chapter 25 passage of title and risk of loss: rights of parties twomey, business law and the...

Chapter 25Chapter 25

Passage of Title and Risk of Loss: Passage of Title and Risk of Loss: Rights of PartiesRights of Parties

Twomey, Business Law and the Regulatory Environment (14th

Ed.)

(c) 2000 West Legal Studies Chapter 25 2

Duties under Particular TermsDuties under Particular Terms [25-1][25-1]Duties under Particular TermsDuties under Particular Terms [25-1][25-1]

Buyer pays the seller costs of goodsand freight to a specified location.

Risk of loss and title pass to buyerafter goods delivered to the carrier.

Buyer pays the seller for costs of goods, insurance, and freight.

Risk of loss and title pass to buyerafter goods delivered to the carrier.

Seller obligated to put the goods onboard named vessel, truck, or carrier

ormake tender at a named point (place).

Risk of loss and title pass to buyerat the F.O.B. point. Seller pays coststo point, buyer from point.

Seller must deliver goods alongsidevessel at own expense and risk.

Risk of loss and title pass to buyer at the shipping point.

Seller must deliver or unload goods from ship at port to destination.

Risk of loss and title pass to buyer when goods are properly unloaded.

CIFCost,

Insurance,Freight

CFCost,

Freight

FOB

Free on Board

FASFree

AlongsideNamed Vessel

Ex-Ship


Passage of Title under Article II Passage of Title under Article II [25-2][25-2]Passage of Title under Article II Passage of Title under Article II [25-2][25-2]

Time ofContractExisting

Future

Fungible

Goods Identified?

Yes

No

Title Cannot PassDelivery

Yes

Document of Title FOB Destination FOB Shipment

Title Passesupon Tender

Title Passes upon Delivery of Goods to Carrier

Yes No

Title Passes at Time of

Contracting

Title Passes upon Delivery

of Title Document

NoShipped, Marked, or Otherwise Designed


Risk of Loss Risk of Loss [25-3][25-3]Risk of Loss Risk of Loss [25-3][25-3]

Identification

Warehouse(Third Party)

Shipment Non-Shipment Sale on Approval Sale or Return

FOBShipment

FOBDestination Merchant

Non-Merchant

NoDocument

Documentof Title

OtherDocument

Passes toBuyeruponDeliveryto Carrier

Passes toBuyerupon

Tender

Passes toBuyerupon

Receipt

Passes toBuyerupon

Tender

Passes toBuyerupon

Receipt ofDocument

Passes toBuyerwhen

Buyer IsNotifiedGoods

AreAvailable

Passes toBuyerwhen Buyer

Accepts Goods

Passes toBuyerunder Same

Rule asOrdinary

Sale


Risk and Property Risk and Property Rights in Sales ContractsRights in Sales Contracts

Risk and Property Risk and Property Rights in Sales ContractsRights in Sales Contracts

Nature ofGoods

Terms ofTransaction

Transfer of Riskof Loss to Buyer

Transfer of Title toBuyer

Acquisition ofInsurable Interest

by Buyer

ExistingGoods

Identifiedat Time of

Contracting

1. WithoutDocument ofTitle

2. Delivery ofDocument ofTitle Only

Buyer’s receipt ofgoods from merchantseller, tender ofdelivery bynonmerchant seller § 2-509(3)

Buyer’s receipt ofnegotiable documentof title § 2-509(2)(a)

Time and place ofcontracting* § 2-401(3)(b)

Time and place ofdelivery ofdocuments by seller §2-401(3)(a)

Time and place ofcontracting §2-501(1)(a)

Time and place ofcontracting § 2-501(1)(a)

FutureGoods

3. Marking forBuyer

4. Contract forShipment toBuyer

5. Contract forDelivery atDestination

No transfer until alater event

Delivery of goods tocarrier § 2-509(1)(a)

Tender of goods atdestination § 2-509(1)(b)

No transfer until alater event

Delivery of goods tocarrier § 2-401(2)(a)

Tender of goods atdestination § 2-401(2)(b)

At time of marking § 2-501(1)(b)

Delivery to carrier ormarking for buyer § 2-501(1)(b)

Delivery to carrier ormarking for buyer § 2-501(1)(b)

*Assumes no document of title


Shipping TermsShipping TermsShipping TermsShipping Terms

COD Cash on Delivery (payment term, not shipment term)

CF Lump sum, price includes cost and freightRisk-buyer upon delivery to carrierTitle-buyer upon delivery to carrierExpense-seller includes cost of freight in contract price

CIF Lump sum, price includes cost, insurance, and freightRisk-buyer upon delivery to carrierTitle-buyer upon delivery to carrierExpense-included in contract price (seller buys insurance in buyer’s name, and pays freight)

FOB Free on Board

FAS Free Alongside (FOB for boats)


Chapter 25 SummaryChapter 25 SummaryChapter 25 SummaryChapter 25 Summary

Problems relating to risk and property rights 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 nature of the transaction between the seller and the buyer. 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. The title to existing goods that are 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 the buyer and the seller have an insurable interest in the goods. If the goods are damaged after the sales agreement has been made, a merchant seller bears the loss occurring until the time the buyer receives the goods.

Chapter 25 Summary Chapter 25 Summary [2][2]Chapter 25 Summary Chapter 25 Summary [2][2]


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. 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. As long as the goods are unidentified, neither title nor risk of loss passes to the buyer.



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 their agreement, such as a sale on approval, sale or return, or consignment sale, determines who has title and who bears the risk of loss.




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.

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