Passage of Title and Risk of Loss in Sales Transactions

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

2. 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.

3. 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. • Futuregoods are not yet owned by the seller or are not yet in existence. • Fungiblegoods are those which, when mixed with other same-type goods, are indistiguishable (such as corn or wheat).

4. Existing Goods • The 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 insurableinterest 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.

5. Future and Fungible Goods • Future 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.

6. At time of contract Existing Goods Identified? When Shipped, Marked; or Otherwise Designed Future Yes No Fungible Delivery? Title Cannot Pass No Yes Document of Title? FOB Destination FOB Shipment Yes No Title passes upon tender Title Passes upon Delivery of Goods to Carrier Title Passes upon Delivery of Title Document Title Passes at Time of Contracting Passage of Title Under Article 2

7. Passage of Title • In 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 shipmentcontract, 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.

8. Shipment Terms • A contract that requires delivery may use acronyms and abbreviations for the various options in shipping. CF Lump sum, price includes cost and freight Risk-buyer upon delivery to carrier Title-buyer upon delivery to carrier Expense-seller includes cost of freight in contract price CIF Lump sum, price includes cost, insurance, and freight Risk-buyer upon delivery to carrier Title-buyer upon delivery to carrier Expense-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)

9. Delivery Terms • A 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 Delivery • A 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.

10. Seller obligated to put the goods on board named vessel, truck, or carrier or make tender at a named point (place). Risk of loss and title pass to buyer at the F.O.B. point. Seller pays costs to point, buyer from point. Buyer pays the seller for costs of goods, insurance, and freight. Risk of loss and title pass to buyer after goods delivered to the carrier. F.O.B. Free on Board C.I.F. Cost, Insurance, Freight Buyer pays the seller costs of goods and freight to a specified location. Risk of loss and title pass to buyer after goods delivered to the carrier. F.A.S. Free Alongside Named Vessel Seller must deliver goods alongside vessel at own expense and risk. Risk of loss and title pass to buyer at the shipping point. C.F. Cost, Freight Duties Under Particular Terms

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

12. 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.

13. Identification Sale on Approval Shipment Non-Shipment Warehouse(Third Party) Sale or Return OtherDocument FOBShipment FOBDestination Non-Merchant Merchant Documentof Title NoDocument Passes toBuyeruponDeliveryto Carrier Passes toBuyeruponTender Passes toBuyeruponReceipt Passes toBuyeruponTender Passes toBuyeruponReceipt ofDocument Passes toBuyerWhenBuyer isNotifiedGoodsAreAvailable Passes toBuyerUnder SameRule asOrdinarySale Passes toBuyerwhen BuyerAccepts Goods Risk of Loss