Comprehensive Volume, 18th Edition

Chapter 26: Passage of Title and Risk of Loss: Rights of Parties

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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.

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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).

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Existing GoodsThe 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.

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Future and Fungible GoodsFuture 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.

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Passage of Title Under Article 2At time ofcontract

When Shipped,

Marked; orOtherwise Designed

Existing

Future

Fungible

Goods Identified?

Yes

FOB Destination FOB Shipment

Title passesupon tender

Title Passes upon Delivery of Goods

to Carrier

No

Document of Title?

Yes No

Title Passes at Time of Contracting

Title Passes upon Delivery of Title

Document

Yes

Title Cannot PassDelivery?

No

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Passage of TitleIn 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.

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Shipment TermsA contract that requires delivery may use acronyms and abbreviations for the various options in shipping.

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 – indicates that the seller will ship the goods.

FAS Free Alongside Ship (FOB for boats)

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Delivery TermsA 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 DeliveryA 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.

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Duties Under Particular Terms

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.

C.I.F.Cost,

Insurance,Freight

C.F.Cost,

Freight

F.O.B.Free on Board F.A.S.

FreeAlongside

NamedVessel

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.

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Special SituationsIn 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.

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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.

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Risk of LossIdentification

Shipment

FOBShipment

FOBDestination

Passes toBuyeruponDeliveryto Carrier

Passes toBuyerupon

Tender

Non-Shipment

MerchantNon-

Merchant

Passes toBuyerupon

Receipt

Passes toBuyerupon

Tender

Warehouse(Third Party)

NoDocument

Documentof Title

OtherDocument

Passes toBuyerupon

Receipt ofDocument

Passes toBuyerWhen

Buyer isNotifiedGoods

AreAvailable

Sale on Approval

Passes toBuyerwhen Buyer

Accepts Goods

Sale or Return

Passes toBuyerUnder Same

Rule asOrdinary

Sale