Sales

Sales Contract
Contract --
Title,
Title, Risk
Risk &
&
Insurable
Insurable Interest
Interest
Introduction
 Sale of goods requires different rules than
real property transactions: risk should not
always pass with title.
 UCC replaces title with identification, risk,

and insurable interest.

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Categories of Title
 Good Title: Acquired from someone who
already owns the goods “free and clear”
 Void Title: Not true title
 Example: Purchase of stolen goods
 Voidable Title: Occurs in certain situations in

which contract between original parties would

be void, but goods have already been sold to
third party

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Rules Regarding Title Acquisition
 Good Title: Acquired from someone who has
rightful ownership
 Void Title: Results when someone acquires

possession of stolen goods

 Voidable Title results when:

◦ Buyer deceived seller regarding his/her identity

◦ Buyer wrote bad check
◦ Buyer committed criminal fraud in securing goods
◦ Buyer is a minor
◦ Buyer and seller agreed title would not transfer
until later time

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Acquiring Good Title
 General Rule: If “third party purchaser” makes
“good-faith” purchase for value, he/she gets
good title (not void/voidable title)
 General Rule: If owner entrusts possession of

goods to merchant who deals in goods of

that kind, merchant can transfer all rights in
the goods to a buyer in the “ordinary course
of business”

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Terminology Regarding Transfer
of Title
 “Ownership”—Transfer of Title

 “Encumbrance”—Goods used as collateral for

debt

 “Loss”—Refers to which party has “risk of

loss” when goods damaged/destroyed

 “Insurable Interest”—Right to insure goods

against any risk exposure

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§1: Identification
For any interest to pass to buyer, goods must
be:
◦ In existence.
◦ Identified as specific goods in the sales contract (by
serial numbers and/or physically separated from
others. Except for fungible goods which do not
need separation).

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Identification [2]
 Gives the buyer the right:
◦ To obtain insurance on the goods.
◦ To recover from third parties who damage the
good.
 Identification occurs:
◦ If goods are designated when contract is made. If
goods are not designated when contract is made,
then identified at time of designation.

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Types of Sales Contracts
 “Simple Delivery” (Definition): Buyer and seller
contract, buyer leaves with goods
 Title transfers to buyer when contract executed

 Risk of loss transfers to buyer when buyer takes

possession
 Buyer has insurable interest upon receiving title

 You purchase a sofa at a yard sale for $50. You

tell the seller that you’ll come back with a truck

to pick up the sofa. When you come back after
1 hour, you discover that the sofa has been
damaged by a freak thunderstorm. Who has the
ROL?

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§2: When Title Passes to Buyer
 Title can pass:
 Upon physical delivery, or
 When agreed to by the parties, or
 If no agreement, depends on whether

contract is shipment or destination contract:

◦ Shipment: title passes at time and place of
shipment.
◦ Destination: title passes when goods are tendered
at the destination.

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Delivery “without movement” of
the goods
 title
passes when agreed by the
parties, or
◦ With document of title: when and where
document delivered.
◦ Without document: when sales contract is
made, if goods have been identified or
when identification occurs if they have not
been identified.

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§3: Risk of Loss
 ROL does not necessarily pass with title. ROL
is important because of insurance concerns.
 Unless agreed otherwise, ROL passes to

Buyer depending on whether delivery is with

or without movement of the goods.
 Delivery With Movement of the Goods.

◦ Shipment vs. Destination Contracts.

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ROL: Delivery with Movement of Goods
 In a shipment contract, ROL passes when
seller tenders goods to carrier. If goods
damaged in transit, Buyer’s loss.
 In a destination contract, ROL passes when

goods tendered at destination.

 E.g. You purchase a sofa from Pottery Barn

and pay for delivery to your home. On the way

to your home, the Pottery Barn truck is
involved in an accident and the sofa is
damaged. Who bears the risk of loss?You have
title. Merchant has ROL 
 Shipping terms 

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ROL: Shipping Terms
Term Definition
F.O.B. Free on Board. Sales price includes shipping to specific FOB
place in contract. Example: FOB Chicago.

F.A.S. Free Along Side. Requires seller to deliver goods alongside the
ship before ROL passes to buyer.

C.I.F. Cost, Insurance and Freight. Seller puts the goods in possession
of a carrier

Delivery Ex- Deliver from Carrying shipping vessel. ROL passes to buyer
Ship when goods leave the ship or unloaded.

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ROL: Delivery Without Movement
of Goods
 Goods Held by Seller:
◦ Document of Title is generally not used.
◦ If Seller is a merchant, ROL passes when buyer
takes physical possession of goods.
 Goods Held by Bailee (Warehouse). ROL
passes when:
◦ Buyer receives document of title; bailee
acknowledges Buyer’s right to goods and buyer
receives title and has reasonable time to pick up.

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ROL: Conditional Sales
 Sale on Approval.
◦ ROL passes when buyer approves expressly or
implicitly.
◦ Title and risk of loss with seller until buyer notifies
seller of approval
 Sale or Return. (Consignment is sale or return
unless it complies with Art. 9.)
◦ ROL passes to buyer with possession.

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ROL: Breach of Contract
 Generally breaching party bears ROL.
 Seller’s Breach.
◦ Rejection - risk stays with seller.
◦ Revocation of acceptance - risk passes back to
seller to the extent that buyer’s insurance does not
cover the loss.
 Buyer’s Breach. Goods are identified, risk
passes to buyer for a reasonable amount of
time after seller learns of the breach, to the
extent that seller’s insurance does not cover
loss.

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§4: Insurable Interest
 Buyer has an insurable interest in goods that
have been identified.
 Seller has an insurable interest in goods as

long as they retain title or a security interest.

 Both buyers and sellers can have an insurable

interest at the same time.

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§5: Bulk Transfers
 Covered by Article 6 of the Uniform.
Commercial Code.
 A bulk transfer is defined as:

◦ Major part of seller’s inventory.

◦ Not made in the usual course of business .
 UCC 6 is becoming obsolete and has been
repealed by many states.

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Case 19.1:
Memphis Hardwood v. Daniel
(Voidable Title)
 FACTS:
◦ Daniel owned 800 acres of land. After an ice
storm, Daniel contracted with Northern
Hardwood to cut from the southern half of the
property the “disaster hardwood timber” that
was twenty inches or more in diameter.
◦ More than a year later, in a second contract,
Daniel agreed to the cutting of the timber down
to sixteen inches, for which Northern would pay
$150,000.
◦ The same day, Northern told Memphis
Hardwood that Northern had an agreement to
cut all of the timber on all of Daniel’s land.

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Case 19.1:
Memphis Hardwood v. Daniel
(Voidable Title)
 FACTS (cont’d)
◦ Northern and Memphis agreed that Northern
would conceal Memphis and buy for both.
◦ Memphis paid Northern $410,000 to cut
Daniel’s timber.
◦ When Memphis proceeded to cut the timber,
Daniel sued Memphis and the others, alleging
fraud.
◦ The court canceled the agreement between
Northern and Memphis and Memphis appealed,
asserting that it was a good faith purchaser.

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Case 19.1:
Memphis Hardwood v. Daniel
(Voidable Title)
 HELD: FOR DANIEL. AFFIRMED.
◦ To establish the status of a good faith purchaser
“[t]he elements the innocent purchaser must
prove are a valuable consideration, the
presence of good faith, and the absence of
notice.”
◦ As to the second element, intentional
concealment of Memphis showed lack of good
faith.
◦ Also, Memphis not only had actual notice, it was
a knowing and willing participant in the
defrauding of Daniel.

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Case 19.2: DeWeldon v. McKean
(Entrustment Rule)
 FACTS:
◦ DeWeldon, a famous artist and art collector,
owned three paintings valued at $26,000 that
were displayed in his home.
◦ When he declared bankruptcy, DeWeldon, Ltd.,
bought the paintings and entrusted them to
DeWeldon. DeWeldon, Ltd., did not put up signs
or tags to indicate that he no longer owned the
paintings. Within a year, DeWeldon sold them
to Robert McKean for $50,000.
◦ DeWeldon, Ltd., sued in a federal district court
to recover the paintings.

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Case 19.2: DeWeldon v. McKean
(Entrustment Rule)
 HELD: FOR MCKEAN.
◦ DeWeldon, Ltd. entrusted the paintings to Felix
DeWeldon.
◦ McKean was a buyer in the ordinary course of
business and Felix DeWeldon acted as a merchant
within the meaning of the [UCC].
◦ He was a well‑known artist and he held himself
out as having knowledge and skill peculiar to art
and the art trade.

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Case 19.3: Windows v. Jordan
Panel
 FACTS:
(Risk of Loss)
◦ Jordan ordered windows from Windows. The
contract required the goods to be “delivered to
New York City.” The windows were damaged
during the shipment.
◦ Jordan salvaged what it could and ordered a
new shipment from Windows (delivered without
incident). Jordan did not pay Windows for either
shipment and sued the carrier.
◦ The court granted Windows’ motion for
summary judgment against Jordan. Jordan
appealed.

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Case 19.3: Windows v. Jordan
Panel
 HELD:
(Risk of Loss)FOR WINDOWS. AFFIRMED.
◦ The contract was a shipment contract. When
Windows put the goods into the hands of the
carrier, the risk of loss passed to Jordan.
◦ Because the parties did not “expressly specify”
that the contract required Windows to deliver
the goods to a particular destination, the
contract was a shipment contract.
◦ Windows thus satisfied its obligations to Jordan
when it put the goods, properly packaged, into
the possession of the carrier for shipment.

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