Power Point Chapter Twenty

Title Risk and Insurable
Chapter 20
Sale v. Lease
• Does title pass under a typical lease
• Legal title vs. equitable title.
– What is the difference?
• Before title can pass, there must be identification
of the goods for which title is to pass.
– Must be in existence
– Must be identified in contract
• Parties can specify when identification will occur.
If not then
– Goods in existence – identification occurs at time
contract is made
– Future goods – 1) livestock when born & 2) crops
when planted or begin to grow.
• Other future goods are identified when seller designates by
marking, shipping or other means
• Goods which are part of a larger mass are
identified when marked, shipped or
identified by seller in another way
– Exception for fungible goods.
• No need for actual separation
• Buyer replaces seller as coowner
• Example: I buy 1000 2X4’s from Menards
• For goods in existence and identified, unless
agreed upon otherwise, title passes when seller
physically delivers
• Exceptions!
– If a shipment contract, title passes at time of tender to
• Example: UPS takes the package from the hardware store.
• Most contracts assumed to be shipment contracts unless
specified otherwise.
– Destination Contract: titles passes when goods
tendered at predetermined destination.
• Delivery without movement of goods
– Depends upon whether seller must deliver documents
such as a bill of lading
• What is a bill of lading?
– Receipt
– If bill of lading is delivered, then title passes with the
delivery of bill of lading
– If no bill of lading, then title passes when contract is
formed IF the goods have been identified. If not
identified and no bill of lading, then title passes when
Imperfect Title
• Buyer purchases at least what a seller has
in regards to imperfect title.
• Lessee
– Does a lessee obtain title?
– Acquires right to possess and use the rights
seller has to goods.
• Subject to limitations under the contract.
Imperfect Title
• Thief has no legal title and cannot transfer title
– Void title if you bought from a thief.
– What is the policy behind this rule?
• Voidable title: if goods were purchased by seller
Through fraud
With a dishonored check
Or if seller was insolvent at time he purchased
Major exception is when a good faith purchaser gives
Good Faith Purchaser
• Must give value i.e. legally sufficient
• Good faith purchaser must have clean hands
and no knowledge of defect in title.
• Good faith purchaser can normally keep the
– How does real owner get justice?
• If no value is given or not a good faith purchaser,
then real owner can recover.
• Same rules apply to leases, however, under a
lease the real owner can demand to receive the
Entrustment Rule
• Beware!!!
– Entrusting goods to a merchant who deals in such
goods allows the merchant to pass title to a buyer in
the ordinary course of business.
– Goods must be entrusted
• Left with merchant for later delivery or pickup
• Purchaser must buy in good faith and without any knowledge
of the imperfect title.
• Pawnbrokers are an exception.
– I leave my car at Dewey Ford for repairs and they sell
it to Ronald. Who gets title to the car?
– What if Josh steals my car and leaves it at Dewey
Ford, and Dewey Ford sells it while Josh is at work?
• Did I entrust the car to anyone?
Risk of Loss
• Contract generally determines when risk of loss
• When agreement does not specify:
– See 20-1 in the case of a common carrier
• FOB, destination or shipping point.
– Shifts when tendered to carrier
• FAS – Free along side
– Shifts when tendered to buyer at destination
• CIF or CF
• Delivery & Ex-ship
• See page 387
Delivery Without Movement
• Risk of loss shifts
– Bailment arises when goods do not move and
title is not delivered. Bailee is one who holds
the goods.
• If seller holds goods &
– Buyer is a merchant, then risk of loss shifts to
buyer at tender of goods
– Buyer is non-merchant, then risk of loss
tendered at actual delivery of goods to buyer
Goods Held by a Bailee
• When bailee holds and delivery does not require
movement risk of loss passes when:
– 1) the buyer receives a negotiable document of title
for the goods
– 2) the bailee acknowledges the buyers rights to the
– 2) the buyer receives a non-negotiable document of
title and has reasonable time to present the
• If bailee refuses to deliver risk of loss does not
Conditional Sales
• Some goods are taken buyer subject to buyer’s
approval or buyer’s ability to resell
• A sale or return contract is one which allows the
buyer to return unsold goods with a reasonable
time frame.
– Risk of loss shifts to buyer when buyer receives
goods and resides with buyer until goods are returned
– Subject to creditors claims while in possession of
– Consignments involve entrusting of goods without
upfront payment.
Conditional Sales
• Sale on approval
– Buyer takes goods as bailment.
– If buyer does not approve, buyer can return goods.
– Risk of loss does not shift until sale is finalized.
• Finalized when
– Express notice of acceptance given.
– Trial period ends and buyer has not returned the goods.
– If delivered and buyer is going to try and resell, then
it’s a sale or return and not a sale on approval.
When Sale or Lease is Breached
• If the buyer has right to reject,
– Risk of loss does not pass
• until defect is cured
• Until buyer waives right to reject
– If buyer later discovers defect and revokes acceptance, then risk
of loss shifts back to original seller
• Key is determining whether originally accepted
• If buyer breaches
– Then risk of loss immediately shifts to buyer if 1) goods have
been identified, 2) buyer has risk of loss for a commercially
reasonable amount of time after breach and 3) buyer or lessor is
liable only to the extent insurance is inadequate.
Insurable Interest
• Buyer obtains insurable interest when
goods are identified
• Seller retains insurable interest until title
– Seller can retain insurable interest after title
passes if the seller has a security interest