Title Risk and Insurable
Interest
Chapter 20
Sale v. Lease
• Does title pass under a typical lease
contract?
• Legal title vs. equitable title.
– What is the difference?
Identification
• 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
Identification
• 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
Title
• 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
carrier.
• 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.
Title
• 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
identified.
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
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Through fraud
With a dishonored check
Or if seller was insolvent at time he purchased
Major exception is when a good faith purchaser gives
value.
Good Faith Purchaser
• Must give value i.e. legally sufficient
consideration
• Good faith purchaser must have clean hands
and no knowledge of defect in title.
• Good faith purchaser can normally keep the
goods.
– 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
rents
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
shifts
• 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
goods
– 2) the buyer receives a non-negotiable document of
title and has reasonable time to present the
document.
• If bailee refuses to deliver risk of loss does not
shift
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
buyer
– 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
passes
– Seller can retain insurable interest after title
passes if the seller has a security interest