chapter 14: ownership and risk of loss in sales

Chapter 14: Ownership and Risk of Loss in

SalesLaw in SocietyMrs. Ingram2013-2014

Discuss who may transfer ownership of goods.

Explain what is required for transfer of ownership of goods and when it occurs.

Section 14-1: Transfer of Goods

Who has the authority to transfer ownership of goods? Generally the legal owner or someone authorized by

the owner or by the law to act in the owner’s stead.

Even though “ownership” is composed of a bundle of rights (title, possession, use, profit, and alienation—which includes the ability to transfer by sale or gift or to mortgage even to destroy) the person who holds title is considered the legal owner of goods.

Question:

Have you ever been approached to buy a tv, stereo system, or other items by someone selling merchandise under suspicious circumstance or at a very low price? Tell me about your experience and how you responded or how you should have responded.

Question:

Only the true owner of goods may legally transfer ownership of those goods.

Exceptions to the Rule: Persons authorized to do so may transfer another’s title

Buyers in a sale induced by the fraud of the seller may transfer better title than they have to an innocent third-party purchaser.

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?

Persons may sell what they do not own if the owner has authorized them to do so.

Auctioneers and sheriffs also are authorized when they sell, under court order or when empowered by statute, stolen or repossessed goods or foreclosed property.

Authorized Persons

If an owner of goods 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 in them.

Buyers in a Sale Induced by Fraud

Brad was walking through a part of town near the docks for ocean going cargo vessels when he came upon an electronic goods store. Attracted by the goods and prices in the window, Brad went inside and eventually haggled Standon, the owner and only sales clerk, into selling a surround-sound system to him. Brad bought the system, available even in discount stores for more than $600, for $110. Standon turned out to be a dock worker who stocked his store with stolen goods. When police showed up to take back the surround-sound system, which had been stolen by Standon, Brad protested that he had paid for it in good faith and didn’t know it was stolen property. Who has title to the surround sound?

What’s Your Verdict? pg. 243

At the Consumer Electronics Show in Las Vegas, Millicent become convinced that an innovative new gaming system that allowed gamers to duel with one another using holograms that followed their body movements would be the hit of the Christmas season. As a consequence, she placed an order for one thousand of the systems, paying for them in full so as to receive one of the first shipments. In early November, she received by overnight mail a negotiable bill of landing indicating the systems had been loaded on a delivery truck in California and were on the way to a local warehouse. Once they arrived she could obtain the warehouse keeper and paying any shipping or storage fee that be due.

In This Case pg. 244

Create a chart of the exceptions to the rule that only the true owner has the authority to transfer title to goods. Across the top, write authorized persons, fraudulent buyers, holders of negotiable documents, and merchants with possession of goods. Add key phrases.

CHART ACTIVITY

Certain documents often are used as a substitute for title to goods. Examples: warehouse receipts issued by public

warehouses when goods are store there. Bills of landing and air bills issued by common carriers when goods are shipped.

Holders of Negotiable Documents of Title

Documents may be negotiable or nonnegotiable.

Negotiable- goods are to be delivered to the bearer, who is the person (holder) in possession of the document, or to the order of a party named by the document.

Holders of Negotiable Documents of Title

A buyer will allow a merchant to retain possession of goods after the sale.

If during that period, the merchant resells and delivers these goods to a faith purchaser the latter receives good title.

The merchant must replace the resold goods or be liable to the original buyer.

Merchants with Possession of Sold Goods

Ownership of goods to be transferred in a sale, must be both existing goods and identified goods.

Existing Goods - are physically in existence and owned by the seller.

Identified Goods- existing goods that have been designated specifically as the subject matter of a particular sales contract.

Requirements for Ownership Transfer

No transfer of ownership until the goods are both physically in existence and identified to the contract.

What are various means by which goods could be identified to the contract? Marked, tagged, set apart.


Future Goods- goods that are not both existing and identified.

Fungible Goods- goods of a homogeneous or essentially identical nature. Each unit is regarded as equal to every other unit. Ex: a quantity of corn or oil of a given variety

and grade, or thousands of cases of identical canned fruit in a warehouse.


In deciding when title transfers from seller to buyer, courts first examine the sales agreement to see if the parties have specified clearly when they intended for title to pass. If they have expressed such intent, courts generally will uphold their agreement.

When Does Ownership Transfer?

Chien Huang ordered electronic equipment worth more than $3 million from InterContinental Traders, a Seattle exporter. The equipment was to be shipped to a company in the People’s Republic of China. The sales agreement, signed by both parties, stated that title and risk of loss would pass “when all necessary governmental permits are obtained.” The Chinese government granted an import permit and necessary clearance to allow the exchange of Chinese currency into dollars to pay for the order. However, the U.S. State Department refused to grant an export permit because of the classified nature of some of the equipment. Did a sale take place?


Reminder: Ownership of goods brings with it duties and burdens as well as rights and benefits. When ownership of goods is transferred, the owner also takes on the responsibility of the goods.

Why is it important to know when the title transfers in the case of goods that are lost or damaged?


Seller Delivers Goods To Their Destination If the contract requires the seller to deliver the

goods to their destination, title passes when the goods are tendered at the specified destination. Tender of Delivery- that the seller places (or authorizes a

carrier to place) the proper goods at the buyer’s disposal and notifies the buyer so that delivery can be received.

When the seller is required to do additional work, title does not pass until such work is completed.

Common Situations

If the contract requires or authorizes the seller to ship the goods but does not obligate the seller to deliver them to the destination, title passes to the buyer at the time and place of shipment, when possession is transferred to the carrier.

Common Situations

When customary, or when the parties have agreed that the seller is to deliver a document of title (for example, an air bill), title passes when and where the document is delivered. Example: Degory bought 600 tons of oats from

Delta. The oats were stored in a public grain elevator. Title passed when authorize agent of Delta delivered a negotiable warehouse receipt for the oats to Degory.

Common Situations

Seller Tenders Goods 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.

Common Situations

Explain the general rules for identifying when risk of loss transfers.

Identify the point at which insurable interest of goods transfers.

Identify when risk of loss and insurable interest transfer in specific situation.

Section 14-2: Risk of Loss and Insurable Interest in Sales

If Seller Ships Goods By Carrier The risk of loss passes to the buyer at the destination,

upon tender of delivery.

This is true even if goods that are shipped by carrier are still in possession of the carrier.

If the seller is not required to deliver the goods to the buyer at a particular destination and the seller used a carrier to transport the goods, the risk of loss passes to the buyer when the goods are delivered to the carrier.

When Does Risk of Loss Transfer?

FOB - Free on board. Assume that the seller is in Atlanta and the

buyer is in New Your City. In this case, “FOB Atlanta” means the seller agrees to deliver the goods no further than the carrier’s freight station in Atlanta.

Title and risk of loss remain with the seller until delivery takes place.


Shipments from foreign countries the seller may quote a CIF- cost, insurance, freight price. This means that 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.

The risk of loss passes to the buyer when the seller delivers the goods to the carrier, such as a seagoing ship.

The insurance provides protection against loss form any identified risks.


Knowing that streaming video cell phones, extremely popular in Japan, would soon hit the American market, Correlone ordered 250 of each of the best-selling cell phone models with the streaming video feature for his high-end electronics store. He ordered them form a wholesaler in Osaka, Japan, to be shipped directly to his location by a carrier that the seller would select. Two weeks later the goods arrived and the carrier notified Correlone that they would be picked up at its local warehouse. When Correlone arrived at the warehouse’s address the next day, he found the building a smoldering ruin. It had been hit by lighting and caught fire the previous evening destroying all of its contents. Who has the risk of loss for the goods, Correlone or the wholesaler?


A bailee has temporary possession of another person’s goods, holding them in trust for a specified purpose. Example: a watch or computer

repairperson. The goods may be sold by the owner, yet the

contract may call for delivery to the buyer without the warehouses goods being moved.

If the Goods are Held by a Bailee

The risk of loss transfers to the buyer under such circumstances upon any of the following events: When the buyer receives a negotiable document of title converting

the goods (ex: a non-neogtiable warehouse receipt)

When the bailee acknowledges the buyer’s right to possession of the goods.

After the buyer receives a non-negotiable document of title (ex: a non-negotiable warehouse receipt) or other written direction to a bailee to deliver the goods. (The buyer must have had a reasonable time to present the document to the bailee, who must have honored it.)

If the Goods are Held by a Bailee

If any case not covered previously, the risk of loss falls on the buyer upon receipt of the goods if the seller is a merchant.

If the seller is not a merchant, the risk of loss transfers to the buyer as soon as the seller makes a tender of delivery.

In Other Cases

Galaxy Furniture Company shipped a truckload of chairs and sofas to Brenda’s Bargain Basement. Without unloading the tractor-trailer, inspection disclosed that Galaxy had mistakenly shipped sofas and chairs upholstered in costly Italian leather. Brenda had ordered the durable but much cheaper vinyl upholstery models. Brenda promptly notified Galaxy of the error and asked for instructions on what to do with them. After a week, the loaded trailer was still parked in back of Brenda’s warehouse. Then a fire of undisclosed origin destroyed the trailer and its contents (along with the vehicles). Galaxy suffers the loss as the goods were faulty and risk of loss therefore remained with it. Do you think the that the cost of the loss should have been borne by the carrier? If so, why?

In This Case pg. 248

Insurable Interest- gives the buyer the right to buy insurance on the goods.

Often necessary as, even though the risk of loss may still reside with the seller, the buyer may lose money should the goods be destroyed and the buyer cannot satisfactorily find them elsewhere.

If the goods already exist and have been identified to the contract when the contract is made, an insurable interest arises in the buyer at that time.

When Does Insurable Interest Transfer?

In addition to the insurable interest, the buyer has the following rights: 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.

Identify three other rights conferred upon the buyer in addition to the insurable interest. Inspection, compel delivery, collect damages for injury to the goods.

When Does Insurable Interest Transfer?

Frosty-Frolic Company was a fresh-food packer and processor. In a sales contract with Goodman, Frosty-Frolic agreed to pack a quantity of head lettuce grown near Salinas, California, in specially marked “Soaring Eagle” brand cartons. The lettuce was routinely dehydrated, cooled, packaged, place in the special cartons, and stacked on pallets in Frosty-Frolic sheds for daily shipment as ordered by Goodman. At what point did Goodman obtain the right to insure the goods against possible loss?


Cash-and-Carry Sales

When a buyer in a sales contract is a consumer who pays cash and takes immediate delivery, title passes to the buyer at the time of the transaction. (most common type of transaction for groceries and lower-priced items.)

Risk of loss passes upon the buyer’s receipt of the goods from a merchant and on tender of goods by a casual seller.

The seller may insist on payment in legal tender.

Checksare commonly used but are not legal tender. Acceptance of a check by the seller is not considered payment until the check is paid at the bank.

Use of a check by a consumer in a cash-and-carry sale does not affect the timing of the transfer of title or risk of loss.

Transfer of Rights and Risks in Specific Sales

Prepare a chart showing along the left-hand side the various specific sales transactions covered and on top three categories: transfer of title, transfer of risk of loss, and transfer of insurable interest. Fill in the chart.

CHART ACTIVITY

Sales on Credit Credit Sale- simply a sale that, by agreement

of the parties, calls for payment for the goods at a later date.

Ownership and risk of loss may pass even though the time of payment or delivery is delayed.


COD Sales COD- collect on delivery

The carrier collects the price and transportation charges upon delivery and transmits this amount to the seller.

If the buyer does not pay, the goods are not delivered.

The buyer loses the right otherwise available to inspect the goods before payment.

Ownership and risk of loss transfer just as though there were no such provisions.


Sale or Return Sale or Return- a completed sale in which the buyer has an option of returning the

goods.

Ownership and risk of loss pass to the buyer upon delivery. Such a transaction is a true sale.

If the buyer returns the goods within the fixed or reasonable amount of time, ownership and risk of loss pass back to the seller. True whether the sale is made for cash or on credit.

Returned goods must essentially be in their original condition.

Sale or return provision should not be confused with the return privilege granted to customers from some retail stores. Stores allow customers to return most purchases that have not been used, even if they are not defective. This is not required by law, but offered to promote goodwill and increase sales.


Create small groups and role-play cash-and-carry sales, sales on credit, COD sales, and sale or return transactions. Identify when transfer of ownership and risk of loss occur.

GROUP ACTIVTY

Dorothy owned her own plumbing business. She bought her tools from a nationwide retailer that offered an unconditional guarantee that tools sold under its trademark could be returned and exchanged for new ones any time the customer was dissatisfied for any reason. Dorothy made it a policy to use the retailer’s tools until they were worn out and then return them, demanding and receiving a new replacement. She did this even though the retailer’s tools outlasted comparable tools by a wide margin. Are her actions legal? Ethical?

A Question of Ethics pg. 250

Sale on Approval Sale on Approval-“on trial” or “on satisfaction.”

Ownership and risk of loss do not pass until the prospective buyer approves the goods. This may be done by words, payment, any conduct indicating approval, or retention of the goods beyond a specified or reasonable time.

The prospective buyer is liable for any damages to the goods caused by his or negligence.

The prospective buyer may reject the goods for any cause, whether or not it is reasonable.


Sale of Undivided Interest Sale of Undivided Interest- a person who 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.


Auction Auction- a public sale to the highest bidder.

When the auctioneer decides that no one will bid any higher for the goods on sale, the bidding is closed. Usually by the pounding of the auctioneer’s gavel. The auctioneer is accepting on behalf of the owner of the goods.

Ownership passes to the buyer at that time.

Risk of loss passes whenever the auctioneer acknowledges the buyer’s right to possess the goods which generally follows payment


With a high bid of $145, Angelina and Tom bought a king-sized mattress at an auction held outside the house of a neighbor who had died the previous month. Before they could pay for and receive their goods, a sudden storm dumped an inch of rain on the mattress ruining it. Who had the risk of loss at the time the mattress was ruined? Who might be liable for the loss of the mattress, as Angelina and Tom or not because they didn’t pay for it?


Prepare a chart that details when title, risk of loss, and insurable interest transfer in a sale of approval, sale of undivided interest, and an auction.

CHART ACTIVITY

Bulk Transfer Bulk Transfer- the transfer, generally by sale, of all or a major part of the

goods of a business in one unit at one time.

Goods include: materials, supplies, merchandise, and equipment if sold with the inventory.

The UCC requires notice to the seller’s creditors before the bulk transfer is made.

The seller is required to list all creditors.

The buyer is required to notify those creditors of the forthcoming transfer of ownership and to pay their claims or to make other arrangements with them.

An innocent third party who in good faith buys some or all of the goods from a bulk transferee gets good title. But if such third party pays no value or knows the buyer failed to comply with requirements of the bulk transfer law, the creditors can retake the goods.


The main reason for the benefits stemming form common currency use was the ease by which trade can be accomplished utilizing one currency instead of many. Another significant factor is the lack of the uncertainties introduced into trade transactions by the fluctuating exchange rates between national currencies.

ECONOMIC IMPACT pg. 253