BLTC 11e IM-Ch21 - NACM



Chapter 21Title and Risk of LossIntroductionBefore the Uniform Commercial Code (UCC), title was a central concept in sales law. The party who had title bore the risk of a loss of goods (and could thus buy insurance against it). It was often difficult to determine when title passed from seller to buyer, however, and thus which party had title at the time of a loss. The UCC divorced the question of title from the question of the rights and obligations of buyers, sellers, and others (subsequent purchasers, creditors). Title remains relevant under the UCC in some situations, and the UCC has rules for locating title.In most situations, however, the UCC replaces the concept of title with other concepts: identification, risk of loss, and insurable interest. Generally, the UCC attempts to place a loss on a party who breaches a contract, the party who has physical control of the goods, or the party who is most likely to have thought of obtaining insurance. Of course, the rules do not apply if a different party caused the loss or if the parties allocated the risk in their contract. The last point is important: parties can agree on who will bear the risk of loss.Chapter OutlineI.IdentificationBefore an interest in goods can pass from seller to buyer, the goods must exist, and they must be identified to the contract [UCC 2–105(2)]. Identification gives a buyer the right to obtain insurance on goods and the right to recover from third parties who damage goods.A.Existing GoodsIf a sale involves specific goods already in existence, identification occurs when the contract is made.B.Future GoodsIf a sale involves unborn animals to be born within twelve months, identification occurs when the animals are conceived. If a sale involves crops to be harvested within twelve months, identification occurs when the crops are planted or begin to grow. Identification of other future goods occurs when they are shipped, marked, or otherwise designated as the contract goods.C.Goods That Are Part of a Larger MassProblems may occur when goods exist in a larger mass, in which case identification can often be made only by separating the goods from the mass. If owners hold fungible goods in common, title and risk can pass without separation [UCC 2–105(4)].II.Passage of TitleIf the parties do not expressly agree to when and under what conditions title passes, it passes at the time and place at which the seller delivers the goods [UCC 2–401(2)], according to the delivery terms.Case Synopsis—Case 21.1: United States v. 2007 Custom MotorcycleTimothy Allen commissioned a custom motorcycle from Indy Route 66 Cycles, Inc., based in Indiana. Indy built it and issued a “Certificate of Origin.” Later, federal law enforcement officers arrested Allen on drug charges and seized the Indy-made cycle from the garage of Allen’s sister Tena. The government alleged that the cycle was subject to forfeiture as the proceeds of drug trafficking. Indy filed a claim in a federal district court against the government. Indy argued that it owned the cycle, as evidenced by the “Certificate of Origin,” which the company still possessed. Indy claimed to have been keeping the cycle in storage. The government asserted that the cycle had been delivered to Allen and filed a motion to strike.The court granted the motion to strike. Under UCC 2–401(2)], “title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods.” Testimony by Indy’s former vice president Vince Ballard was “inconclusive.” Ballard implied that Indy delivered the cycle to Allen and asserted that Indy kept it in storage. But the cycle was found in Tena Allen’s garage. This “strongly indicates that claimant delivered it to Allen...................................................................................................................................................Notes and QuestionsAs in many cases, there may have been unstated reasons for the court’s decision against Indy in this case. When asked whether Indy inquired into the occupations of its customers, the seller said no, because if it did, it would likely lose half of them. In response to queries about the price of Allen’s custom cycle, Indy gave different answers at different times. The seller was also not clear on how much the buyer still owed on the price. When asked how long the cycle had been in storage, Indy provided a date that fell after the cycle had been seized by law enforcement officers.Is it ethical for the government to seize goods that arguably constitute the proceeds of a crime even if those goods are not in the possession of the criminal? Yes. Ethics has to do with the fairness, justness, rightness, or wrongness of action. A crime is illegal and generally unethical—a crime is not fair to its victims, whether they are individuals or society as a whole. It is just and fair, however, for the government to seize goods that constitute the proceeds of a crime, regardless of whose possession they are in, so that the “wrongness” of the crime can be made right.Should the passage of title be tied so closely to the possession of the goods? Discuss. Yes. Before the creation of the UC, title—the right of ownership—was the central concept in sales law, controlling all of the issues of rights and remedies of the parties to a sales contract. There are numerous problems with this concept, however, making it difficult to predict and determine which party had title and when. The UCC divorced the question of title as completely as possible from the question of the rights and obligations of the parties, replacing the concept in most situations with the concepts of identification, risk of loss, and insurable interest. The concept of title is still relevant but its passage is tied to the possession of the goods—once the seller has relinquished possession of sold goods, the buyer has them, and the parties expect no further action by the seller, the buyer also has title. The UCC allows the parties to “otherwise explicitly agree.” This provides for the parties to create their own rule to pass title. The UCC rules apply only if they do not otherwise agree.Additional Cases Addressing this Issue —Passage of TitleCases involving the passage of title in a sales contract include the following.?Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880 (N.D.Ill. 2002) (title passed to the buyer at the time and place at which the seller physically delivered the goods—steel—despite the seller’s reservation, in their contract, of a security interest in the goods).?Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., 78 S.W.3d 619 (Tex.App.—Austin 2002) (title to motor vehicles did not pass to the buyer on the physical delivery of the goods because the parties had agreed that transfer of title was contingent on the seller’s receipt of payment).?In re Pro Page Partners, LLC, 270 Bankr. 221 (E.D.Tenn. 2001) (title passed to the buyer at the time and place at which the seller physically delivered the goods—office equipment—despite the seller’s reservation, in their contract, of a security interest in the goods).?Right Touch of Class, Inc. v. Superior Bank, FSB, 536 S.E.2d 181 (Ga.App. 2000) (title to motor vehicle passed to the buyer on the physical delivery of the goods in a sale between used-car dealers for the express purpose of the vehicle’s resale to a third party).?Concord General Mutual Insurance Co. v. Sumner, 762 A.2d 849 (Vt. 2000) (title to motor vehicle passed to the buyer on the physical delivery of the goods in a sale between dealers).A.Shipment and Destination ContractsUnder a shipment contract, title passes at the time and place of shipment. Under a destination contract, title passes when goods are tendered at the destination.B.Delivery without Movement of the Goods?When a buyer is to pick up goods and a document of title is required, title passes when and where the document is delivered.?When a buyer is to pick up goods and a document of title is not required, title passes at the time and place of contracting, if the goods have been identified; if they have not, title passes on identification [UCC 2–401(3)].C.Sales or Leases by Nonowners1.Void TitleIf a seller or lessor is a thief, his or her title is void, the buyer or lessee acquires no title, and the owner can reclaim the goods.2.Voidable TitleIf a seller or lessor obtained goods by fraud; with a check that is later dishonored; on credit, when the seller or lessor was insolvent; or from a minor, the seller or lessor has voidable title.?A seller with voidable title can transfer good title to a good faith purchaser for value—and the owner cannot recover the goods [UCC 2–403(1)].?A seller with voidable title can transfer good title to a good faith lessee for value. The owner can recover the proceeds from the lease and the lessor’s interest in the return of the goods [UCC 2–403(1)].3.The Entrustment RuleEntrusting goods to a merchant who deals in goods of the kind gives the merchant power to transfer all rights to a buyer or sublessee in the ordinary course of business [UCC 2–403(2), 2A–305(2)].Case Synopsis—Case 21.2: Lindholm v. BrantIn 1987, Kerstin Lindholm of Greenwich, Connecticut, bought a silkscreen by Andy Warhol titled Red Elvis from Anders Malmberg, a Swedish art dealer, for $300,000. In 1998, Lindholm loaned Red Elvis to the Guggenheim Museum in New York City for an exhibition to tour Europe. Peter Brant, one of the museum’s trustees, believed that Lindholm was the owner. Stellan Holm, a Swedish art dealer, told him, however, that Malmberg had bought it and would sell it for $2.9 million. Malmberg refused to provide a copy of an invoice between Lindholm and himself on the ground that such documents normally and customarily are not disclosed in art deals. A search of reliable databases and other sources revealed no problems with the title. Malmberg “sold” the work to Brant in April 2000. Lindholm filed a suit in a Connecticut state court against Brant, alleging conversion. The court issued a judgment in Brant’s favor. Lindholm appealed.The Connecticut Supreme Court affirmed. The court pointed out that a person buys goods in good faith if there is “honesty in fact and the observance of reasonable commercial standards of fair dealing” in the conduct or transaction concerned under UCC 1–201(20). “[O]n the basis of all the circumstances surrounding this sale” Brant was a buyer in the ordinary course of business and, therefore, took all rights to Red Elvis under UCC 2–403(2).. Brant followed the usual and customary practices of sophisticated buyers and sellers in the commercial art trade. Among other things “[i]t is customary to rely upon representations made by respected dealers regarding their authority to sell works of art.”..................................................................................................................................................Notes and QuestionsIf the arrangement between Lindholm and Malmberg had been a consignment—that is, if Lindholm had authorized Malmberg to sell Red Elvis rather than having authorized him only to arrange for its loan—how would the legal relations among these parties have been different? The UCC views a consignment as a sale or return subject to UCC 2–326. In that circumstance, if the consignee (Malmberg) sells the goods (Red Elvis), the consignee must pay the consignor (the owner—Lindholm, here) for them. Thus, under these facts and this principle, Malmberg would be liable to Lindholm for the price paid by Brant. He could also be liable in fraud to the Japanese buyer for the funds he accepted from that individual, but he would not as likely be liable to Lindholm for that amount. Additionally, under these facts, while Red Elvis was in Malmberg’s possession, he would hold title to the work, and his creditors could prevail over Lindholm in any action to repossess it.Considering the international locales in this case, why was Lindholm able to bring an action against Brant in Connecticut? A Connecticut state court could exercise personal jurisdiction in this case because both Lindholm and Brant were residents of Greenwich.III.Risk of LossBy agreement, parties can generally control when risk of loss passes from seller to buyer.Case Synopsis—Case 21.3: Person v. BowmanTammy Herring and Stacy Bowman signed a document titled “Bill of Sale—Purchase Agreement” that required Herring to pay $2,200 for a horse named Toby. Until the price was paid in full, the document required Herring to board Toby at Bowman’s Summit Stables in Puyallup, Wisconsin. Bowman would provide Toby’s registration papers to Herring only when she paid in full. Before the price was paid, Tammy’s minor daughter, Alex, was driving a buggy drawn by Toby when the horse reared and threw its passenger Diana Person from the buggy. To recover for her injuries, Person filed a suit in a Wisconsin state court against Bowman, claiming that Bowman owned the horse. The court ruled that Herring owned the horse. Person appealed.A state intermediate appellate court affirmed. “While Herring’s subjective belief may have been that she did not own Toby and that this was a lease-like agreement, the parties’ objective manifestations are consistent with this being a sale not a lease.”..................................................................................................................................................Notes and QuestionsRisk of loss does not necessarily pass with title. If the parties to a contract do not specify when the risk of loss passes, and the goods are to be delivered without their movement by the seller, when does the risk pass? If the seller holds the goods and is a merchant, the risk of loss passes to the buyer when the buyer takes physical possession of the goods. If the seller holds the goods and is not a merchant, the risk of loss passes to the buyer on tender of delivery. When a bailee is holding the goods, the risk of loss passes to the buyer when (1) the buyer receives a negotiable document of title for the goods, (2) the bailee acknowledges the buyer’s right to possess the goods, or (3) the buyer receives a nonnegotiable document of title and has had a reasonable time to present the document to the bailee and demand the goods. Which of these situations existed in this case? Arguably, Stacy Bowman was a merchant, and the court ruled that Tammy Herring was a buyer (not a lessee). In that case, the risk of loss passed to Herring when she took physical possession of Toby. If Bowman did not qualify as a merchant, then Herring took the risk on Bowman’s tender of the horse.What did the contract between Herring and the Bowmans require Herring to do? What is the significance of these provisions? The contract required Herring to keep the horse at the Bowmans’ stable, make timely payments, and not remove the horse without permission, and it gave the Bowmans the right to terminate the contract if Herring defaulted on the payments.These stipulations give the Bowmans recourse to recover the horse in the event of Herring’s default on the payments. In other words, these provisions act as the seller's security interest, protecting the seller until it no longer has a risk of loss. Although Herring would not own Toby free and clear until she made her final payment, these provisions make it clear that Herring owned Toby. Thus, for purposes of the passage of risk, Herring owned the horse.On the issue of liability, in whose favor did the court rule? Why? On the issue of liability, the court ruled that Herring was liable for Person’s injuries. This ruling was based on the court’s determination that Herring owned Toby the horse, according to the terms and statements in the contract between the parties. “Looking at the contract *??*??* makes it clear that Herring owned Toby. The title of the agreement, the use of BUYER and SELLER, and the buyer’s responsibility to board the horse and pay all incidental expenses all show ownership responsibility.”The contract required Herring to keep the horse at Bowman’s stable, make timely payments, and not remove the horse without permission, and it gave Bowman the seller the right to terminate the contract if Herring defaulted on the payments. These provisions gave the seller recourse to recover the horse should there be a default, indicating that Herring would not own Toby free and clear or have the right to remove him from the stable until she made her final payment. But for purposes of the passage of risk, Herring owned the horse.What theory of contract interpretation supported the court’s reasoning? The theory of contract interpretation that supported the court’s reasoning in the Person case was the objective theory of contracts, or as the court phrased it, “the objective manifestation theory of contract interpretation, under which courts try to ascertain the parties' intent by focusing on the objective manifestations of the agreement, rather than on the unexpressed subjective intent of the parties.”Here, the court reasoned that “while Herring's subjective belief may have been that she did not own Toby and that this was a lease-like agreement, the parties' objective manifestations are consistent with this being a sale not a lease.”A.Delivery with Movement of the Goods—Carrier Cases1.Shipment ContractsUnder a shipment contract, risk passes when goods are delivered to a carrier [UCC 2–509(1)(a), 2A–219(2)(a)]. Generally, all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the contract.2.Destination ContractsUnder a destination contract, risk passes when goods are tendered to a buyer or lessee at the specified destination [UCC 2–509(1)(b), 2A–219(2)(b)].B.Delivery without Movement of the Goods1.Goods Held by the Seller?If a seller is a merchant, risk passes only on a buyer’s taking possession of the goods. If a seller is a nonmerchant, risk passes on the seller’s tender of delivery [UCC 2–509(3)].?The same rules apply to lessors (or suppliers under finance leases) and lessees [UCC 2A–219(c)].2.Goods Held by a BaileeIf a bailee holds goods for a seller and the goods are to be delivered without being moved, risk passes when—?The buyer receives a negotiable document of title for the goods.?The bailee acknowledges the buyer’s right to possess the goods.?The buyer receives a nonnegotiable document of title and has had a reasonable time to present the document to the bailee and demand the goods [UCC 2–509(2), 2–503(4)(b)].If a bailee holds goods for a lessor and the goods are to be delivered without being moved, risk passes when the bailee acknowledges the lesse’s right to possess the goods [UCC 2A–219(2)(b)].Additional Background—Goods Held by a BaileeWhen a seller, a buyer, and the goods that serve as the subject of their contract are located in the same city, delivery does not present many problems. The buyer will pick up the goods, or the seller will deliver them.In many transactions, however, the seller, the buyer, and the goods are located in different cities. Distance can complicate an otherwise simple transaction. The parties may agree in their contract as to which party will make delivery arrangements and who will pay the costs. This can be stated in delivery terms in the parties’ contract. If the parties do not expressly agree as to delivery obligations, the UCC will control. (Under the UCC, usage of trade, course of dealing, or course of performance may be applicable. Otherwise, specific UCC provisions concerning delivery will apply [UCC 2–307, 2–308, 2–309, 2–504].)Most sellers are not in the delivery business. Generally, a seller uses independent, common carriers (trucking companies, shipping companies, railroads, airlines) to deliver goods. When a carrier receives goods from a seller, the carrier issues a bill of lading to the seller. On the bill, the seller is usually identified as the shipper (or consignor) and the buyer is named as the consignee. A bill of lading serves as the seller’s receipt and as the contract between the seller and the carrier for transportation of the goods.There are two forms of bills of lading—negotiable bills and nonnegotiable bills. Negotiable bills (or order bills) are easily recognizable. On a negotiable bill, goods are consigned to the order of a party (usually the buyer). Typically, a negotiable bill specifies that “[s]urrender of this original order bill of lading properly indorsed is required prior to delivery of the property.” A negotiable bill is normally printed on yellow paper. If goods are shipped under a negotiable bill, a carrier does not give the goods to the buyer until the original copy of the negotiable bill is presented to the carrier. A carrier that delivers goods to a party without insisting on the surrender of the original copy of the negotiable bill may be held to have converted the goods and will be liable to the holder of the negotiable bill [UCC 7–403]. To prevent this, the seller must deliver the original copy of the negotiable bill to the buyer before the buyer can obtain the goods from the carrier.Most deliveries are made under nonnegotiable bills of lading. A nonnegotiable bill (or straight bill) is also easily recognizable. Normally, somewhere on the nonnegotiable bill is printed the words “straight bill of lading.” On a nonnegotiable bill, goods are simply consigned to a party (rather than consigned to the order of a party). A nonnegotiable bill is usually printed on white paper. If goods are delivered under a nonnegotiable bill, the carrier will turn the goods over to the named consignee (normally the buyer) without insisting on surrender of the original copy of the bill. Sellers often send nonnegotiable bills to buyers anyway. It is an easy way to fulfill the UCC’s notice requirement. (Under the circumstances described in UCC 2–504, a seller must “promptly notify the buyer of [a] shipment.”) Also, the buyer might need the bill to file a claim against the carrier if the goods are lost.C.Risk of Loss When a Sales or Lease Contract Is BreachedGenerally, the party in breach bears the risk of loss.1.When the Seller or Lessor BreachesIf goods are so nonconforming that a buyer or lessee has the right to reject them, risk of loss will not pass until—?The defects are cured.?The buyer or lessee accepts the defective goods [UCC 2–510], 2A–220(1)(a). If a buyer or lessee accepts and later discovers a latent defect, acceptance can be revoked. Revocation passes the risk back to the seller, at least to the extent that the buyer’s insurance does not cover the loss [UCC 2–510(2)].Article 2A provides a similar rule for leases [UCC 2A–220(1)(b)].2.When the Buyer or Lessee BreachesWhen a buyer or lessee breaches, the risk immediately shifts to the buyer or lessee—?If the seller or lessor has identified the goods under the contract.?But the buyer or lessee bears the risk for only a commercially reasonable time after the seller or lessor learns of the breach.?And the buyer or lessee is liable only to the extent of any deficiency in the seller’s or lessor’s insurance [UCC 2–510(3), 2A–220(2)].Enhancing Your Lecture—????Risk of Loss inInternational Sales Contracts?????The possibility that goods will be lost or damaged in transit or at some time before the buyer takes possession increases when goods are shipped great distances, as normally occurs with international sales contracts. Therefore, those who form international sales contracts should safeguard their interests by indicating in the contract the point at which risk of loss passes from the seller to the buyer. Note that the international sales contract between Starbucks Coffee Company and one of its coffee suppliers, shown in the fold-out exhibit in Chapter 19, includes a specific (insurance) clause indicating when risk of loss will pass to the buyer (see annotation 18 to that exhibit).The United Nations Convention on Contracts for the International Sale of Goods (CISG), which governs international sales contracts (see Chapter 19), contains provisions relating to risk of loss. Article 67 of the CISG provides that unless the contract requires the seller to hand the goods over at a particular place, the risk passes to the buyer when the goods identified to the contract “are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale.” In regard to goods sold in transit, Article 68 provides that risk of loss “passes to the buyer from the time of the conclusion of the contract.” If the seller knew or should have known that the contract goods were lost or damaged, however, and failed to disclose this to the buyer, then the seller bears the risk.For Critical AnalysisWhy would buyers of goods that are to be shipped internationally ever agree to shipment contracts—which subject them to liability for any loss or damage to the goods while they are in transit?IV.Insurable InterestWith an insurable interest, a party can buy insurance to protect against the loss of goods.A.Insurable Interest of the Buyer or LesseeA buyer or lessee has an insurable interest in goods the moment they are identified to the contract by the seller or lessor [UCC 2–501(1), 2A–218(1)].B.Insurable Interest of the Seller or LessorA seller or lessor has an insurable interest in goods as long as he or she has title. After title passes, a seller who has a security interest in goods retains an insurable interest [UCC 2–501(2)]. A lessor retains an insurable interest until an option to buy is exercised by the lessee and the risk is passed [UCC 2A–218(3)].Teaching Suggestions1.Students have difficulty understanding that title is relatively unimportant under the UCC. Before explaining that title is important to individuals, but it is of only small importance in determining rights under a contract for a sale of goods, ask students what they think title means and how they think it affects who bears the risk of a loss of goods. Emphasize the importance that possession has in this context.2.Despite the difficulty, students should be encouraged to learn the UCC rules governing identification, risk of loss, and insurable interest. These rules are indispensable to anyone selling or buying goods under contracts subject to the UCC, and this includes virtually everyone doing business. A businessperson may be at a serious disadvantage if he or she is not aware of these rules when a competitor is, and it would do little good to learn the rules after a problem has arisen.3.Ask students to assume that they are buying produce for a supermarket. What different approaches might they take to avoid having to pay for a delivery of wilted produce? There are several ways to protect against the risk of having to pay for produce that has spoiled en route to you, the buyer. First of all, you can obtain insurance that covers the goods from the moment title passes to you in a shipment contract (when conforming goods are delivered to the carrier). That way, if something happens to the produce in transit, you will be able to recover insurance proceeds. Second, you could include a provision in your contract with the carrier stating that trucks that are not refrigerated must drive on a route specified by you (not through Death Valley in the heat) and/or specifying that the carrier must obtain your approval before changing the route for any reason (for instance, when a rock slide is blocking the usual route). You might also negotiate for a destination contract instead of a shipment contract when you are purchasing produce that will spoil quickly, such as lettuce or fruit.4.Parties can agree to many things in their contracts, but some of the principles imposed by the UCC cannot be avoided or changed. Parties cannot agree not to follow the duty of good faith and fair dealing, for example. Many of the obligations apply only in the absence of an agreement to the contrary, however. That is, if the contract is silent, the UCC rules apply. In this way, the UCC is comparable to the rules of a game—the rules are the rules, unless the players agree to make their own.Cyberlaw LinkAre the UCC’s principles regarding the topics discussed in this chapter changed when a contract for a sale of goods is entered into in cyberspace? If so, in what ways?Discussion Questions1.What is identification? For title to pass from seller to buyer, goods must be distinguished from similar goods—that is, they must be identified. Frequently, identification is only a matter of designating specific items (for example, by serial number), but when goods exist in a larger mass (1,000-case lots, for instance), identification can be made only by separating goods from the mass. There are exceptions. An agreement to buy “all [of a seller’s] hen chickens” would likely be held sufficient, for example, to pass title without the hens being separated from other chickens (roosters). If fungible goods (goods that are alike by physical nature, agreement, or trade usage) are held by owners in common, separation is unnecessary—a buyer becomes an owner in common with the other owners. Identification gives a buyer a right to obtain insurance on goods and to recover from third parties who damage the goods. Identification may allow a buyer to take the goods from the seller. If identification is not specified in a contract, additional rules apply: (1) identification occurs when a contract is made if the contract calls for a sale of goods already existing; (2) if a sale involves unborn animals that will be born within twelve months, identification occurs when the young are conceived (if it involves crops to be harvested within twelve months or during the next season, identification occurs when they are planted or begin to grow); and (3) in other cases, identification occurs when goods are marked, shipped, or otherwise designated by the seller as the goods to pass under the contract (the seller can delegate the right to identify goods to the buyer).2.When and where does title pass? Parties can expressly agree to when and under what conditions title will pass. If they do not, title passes when and where the seller delivers the goods, according to the contractual delivery terms. Under a shipment contract, a seller is to ship goods by carrier (a trucking company, a railroad), and title passes at the time and place of shipment. Under a destination contract, a seller is to deliver goods to a specific destination (designated by the buyer), and title passes when goods are tendered at there. When a buyer is to pick up goods, passage of title depends on whether the seller must deliver to the buyer a document of title (a bill of lading, a warehouse receipt). When a document of title is required, title passes when and where the document is delivered. The goods need not move. When a document of title is not required, title passes at the time and place of contracting, if the goods have been identified; if the goods have not been identified, title passes when they are identified.3.What title does a buyer acquire from a seller with voidable title? A buyer of goods acquires the title that the seller had or had the power to transfer, and a buyer of a limited interest acquires rights only to the extent of the interest bought. Nevertheless, a seller with voidable title can transfer good title to a good faith purchaser for value because an owner cannot recover goods from a good faith purchaser for value (for example, if a buyer pays for a watch with a bad check and then sells the watch to an unsuspecting third party, the owner—the original seller—cannot recover the watch from that third party).4.What is “risk of loss” under the UCC? Under the UCC, risk of loss is the question of who risks a financial loss if goods are damaged, destroyed, or lost.5.When does risk pass (a) under a shipment contract? Under a shipment contract, risk passes when goods are delivered to a carrier. (Generally, all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the contract.) (b) Under a destination contract? Under a destination contract, risk passes when goods are tendered to a buyer at a specified destination.6.When does risk pass (a) when the buyer is to pick up the goods and the seller is a merchant? When goods are to be picked up by a buyer, if the seller is a merchant, risk passes only on a buyer’s taking possession of the goods. (b) When the buyer is to pick up the goods and the seller is not a merchant? If the seller is a nonmerchant, risk passes on the seller’s tender of delivery.7.When does risk pass when a bailee holds the goods? If a bailee holds the goods, risk passes when: (1) the buyer receives a negotiable document of title (for instance, a negotiable warehouse receipt that the seller has indorsed) for the goods, (2) the bailee acknowledges the buyer’s right to possess the goods, or (3) the buyer receives a nonnegotiable document of title and has had a reasonable time to present the document to the bailee and demand the goods. If the bailee refuses to honor the document, the risk remains with the seller.8.For purposes of the entrustment rule, what is “a buyer in the ordinary course of business”? A buyer in the ordinary course is a person who buys in good faith from a person who deals in goods of that kind. The buyer cannot know that the sale violates the ownership rights of a third person. (For example, a customer who unknowingly buys another customer’s bike from a bicycle shop gets good title to the bike against the original owner.) A good faith buyer obtains only those rights held by the person who entrusted the goods. (In the above example, if the other customer had stolen the bike, the buyer would have acquired title good only against the thief, not against the original owner.)9.Who bears the risk of loss when a contract is breached? Generally, the party in breach bears the risk. If a seller breaches by delivering goods so nonconforming that a buyer has the right to reject them (red flags instead of yellow ones, for example), risk will not pass until the defects are cured or the buyer accepts the defective goods. (If a buyer accepts and later discovers a latent defect, acceptance can be revoked, at which time risk passes back to the seller, to the extent that the buyer’s insurance does not cover the loss.) When a buyer breaches, risk immediately shifts to the buyer if the seller has identified the goods. (The buyer bears the risk for only a commercially reasonable time after the seller learns of the breach, however, but the buyer is liable to the extent of any deficiency in the seller’s insurance.)10.When does a buyer have an insurable interest in goods? A buyer has an insurable interest in goods the moment they are identified to the contract by the seller. (For example, a crop is identified to a contract when it is planted or begins to grow, and thus, a buyer who contracts in March to buy a crop to be harvested in October obtains an insurable interest in the crop when it is planted in April.)Activity and Research Assignments1.Have students examine standard form contracts to identify risk of loss provisions, insurance provisions, and shipping terms. Ask them to interpret the terms and determine what a party who signs one of the contracts is agreeing to. Select a sales order and a purchase order and ask students which form, in a battle of the forms, would prevail. Who would bear the risk of loss? Who could insure the goods?2.Ask students to find and read St. Paul Fire and Marine Insurance Co. v. Toman, 351 N.W.2d 146 (S.Dak. 1984). The case involves the loss by fire of a house recently sold. Briefly, the facts are as follows: James Toman advertised a small house on his farm for sale. The ad stated that the buyer was to remove the house from Toman’s land, but under terms to be negotiated. On September 23, Van Collins bought the house. Collins had no immediate plans to remove the house, and no specific time for removal was discussed. Collins knew before the sale that Toman was still occupying the house on a part-time basis and that it could be removed only with Toman’s approval. Collins also agreed before the sale that Toman could rent the house to hunters during the upcoming hunting season. On September 25, Toman left on a business trip. Before he returned the next day, fire completely destroyed the house. He filed an insurance claim for the loss under his policy with St. Paul Fire and Marine Insurance Company. St. Paul filed suit, asking the court to declare that Toman did not have an insurable interest in the house at the time of the fire and that the risk of loss had passed to Collins. The trial court found that title to the house had passed to Collins but the risk of loss had not, and entered judgment in favor of Toman. St. Paul appealed. The Minnesota Supreme Court affirmed the trial court’s judgment.Have students answer the following questions:a.Why did the court consider the contract for the sale of the house a contract for a sale of goods (instead of a contract for a sale of real estate)? St. Paul claimed that the sale of the house was a sale of real property to which the UCC does not apply. The court pointed out that under UCC 2–107(2) a contract for the sale of “things attached to realty and capable of severance without material harm thereto .??.??. is a contract for the sale of goods .??.??. even though [the subject matter] forms part of the realty at the time of contracting.”b.What was the basis for St. Paul’s claim that Toman had no insurable interest in the house? What did the court say in response to St. Paul’s claim? St. Paul claimed that passage of title to Collins negated any insurable interest in Toman. The court stated that “the passage of title is not a final determining factor. Under the risk of loss provisions of the UCC the courts should determine the rights of the parties.”c.Did the court consider Toman a merchant? What difference did it make? The court concluded that Toman was not a “merchant” as defined in UCC 2-104(1). Under UCC 2-509(3), if the seller is not a merchant, “the risk passes to the buyer on tender of delivery.”d.Did the court conclude that “tender of delivery” of the house had been made? What was the court’s reasoning? The court concluded that Toman “never made the ‘tender of delivery’ of the house [because] Collins knew that Toman was occupying the house at least on a part-time basis; he further knew . . . that the removal of the house would have to be negotiated with Toman.”e.Who did the court decide should bear the cost of the loss of the house? The trial court’s judgment was affirmed. The state supreme court concluded that although title to the house had passed from Toman to Collins, the risk of loss had not passed, before the house was destroyed by fire, because there had been no “tender of delivery.” The court ordered St. Paul to pay Toman according to the terms of its policy.Explanation of a Selected Footnote in the TextFootnote 3: Henry Ganno bought a 12-foot beam weighing 100 pounds at a Lumbermen’s Building Center store in Fife, Washington. The store put the beam is Ganno’s truck but did not otherwise secure it, as per a sign that stated it was store policy not to secure loads. On a public street, the beam fell off the truck. As Ganno attempted to retrieve it, another vehicle hit it, causing it to strike Ganno’s leg and shatter his kneecap. Ganno filed a suit in a Washington state court against Lanoga Corp., which owned the store, alleging negligence. The court granted a judgment in Lanoga’s favor. Ganno appealed. In Ganno v. Lanoga Corp., a state intermediate appellate court affirmed. Under UCC 2–509(3), “where the seller is a merchant, the risk of loss passes to the buyer on receipt of goods.” Here, Ganno received the beam from Lumbermen’s at its place of business. The risk of loss passed to Ganno when Lumbermen’s loaded the beam onto his truckOn what basis might it be contended that Ganno, if anyone, was the negligent party in this case? Ganno assumed that the Lumbermen’s employee secured the beam after loading it into the truck. Ganno did not get out of the truck to check the security of the load before driving off. Ganno’s reliance on his own false assumption was not due to anything that Lumbermen’s did. Ganno’s mistaken assumption was the result of his own negligenceCould Ganno successfully argue that Lumbermen’s owed a duty to Ganno as an invitee on Lumbermen’s property? No. Premises liability arises from dangers on a landowner’s property and a landowner’s duty to correct or warn an invitee about these dangers. The key to liability from obvious or known dangers is that a condition or activity causing the injury occurs on the landowner’s property. As the court noted, “such is not the case here. There is no evidence that a condition or activity on Lumbermen’s property caused Ganno’s injury: Contrary to Ganno’s assertions, he did not delegate to Lumbermen’s his duty to secure his load before driving away; nor did Lumbermen’s at any time undertake to secure the load. Thus, there is no premises liability here.” ................
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