Ownership and Risk of Loss in Sales Transactions

Chapter 16

The Power to Transfer Ownership

Lesson 16-1

Goals

• Describe various types of goods

• Discuss who may transfer ownership of goods

• Explain what is required for transfer of ownership of goods

• Identify when the ownership of goods has transferred

Who may transfer the ownership of goods?

• Brad stole a cassette player from Fuller’s car. He then sold it to Standon, who knew it was stolen.

• Did either Brad or Standon receive good title to the cassette player?– No, neither received title and Standon is guilty

of receiving stolen property because he know it was stolen

Power to Transfer Ownership

• Only the true owner of goods may legally transfer– Stolen goods – receive possession, but no

title, because the thief did not have good title to give

• True whether the buyer is innocent or knows that the goods were stolen

– Stolen goods often are not clearly identified and therefore not returned to the owner

• Public Auction

Transfer of Ownership

• 4 exceptions to transfer of ownership1. Authorized persons

2. Buyers in a sale induced by fraud

3. Holders of negotiable documents of title

4. Merchants with possession of sold goods

1. Authorized persons

– May validly sell what they do not own if the owner has authorized

– Salespeople, Auctioneers and Sheriffs

2. Buyers in a sale induced by fraud

• If an owner of goods is induced by fraud to sell the goods, the buyer obtains a voidable title

• The victimized seller may cancel the contract and recover the goods unless an innocent third party has given value and acquired rights in them– Good faith purchaser

• The defrauded seller must seek damages from the original fraudulent buyer

• Case (page 247)

3. Holders of negotiable documents of title

• Certain documents are often used as a substitute for possession of goods– Warehouse receipts, bills of lading, airbills

• Ownership transfers by transferring the document alone

• May be negotiable or nonnegotiable– If negotiable, the goods are to be delivered to the

bearer, who is the person in possession of the document (holder)

• Holders are deemed to have title to the goods

4. Merchants with possession of sold goods

• Sometimes a buyer will allow the merchant seller to temporarily retain possession of the goods

• Tort of conversion – using property in a manner inconsistent with the owner’s rights

• Case (page 248)

What’s Your Verdict?

• O’Dell was preparing for a gala New Year’s Eve charity ball. He could not decide which of three tuxedos to buy from Signet Styles. At O’Dell’s request, the manager set all three aside until the next day so O’Dell’s friend could come in to help him decide. That night a fire destroyed the store and its contents.

• Must O’Dell pay for the tuxedos that were set aside?

Requirements for Transfer of Ownership

• For transfer of ownership goods must be BOTH existing and identified

• Existing goods – Are physically in existence even though they may not

be in a fully assembled and immediately deliverable condition

• Owned by the seller

• Identified goods– Have been specifically designated as the subject

matter of a particular sales contract• Marked, separated, or made distinct

Requirements for Transfer of Ownership

• Future goods– Is a contract to sell rather than a sale– Neither ownership nor risk of loss passes at the time

of the agreement– Unless goods are BOTH existing and identified, they

are future goods• Fungible goods (exception to identification)

– Goods of a homogenous or essentially identical in nature (each unit is equal to every other unit)

• Corn, oil, canned fruits in a warehouse– Buyer becomes owner at the time of agreement– Goods pass without selection or identification

When Does Ownership Transfer?

• Page 249 – What’s Your Verdict?• Once goods are identified and existing, disputes

arise over who has title• Risk of loss if goods are damaged, stolen, or

destroyed• Courts will examine the sales agreement• If no agreement, look to the UCC for a solution• Neither the method of payment nor the time of

payment governs the outcome of ownership

Seller delivers goods to the destination

• Title passes when goods are tendered at the specified destination

• Tender of delivery– Means 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

Seller ships, but does not deliver, goods to the destination

• Authorized the seller to ship the goods buy 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

Seller delivers document of title

• Seller is to deliver a document of title (airbill)• 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 an authorized agent of Delta delivered a negotiable warehouse receipt for the oats to Degory

Buyer takes possession at place of sale

• Title passes at the time and place where the sales contract is made

Risk of Loss and Insurable Interest

16-2

Goals

• Explain when the risk of loss from seller to buyer transfers in different situations

• Explain when insurable property interests transfer in different situations

Seller Ships Goods by Carrier

• If seller is to deliver the goods to a particular destination using a carrier (railroad)– Risk of loss passes to the buyer at

destination, upon tender of delivery

• If seller is NOT to deliver the goods to a particular destination using a carrier– Risk of loss passes to the buyer when the

goods are delivered to the carrier

• What’s Your Verdict? (Page 251)

• Case (Page 251)

FOB• Free on Board• FOB Atlanta

– Seller agrees to deliver the goods only to the carrier’s freight station in Atlanta

• FOB, Buyer’s warehouse, NYC– Risk of loss remains with seller until the goods are

delivered to the warehouse

Seller

Atlanta

Buyer

NYC

Foreign Shipments

• CIF Price– Cost, Insurance, and freight

• Seller contracts for adequate insurance

• ROL transfers when the seller delivers the goods to the carrier

• Insurance provides protection

Goods Held by Bailee

• Bailee– Has temporary possession of another person’s goods, holding

them in trust for a specified purpose (public warehouse)• The goods may be sold by the owner, yet the contract

may call for delivery to the buyer without the goods being moved

• ROL transfers to buyer in any of the following situations:

1. When the buyer receives a negotiable document of title (warehouse receipt)

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

3. After the buyer receives a non-negotiable document of title or other written direction to a bailee to deliver the goods

Breach After Goods Identified

• The seller sometimes breaches by providing goods so faulty that the buyer rightly rejects them

• ROL remains with the seller until the defects are corrected

Goods neither shipped by carrier nor held by bailee

• If seller is a merchant, ROL falls on the buyer

• If the seller is NOT a merchant, the ROL transfers to the buyer as soon as the seller makes a tender of delivery

• Cases (Page 252)

Insurable Interest

• Buyer obtains a special property interest in goods at the time of their identification to the contract

• The special interest gives the buyer the right to buy insurance

• Identification– Setting aside, marking, tagging, labeling,

boxing, branding, or shipping

• What’s Your Verdict? (Page 252)

Insurable Interest

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

1. To inspect the identified goods at a reasonable hour

2. To compel delivery if the seller wrongfully withholds delivery

3. To collect damages from third persons who take or injure the goods

Specific Transactions

• Cash-and-Carry Sales– Pay cash and take immediate delivery– Title passes at time of transaction– Checks are common but are not legal tender– Check is not considered payment until the

check is paid by the bank• Does not affect the timing of the transfer or the

ROL for the buyer

Specific Transactions

• Sales on Credit– A sale that calls for payment for the goods at

a later date– Ownership and ROL may pass even though

the time of payment or delivery is delayed

• COD Sale– Collect on Delivery– If the buyer does not pay, goods are not

delivered• Seller retains control over goods until paid

Specific Transactions

• Sale or Return– Is a completed sale in which the buyer has an option

of returning the goods– Ownership and ROL pass to the buyer upon delivery– If the goods are returned in a reasonable amount of

time, ownership and ROL transfer back to the seller (goods must be in original condition)

– The good are subject to the buyers creditors

• What’s Your Verdict? (Page 253)

Specific Transactions

• Sale on Approval– “on trial” or “on satisfaction”– Ownership and ROL do not transfer until the

buyer approves the goods• Words, payment, any conduct indicating approval,

or retention of goods

– Buyer is liable for any damage to them caused by his or her negligence

– Buyer may reject the goods for any cause (reasonable or not)

Specific Transactions

• Sale of an 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 ROL pass to each buyer at the time of the sale

• Auction– Public sale to the highest bidder– The auctioneer accepts the highest bid on behalf of the owner of

the goods• Ownership passes at that time• ROL passes upon tender of the goods in exchange for payment

– “With Reserve” and “Without Reserve”

Specific Transactions

• Bulk Transfer– 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– Law protects dishonest merchants who sell out

secretly, keep the proceeds, and disappear• The UCC requires notice to the seller’s creditors before the

bulk transfer is made

Assignment

• Page 254-255 #1-10

• Page 256 #1-9

• Page 257 #17-19