between the sender and the company carrying it—FedEx, UPS, USPS) The goods are to be delivered to the bearer, who is the person in possession of the document, or to the order of the named party Must be signed and delivered to transfer to a third party

Who may transfer ownership? Merchants with Possession of Sold Goods Occasionally, a buyer will allow the merchant seller to temporarily retain possession of the goods after the sale If, during this period, the merchant resells and delivers these goods to a good faith purchaser, the latter receives the title The merchant must replace the goods or be liable for damages to the original buyer for the tort of conversion

Requirements for ownership transfer For the ownership of goods to be transferred in a sale the goods must be both existing and identified Existing goods—are physically in existence even though they may not be fully assembled and immediately deliverable condition Also owned by the seller Identified goods—have been designated specifically as the subject matter of a particular sales contract May be done by the buyer, seller, or both, or a third party When identified, the goods are marked, separated, or in some way made distinct from similar goods the seller may have on hand

Requirements for ownership transfer Unless goods are both existing and identified, they are future goods Contract to sell—sale of goods in the future Neither ownership nor risk of loss passes at the time of agreement Exception Fungible goods—goods of a homogeneous or essentially identical nature Buy nature or trade usage, each unit is regarded as equal to every other unit Examples: corn or oil of a given variety and grade, thousands of cases of canned fruit/vegetables in a warehouse In many states, ownership and risk of loss in fungible goods pass without selection or identification of specific goods The buyer therefore becomes the owner at the time of agreement

Requirements for ownership transfer When does Ownership Transfer? Once goods are existing and identified, disputes may still arise over who has title and risk of loss to the goods at particular times Sometimes creditors of the seller or creditors of the buyer may claim possession in order to collect money due Other disputes may concern who bears the risk of loss if the goods are damaged, stolen, or destroyed before the transaction is complete Risk bearer may want or need insurance Generally the person who has title to goods will bear the loss

Requirements for ownership transfer When does Ownership Transfer? In deciding when title transfers form seller to buyer, courts first examine the sales agreement to see if the parties have specified clearly when they intended for the title to pass If the parties do not specify when title is to pass, courts first determine if there is any applicable custom or usage in the particular trade that can settle the dispute If there is no agreement on the matter and no available trade custom or usage, the courts look to the UCC

REQUIREMENTS FOR OWNERSHIP TRANSFER Common Situations Seller delivers goods to their destination If the contract requires the seller to deliver goods to their destination, title passes when the goods are tendered at that location Tender of Delivery—the seller places the proper goods at the buyer’s disposal and notifies the buyer so that delivery can be received The manner, time, and place for tender are determined by the agreement and the UCC When the seller is required to do additional work, transfer does not pass until that work is done

Requirements for ownership transfer Common Situations Seller ships, but does not deliver, goods to their destination If the contract requires or authorizes the seller to ship the goods but does not obligate the seller to deliver the goods, title passes to the buyer at the time and place of shipment, when possession is transferred to the carrier

Requirements for ownership transfer Common Situations Seller delivers document of title When customary, or when the parties have agreed that the seller is to deliver document of title, title passes when and where the document is delivered Example: Jessica bought 600 tons of oats from Delta for her horse. The oats were stored in a public grain elevator. Title passes when an authorized agent of Delta delivered a negotiable warehouse receipt for the oats to Jessica.

Requirements for ownership Common Situations Buyer takes possession at place of sale If the seller is to tender the goods at the place of sale, title passes at the time and the place where the sales contract is made

When does risk of loss transfer? If the Seller Ships Goods by Carrier If the seller is required to deliver the goods to a particular destination but is allowed to use a carrier (railroad, 18-wheeler) to make delivery, the risk of loss passes to the buyer at the destination upon tender of delivery If the seller is NOT required to deliver the goods to the buyer at a particular destination, and the seller uses a carrier to transport the goods, risk of loss passes to the buyer when the goods are delivered to the carrier

When does risk of loss transfer? If the Seller Ships Goods by Carrier Commercial buyers often use the term FOB (free on board) Risk of loss transfers to the buyer when the goods are delivered to the carrier Shipments from foreign countries, the seller might quote a CIF (cost, insurance, freight) price The seller contracts for adequate insurance and for proper shipment to the named destination and then adds these items to the price or cost of the goods Risk of loss passes to the buyer when the seller delivers the goods to the carrier, however, the insurance provides protection against loss from any identified risks

When does risk of loss transfer? If the Goods are Held by a Bailee Bailee—has temporary possession of another person’s goods, holding them in trust for a specified purpose (example: public warehouse) Risk of loss transfers to the buyer under the following conditions: When the buyer receives a negotiable document of title covering the goods When the bailee acknowledges the buyer’s right of possession After the buyer receives a non-negotiable document of title or other written direction to a bailee to deliver the goods

When does risk of loss transfer? If Either Party Breaches After the Goods are Identified The seller sometimes breaches by providing goods so faulty that the buyer rightly rejects them Risk of loss remains with the seller until the defects are corrected Other Cases The risk of loss falls on the buyer upon receipt of the goods if the seller is a merchant The risk of loss transfers to the buyer as soon as the seller makes tender of delivery if the seller is not a merchant

When does insurable interest transfer? The buyer obtains certain rights in goods at the time of their identification to a sales contract Insurable interest—gives the buyer the right to purchase insurance on the goods Even though risk of loss may still reside with the seller, the buyer may lose money should the goods be destroyed and the buyer cannot find a suitable replacement elsewhere If the goods already exist and have been identified to the contract when the contract is made, an insurable interest happens for the buyer at that time Other rights the buyer has: To inspect the identified goods at a reasonable hour To compel delivery if the seller wrongfully withholds delivery To collect damages from third persons who take or injure the goods

Transfer of rights and risks in specific sales Cash and Carry Sales When the buyer is a consumer who pays cash and takes immediate delivery, title passes to the buyer at the time of the transaction Sales on Credit Goods paid for at a later date Title still may pass at the time of the transaction

Transfer of rights and risks in specific sales COD Sales (Collect on Delivery) Seller retains control over the possession of the goods until the price is paid Buyer loses the right to inspect the goods before payment Ownership and risk of loss transfer once the buyer pays

Transfer of rights and risks in specific sales Sale or Return A completed sale in which the buyer has the option to return the goods. Ownership and risk of loss pass to the buyer at delivery, HOWEVER, the buyer has the right to return the goods within a fixed or reasonable amount of time, passing ownership and risk back to the seller Normally goods held on sale or return are subject to the claims of the buyer’s creditors, who can seize the goods under court order

Transfer of rights and risks in specific sales Sale on Approval “on trial” or “on satisfaction” Ownership and risk of loss do not transfer until the prospective buyer approves the goods May be done by words, payment, or any conduct indicating approval, or by keeping the goods beyond a specified time period While in possession of the goods, the buyer is liable for any damage to them caused by negligence

Transfer of rights and risks in specific sales Sale of an Undivided Interest Person sells a fractional interest in a single good or in a number of goods that are to remain together Ownership and risk of loss pass to each buyer at the time of the sale of each undivided interest Examples: owners of a team, owners of a piece of real estate

Transfer of rights and risks in specific sales Auction Ownership passes to the buyer at the time the auctioneer accepts a bid on behalf of the owner Risk of loss passes when the auctioneer acknowledges the buyer’s right to possess the goods—generally follows payment

Transfer of rights and risks in specific sales Bulk Transfer Transfer, generally by sale, of all or a major part of the goods of a business in one unit at one time Materials, supplies, merchandise, equipment (if sold with inventory) The law protects creditor of dishonest merchants UCC requires notice to the seller’s creditors before the bulk transfer is made Seller is required to list all creditors The buyer is required to notify the creditors of the transfer of ownership to pay their claims or to make other arrangements with them Creditors may make claims against the inventory and equipment if this is not done