Business Law 4510 Chapter 15 Notes Title and Risk of Loss I Identification a b Before any interest in specific goods can pass from the seller to the buyer the goods must be Title the right of ownership i ii In existence Identified as the specific goods designated in the contract 1 Identification when specific goods are designated as the subject matter of a sales or lease contract Important because it gives the buyer or lessee the right to insure the goods and the right to recover from third parties who damage the goods c Title and risk of loss cannot pass from the seller to the buyer unless the goods are identified to the contract i Title of leased goods stays with the seller or lessor it does not transfer to the lessee If the contract calls for the sale or lease of specific and ascertained goods that are already in existence identification takes place at the time the contract is made d Existing Goods i e Future Goods i Animals 1 2 ii Crops 1 iii Other 1 If sale involves unborn animals to be born within 12 weeks identification takes place when the animals are conceived If lease involves any unborn animals identification occurs when the animals are conceived If sale involves crops that are to be harvested within 12 months or the next harvest season identification takes place when the crops are planted a Otherwise identification takes place when the plants begin to grow Identification occurs when the goods are shipped marked or otherwise designated by the seller or lessor as the goods to which the contract refers f Goods that are Part of a Larger Mass i Identification occurs when the goods are shipped marked or otherwise designated by the seller or lessor as the goods to which the contract refers 1 Fungible goods goods that are alike by physical nature by agreement or by trade usage a A seller owner passes title and risk of loss to the buyer without an actual separation II Passage of Title a Shipment and Destination Contracts ii Exception the buyer i Shipment contract the seller is required or authorized to ship goods by carrier and then the title passes to 1 All contracts assumed to be shipment contracts unless explicitly stated otherwise in the contract ii Destination contract the seller is required to deliver the goods to a particular destination usually directly to the buyer but sometimes to another party designated by the buyer Then the title passes to the buyer once the goods are tendered at that destination 1 Tender of delivery occurs when the seller places or holds conforming goods at the buyer s disposal with necessary notice enabling the buyer to take possession b Delivery without Movement of the Goods i When a document of title is required title passes to the buyer when the document is delivered 1 bill of landing a receipt for goods that is signed by a carrier and serves as a contract for the transportation of the goods 2 warehouse receipt a receipt issued by a warehouse for goods stored in a warehouse ii When no documents of title are required title passes at the time the sales contract is made if the goods have been identified the title does not pass until identification occurs c Sales or Leases by Non owners i A buyer acquires at least whatever title the seller has to the goods sold ii A lessee acquires a right to possess and use the goods a leasehold interest iii Void Title 1 If the buyer unknowingly purchases goods from a seller who is not the owner of the goods a thief then no title exists and the real owner can reclaim the goods from the buyer iv Voidable Title 1 A seller has a voidable title if the goods that they are selling were obtained by fraud paid for with a check that is later dishonored purchased from a minor or purchased on credit when the seller was insolvent when a person ceases to pay their debts in the ordinary course of business or cannot pay their debts as they become due 2 Good Faith Purchasers a b c Someone who buys without knowledge of circumstances that would make a person of ordinary prudence inquire about the validity of the seller s title to the goods The original owner cannot recover goods from a good faith purchaser Empire Fire and Marine Insurance Co v Banc Auto Inc i Issue did Euro s possession of the document of title affect Banc s award ii No since Euro had given possession of the Mercedes to Figueroa with the intent of later providing the document of title Figueroa had obtained a voidable title when he transferred the car to Banc a good faith purchaser who was indeed entitled to the damages awarded 3 Voidable Title and Leases good faith lessee for value a A lessor with a voidable title has the power to transfer a valid leasehold interest to a i Real owner cannot recover goods except as permitted by the terms of the lease 1 Entrusting goods to a merchant who deals in goods of that kind gives the merchant the power to transfer all rights to a buyer in the ordinary course of business a A buyer in the ordinary course of business is a person who in good faith and without knowledge that the sale violates the rights of another party buys goods in the ordinary course from a merchant in the business of selling goods of that kind b Basically allows innocent buyers to obtain a legitimate title to goods purchased from merchants even if the merchants do not have a good title 2 Lindholm v Brant a b Issue was Brant a buyer in the ordinary course of business when he purchased Red Elvis Yes A person buys goods in good faith if there is honesty in fact and the observance of reasonable commercial standards of fair dealing in the conduct or transaction concerned v The Entrustment Rule Specific delivery terms in the contract can determine when risk of loss passes to the buyer a F O B free on board indicates that the selling price of goods includes transportation costs to the specific F O B place named in the contract The seller pays the expenses and carries the risk of loss to the F O B place named i ii if the named place is the place from which the goods are shipped the contract is a shipment contract if the named place is the place to which the goods are to be shipped the contract is a destination contract c b F A S free alongside requires that the seller at their own expense and risk deliver the goods alongside the carrier before risk passes to the buyer C I F or C F cost insurance and freight or just cost and freight required that the seller put the goods in the possession of a carrier before risk passes to the buyer d Delivery ex ship delivery from