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Chapter 23
TITLE AND RISK OF LOSS
RESTATEMENT
Issues that arise during the performance of a contract for the sale of goods include the liability if the goods are
damaged and the rights of buyers’ and sellers’ creditors to seize the goods. These issues of loss and seizure are
covered by Article 2 rules on passage of title and risk of loss.
A warehouser is a person or entity in the business of storing others’ goods for compensation. The rights and duties of
a warehouser are the same as the rights and duties of a bailee in a mutual benefit bailment. Article 7 of the UCC
governs the rights and duties of warehousers. Warehousers have liens on the goods they store for reasonable
storage charges. The lien may be enforced by sale.
Warehousers issue warehouse receipts which are written acknowledgments of receipt of goods. Warehouse receipts
are memoranda of the contract between the issuer, the warehouser and the depositor. A warehouse receipt is a
document of title and can be bought and sold or used as security for a loan. A warehouse receipt can be negotiable
or non-negotiable. A negotiable warehouse receipt can be negotiated with due negotiation. Due negotiation transfers
both title to the document and the goods. Due negotiation gives the holder of the warehouse receipt rights superior
even to those of the depositor. Defenses to holders of a duly negotiated warehouse receipt are that the goods in the
warehouse are stolen goods. Warranties are made by transferors of warehouse receipts. Field warehousing is the
use of the warehouse system for control of title through the placement of an agent in an area where the warehouser
has the goods. Field warehousing allows the owner of the goods to pledge the goods as security with creditors’
reassurance through the agent’s presence.
Common carriers are public transporters of goods. Consignors or shippers deliver goods to the carrier and
consignees are the parties to whom the goods will be shipped.
Bills of lading are documents of title used to provide rights and control similar to those provided under warehouse
receipts. A bill of lading can be negotiable or non-negotiable. One of the few defenses to a claim under a negotiable
bill of lading is that the underlying goods were stolen. Common carriers are absolutely liable for the goods from start
of shipment until delivery with a few exceptions for losses caused by acts of God, war, public authority, fraud by the
shipper or the natural properties of the goods. Carriers may limit their liability for reasonable amounts. A factor is a
bailee who sells consigned goods. Title remains with the consignor until a sale occurs.
When risk of loss and title pass depends upon the nature of the contract including whether the goods are in existence
and identified at the time of the contract and whether there is a document of title. Damage and destruction of the
goods or breach in performance are also issues that determine passage of title and risk of loss. Special sales
situations, like auctions and self-service stores, also carry special rules for title and risk.
STUDENT LEARNING OUTCOMES
LO.1: Explain when title and risk of loss pass with respect to goods.
LO.2: Determine who bears the risk of loss when goods are damaged or destroyed.
LO.3: Explain why it is important to know when risk of loss and title pass in transactions for the sale of goods.
LO.4: Describe the passage of title and risk in special situations, such as a bailment, sale or return, or a sale on
approval.
LO.5: Classify the various circumstances in which title can be passed to a bona fide purchaser.
INSTRUCTOR’S INSIGHTS
Break the chapter down into five components – related Learning Outcomes are indicated in ( ):
1. What are the potential problems in the delivery of goods?
Explain possible damages to goods
2. How are goods identified under a contract and why is identification important? (LO.2)
3. When does title to goods pass from the seller to the buyer?
Define the terms used in shipping goods
4. Who has the risk of loss when goods are destroyed or lost?
Give the timing rules for passage of risk of loss
5. What special situations exist and what are the rights of the parties?
Explain sales and returns (LO.5)
CHAPTER OUTLINE
I. What Are the Types of Potential Problems in the Delivery of Goods?
A. Damage to goods – total or partial: theft, loss, destruction
II. Determining Rights: How Are Goods Identified Under a Contract and Why Is Identification Important?
A. Existing and identified goods
1. Physically in existence
B. Future and unidentified goods
1. Future: not yet in existence or not yet owned by the seller
C. Fungible good
1. Goods mixed together and indistinguishable – milk, oil, corn
D. Effect of Identification
1. Buyer holds an insurable interest
III. Determining Rights: When Does Title to Goods Pass From the Seller to the Buyer?
A. Goods represented by documents of title
1. Examples are bills of lading and warehouse receipts
B. Passage of title in nonshipment contracts
1. No requirement for seller to deliver unless contract specifies
2. With no delivery specified (and no document of title), the title passes to the buyer at the time the
3. Field warehousing
a. Receipts that owner uses as a pledge for loans
DISCUSSION POINTS: Thinking Things Through
Serving Up Title and Insurance at the Burned Bar
The title to the personal property at the bar passed at the time of the contract. There was no document of title and no
delivery, so Blasini had title, which meant that Cheran did not have the right to pledge that property as security.
Cheran’s lender has no rights in the personal property. Nonpayment is a breach of contract, but title is not affected by
that until there is a judgment and the goods are attached. So, the creditors, the Rajs, did not have title. Insurance
proceeds go to the guy who bought the property and had title. Some provisions in sales contract may entitle Rajs to
the proceeds, but in this case there was no such provision. Point out to the students how confusing it can all look,
even to sophisticated insurers, but the simple concept of when title passes takes care of all the issues.
C. Passage of title in warehouse arrangement
1. Title passes when buyer has documents
D. Passage of title in bailments and other forms of possession
CASE BRIEF: Northern Insurance Company of New York v. 1996 Sea Ray Model 370DA Yacht
453 F. Supp. 2d 905 (D. S.C. 2006)
FACTS: On August 23, 1995, Eric T. Small purchased a thirty-seven foot (37') SEA RAY 370 Sundancer
Yacht from Gulfwind Marine for $251,000.00. Sea Ray had engraved the vessel's Hull Identification
Number (“HIN”) into the fiberglass on the vessel's transom. The vessel's proper HIN was
SER4860F596 Sea Ray. Northern issued a Master Mariner yacht policy to Small providing
insurance coverage for the Sea Ray yacht for theft or loss for $200,000.00.
On February 27, 2001, Daniel Dey, a Florida resident, stole the Sea Ray yacht while it was moored
at her slip at Gulfwind Marina in Venice, Florida. A police report was filed. After the theft, Northern
paid Small a total loss of $200,000.00 for the vessel.
Subsequently, Dey altered the Sea Ray yacht's HIN to SERF3571C298 and made other changes to
the vessel to disguise the theft and manufacture date. Dey then advertised the sale of the vessel as
a 1998 Sea Ray on an Internet website. On August 5, 2002, Dey signed a bill of sale conveying the
Sea Ray yacht to Fat Boy, a Delaware Limited Liability Company owned by George Lee, for
$127,500.00. No boat dealer, retailer, distributor or seller was involved in the transaction.
Fat Boy gave a ship mortgage on the Sea Ray yacht to Carolina First. Carolina First filed the
preferred ship mortgage on the Sea Ray yacht.
George Lee and Paul Degenhart, the lawyer for and principal in Fat Boy, became concerned that
the Sea Ray yacht may have been manufactured in 1996, not 1998, as previously indicated by Dey.
Lee and Degenhart confronted Dey about the incorrect model year of the Sea Ray yacht. Dey
admitted that he had altered the vessel's HIN to disguise the actual manufacture date.
Fat Boy and Lee attempted to trade the Sea Ray yacht to a vessel dealer for another vessel that
Lee wanted to purchase. At that time, it was determined that the vessel had been stolen and Small
was informed. Small contacted Lee and Fat Boy, but Lee did not return the vessel to Small. In
June, 2004, the Sea Ray yacht was seized by the U.S. Marshal Service and Northern filed suit to
get the yacht back. Fat Boy and Carolina First claimed title and interest in the yacht.
ISSUES: Who has title to the yacht? What is the effect of having a thief in the chain of transfer of the goods?
REASONING: A thief cannot pass good title, even when the yacht identification number is changed. The rights of
all the parties, including the lender and the buyer, are all subordinate to the original owner of the
yacht. A party can pass only as good a title as he or she holds. A thief holds no title and cannot
pass good title, even to those who are not aware that the goods are stolen.
DISCUSSION POINTS: Have the students discuss the passage of title on stolen goods using the Northern
Insurance Company of New York v. 1996 Sea Ray Model 370DA Yacht case.
2. Authorization – lien holders can sell property when debtors default
3. Voidable title
a. Minor has title and transfers; transferee transfers to bfp
DISCUSSION POINTS: Ethics & the Law
The $7 Renoir at the Flea Market
Cover ethical issues of government taking of property and the implications of title for later holders of the property.
Here is the outcome of the case in a nutshell:
“The common law provides that possession of property constitutes prima facie evidence of ownership until a
better title is proven.” That presumption, undoubtedly, favors Fuqua on the facts presented here. She claims
to have purchased the painting in good faith at a flea market in West Virginia, and she possessed the
painting until the FBI seized it. See Adams, 672 S.E. 2d at 867. The burden thus lies with BMA, as the
claimant out of possession, to rebut Fuqua's presumptive proof of ownership by “produc[ing] evidence of
superior title.” BMA does so by way of a detinue action, alleging that the painting was stolen from its
collection in November 1951.
The only conclusion to be drawn from the evidence presented by BMA is that it was in lawful possession of
the painting until the painting was stolen from its collection in November 1951. To this end, BMA appended a
number of affidavits and supporting exhibits to its memorandum. Internal records, discussed above, indicate
that BMA received the painting as a loan from Saidie May, cataloged the painting, and put it on exhibit
before reporting it stolen. See BMA's Mem., Ex. 1. Of particular significance is the police report, which
demonstrates that BMA reported the painting as stolen to the City of Baltimore Police Department on
November 17, 1951. See id. at Ex. 2. The theft is further corroborated by BMA's records, including
handwritten and typed notations on the catalog card reflecting the painting's status as stolen, id. at Ex. 1–C;
minutes from a board meeting stating that BMA made an insurance claim as a result of the theft, id. at Ex.
1–G; and BMA's financial ledger confirming that it received a $2,500 payment from its insurer, id. at Ex. 1–H.
Together these records offer overwhelming evidence in support of BMA's claim that the painting was stolen.
Given this quantum of evidence, there can be no doubt that BMA has proved all it must under Virginia law,
and that Fuqua cannot have good title as the possessor of a stolen work of art.
This conclusion is consistent with Brown University v. Tharpe, No. 4:10cv167, 2013 WL 2446527 (E.D. Va.
June 5, 2013), a detinue action involving a stolen Tiffany presentation sword to which both parties have cited
in their papers. In that case, Brown University brought an action against Tharpe seeking to recover the
sword, id. at *1, which had gone missing from Brown's collection sometime between 1975 and 1977, a fact
that was documented in a memo to the Provost but, unlike the instant case, had not been reported to the
police or the insurance company out of concern for the institution's reputation, id. at *7. The sword
reappeared thirty years later when Tharpe purchased it in good faith from a collector. Id. Despite evidentiary
shortcomings not present here, the court found in favor of Brown on the basis of a typewritten card
identifying the sword as part of Brown's holdings and the testimony of an employee who had observed the
sword in Brown's collection, both of which established prior possession. Id. at *6. The court then inferred that
the sword had been stolen based on evidence that its display case remained in the same place after its
disappearance and that several other items in the vicinity were also missing, even though Brown had a
policy prohibiting removal for any purpose other than repair and restoration. To the extent Tharpe is
instructive at all, it merely bolsters BMA's position that the evidence before the Court is more than adequate
to make out a detinue claim.
The interesting ethical issue involves Fuqua trying to claim title – the court referred to her arguments as ridiculous
because the answer was so clear under UCC passage of title concepts.
4. Bailments
a. Sale by bailee/entrustee to bfp turns possession into title
E. Shipment contracts – the shipping terms (See Figure 23-1 in text)
1. FOB (Free on Board) place of shipment – seller must get the goods to a carrier for shipment, e.g., “FOB
2. FOB place of destination – seller must get the goods to the buyer, e.g., “FOB New York” means that the
a. Seller cannot hand over obligation to carrier
3. FAS – Free Along Side, FOB for boat transportation
4. CF
a. Cost and freight
5. CIF
a. Cost, insurance and freight
6. COD
a. Cash on delivery
F. Shipping contracts and passage of title (See Figure 23-2 in text)
1. FOB place of shipment – title passes when the seller delivers the goods to the carrier
IV. Determining Rights: Who Has the Risk of Loss When Goods Are Destroyed or Lost?
A. Nonshipment contracts (See Figure 23-3 in text)
1. In the absence of an agreement, there is no delivery requirement under Article 2
DISCUSSION POINTS: E-Commerce & Cyberlaw
Supply Chain and Risk Management
Discuss how shipping is less risky because of the availability of tracking; direct orders; automatic shipment.
B. Shipment contracts
1. FOB place of shipment – risk of loss passes to buyer when the seller gets goods to the carrier
CASE BRIEF: Total Quality Logistics, LLC v. Frye Trucking, LLC
997 F. Supp. 2d 384 (E.D.N.C. 2014)
FACTS: Total Quality Logistics, LLC (plaintiff/TQL) hired Frye Trucking, LLC (defendant/Frye) to transport
fruit to TQL's customer's facility in Georgia. Frye's driver picked up the fruit in New Jersey and
Pennsylvania and transported the fruit to Georgia over a period of three days. The driver received
bills of lading for the fruit when he picked them up and, after delivery, he received the three bills of
lading after they were stamped as approved by the customer. Each bill of lading has a stamp and
notation from the customer that shows all cases were received, no cases were damaged, no cases
were rejected, and lists the pulp temperature of the fruit upon arrival. After the driver had left the
customer's premises, the customer noticed that the fruit was not in good condition and requested
an inspection by the USDA. The USDA prepared three reports on March 2, 2012, the delivery date,
which stated that the fruit was spoiled and evidenced decay and other issues. TQL then
unsuccessfully tried to salvage the shipment of fruit, but it was determined that the fruit was in too
poor of a condition to salvage. TQL filed a claim with Frye on March 13, 2012. Frye's insurance
company denied an insurance claim filed for the lost fruit product because it believed that the fruit
was delivered to Frye in damaged condition. TQL filed suit and both parties moved for summary
judgment.
ISSUE: Who is liable for the non-salvageable fruit?
REASONING: The records showed that the temp was too high during transit with the result being that the fruit was
damaged in transit. The buyer need not pay and the seller would be able to recover from the
carrier’s insurer because the carrier was negligent in shipping with the high temps.
Even though the documents were signed and no damage was noted, the thorough inspection had
not been done and once that was done, there was evidence of damage and the shipping records
revealed that the temperature was not where it needed to be to preserve the fruit.
The plaintiff was awarded $11,925.00 plus prejudgment interest and the costs of this action against
defendant Frye Trucking.
C. Effect of damage or destruction
1. Damage to identified goods before risk of loss passes
a. Partial or complete loss
2. Damage to identified goods after risk of loss passes
CASE BRIEF: King Jewelry, Inc. v. Federal Express Corporation
166 F.Supp.2d 1280 (C.D. Cal. 2001)
FACTS: Yehouda Hanasab, president and sole shareholder of King Jewelry, Inc., bought a pair of marble
and brass statues with candelabra from Elegant Reflections, a purveyor of jewelry and object d'art
located in Florida, for $37,500.00. Elegant Reflections was to ship the goods to King under FOB
place of shipment terms. Elegant Reflections hired Raymond Reppert, a "professional packager
and crater" with 12 years experience, to package, crate and ship the statues and candelabra to
King. Reppert packaged and crated the statues with directional markings and signs stating
"Fragile-Handle with Care."
Reppert paid FedEx $684.50 (transportation charge in the amount of $485.04, declared value
charge in the amount of $185.00, and fuel surcharge in the amount of $14.55) to ship the
candelabras. However, both candelabra were broken in transit, something King discovered when
they arrived in King’s California offices. FedEx’s airbill limits damages to $500. King sought
recovery from Elegant and/or FedEx and Reppert.
ISSUES: On a FOB place of shipment contract, what happens when the goods are damaged? Can the
shipper limit its payment for goods damaged during transit?
HOLDING AND
REASONING: The standard airbill holding FedEx harmless for any damage to artwork were sufficiently plain and
conspicuous to give reasonable notice of their meaning and, thus, effectively limited carrier's
liability for damage to sculptures; conspicuous notice limiting coverage for artwork appeared on
DISCUSSION POINTS: Have the students discuss what happens when good are damaged in a FOB place of
shipment contract using the King Jewelry, Inc. v. Federal Express Corporation case.
V. Determining Rights in Special Situations: What Special Situations Exist and What are the Rights of the Parties?
A. Returnable goods transactions
Mention that a buyer’s creditors will be able to seize the goods if it is a sale or return; whereas, a seller’s
creditors will be able to seize the goods if it is a sale on approval and there has been no approval. Ask the
students how a seller can protect himself or herself from the buyer’s creditors seizing the goods in a sale or
B. Sale on approval
1. Risk and title pass with approval
2. What constitutes approval
a. Express words
C. Sale or return – title and risk with the buyer until return
D. Sale on consignment
E. Self-service stores
F. Auction sales
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Title; risk of loss. If the seller is a nonmerchant, the risk of loss passes to the buyer on tender of delivery. Tender
of delivery requires that the seller “put and hold conforming goods at the buyers’ disposition....” At the time of
The UCC deviated significantly from the earlier common law discounting the role of title in determining risk of
loss. See UCC § 2-401. While many traditionalists bemoaned the loss, the realities of commerce affected the
Where a party has breached, UCC § 2-209 does not apply, its sibling § 2-210 applies instead. Under § 2-210,
2. Void; voidable title. Although the Mendenhalls might have been bona fide purchasers, Clark did not have
voidable title. He was a thief, and a thief can never pass good title to stolen property. Even in the case of
3. Sale on approval; sale or return. The court held that “pay on scan” meant that CVS would pay only if the cookies
sold. The arrangement was, therefore, a type of sale or return that meant that CVS could send the cookies back.
4. Risk of loss. The court held that delivery had not yet occurred because delivery included installment. Sunkissed
5. Rick of loss. Ownership of the wafers had passed from Omneon to PPI when the shipment left Omneon's dock.
The direct shipment to City University does not interfere with the passage of risk of loss to the buyer, which was
6. Ability of vendor with voidable title to transfer valid title. While B had only a voidable title because of the fraud in
using a bad check, B had the power under the UCC to pass a good title to a good faith buyer for value. Such a
buyer may buy either directly from the holder of the voidable title or at an auction at which the holder of the
7. Distinction between sale on approval and sale or return. The transaction was a sale on approval. Because the
goods could be returned by the buyer, the transaction was either a sale on approval or a sale or return. Because
8. Passage of title. No. The mechanic may know the auto industry, but the auto mechanic is not a merchant for
9. Passage of title; theft. The pawnbroker passes only the title that he has. If there is a theft involved, title cannot
10. Risk of loss. In this case, risk of loss remains with the merchant seller until the buyer obtains the goods. Conway
11. Risk of loss. Future Tech, not Tae II Media, has title to the computer equipment in the containers. The goods in
question were sold on the terms F.O.B. Pusan, Korea and “net 90 days.” In other words, “delivery” to Future
Tech occurred not in Miami, but in Pusan, where title and the risk of loss passed to Future Tech. Thus, although
12. Passage of title. The risk of loss never passed to Bakker Brothers because Graff did not ship goods in
compliance with the terms of the contract. The seed did not meet the germination rate, and Bakker Brothers did
13. Effect of sale on title. The buyer had no title to the timber. A purchaser receives only the title that the seller had.
14. Transfer of risk loss in a shipment contract. The buyer will bear the loss. Because the contract required shipment
to the buyer, and no agreement was made as to who would bear the loss, the loss is the buyer’s when the goods
are delivered to the carrier. [Eberhard Manufacturing Co. v. Brown, 232 N.W. 2d 378 (Mich. App.)]
15. Passage of title. Develop a chart for when a seller's creditors can repossess goods in transit to a buyer.
Buyer fails to provide assurance Buyer insolvent Buyer breach
Seller can decide not to ship Seller can decide not to ship Seller can decide not to ship
Seller can stop truckload,
Seller can stop any size shipment Seller can stop truckload,
LAWFLIX
RV (2006) (PG)
Robin Williams leases an RV and drives his family from California to Colorado. Along the way, the RV ends up
management system for classroom use.
