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ANSWER TO VIDEO QUESTION LTR. B
Does Oscar have a right to refuse the shipment because the lettuce is not organic butter crunch lettuce? Why or
why not? Yes, Oscar can refuse the shipment if the goods are nonconforming. In a shipment contract, the seller must
2. When the Buyer or Lessee Breaches
When a buyer or lessee breaches, the risk immediately shifts to the buyer or lessee—
• If the seller or lessor has identified the goods under the contract.
• But the buyer or lessee bears the risk for only a commercially reasonable time after the seller or lessor
learns of the breach.
• And the buyer or lessee is liable only to the extent of any deficiency in the seller’s or lessor’s insurance
[UCC 2–510(3), 2A–220(2)].
ENHANCING YOUR LECTURE—
RISK OF LOSS IN
INTERNATIONAL SALES CONTRACTS
The possibility that goods will be lost or damaged in transit or at some time before the buyer takes possession
increases when goods are shipped great distances, as normally occurs with international sales contracts. Therefore,
those who form international sales contracts should safeguard their interests by indicating in the contract the point at
which risk of loss passes from the seller to the buyer. Note that the international sales contract between Starbucks
Coffee Company and one of its coffee suppliers, shown in the fold-out exhibit in Chapter 15, includes a specific
(insurance) clause indicating when risk of loss will pass to the buyer (see annotation 18 to that exhibit).
490 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
goods were lost or damaged, however, and failed to disclose this to the buyer, then the seller bears the risk.
FOR CRITICAL ANALYSIS
IV. Insurable Interest
With an insurable interest, a party can buy insurance to protect against the loss of goods.
A. INSURABLE INTEREST OF THE BUYER OR LESSEE
A buyer or lessee has an insurable interest in goods the moment they are identified to the contract by the seller
or lessor [UCC 2–501(1), 2A–218(1)].
B. INSURABLE INTEREST OF THE SELLER OR LESSOR
ANSWER TO VIDEO QUESTION LTR. C
Assume that you are in Oscar’s position—that is, you are buying produce for a supermarket. What different
approaches might you take to avoid having to pay for a delivery of wilted produce? There are several ways to protect
against the risk of having to pay for produce that has spoiled en route to you, the buyer. First of all, you can obtain
insurance that covers the goods from the moment title passes to you in a shipment contract (when conforming goods
are delivered to the carrier). That way, if something happens to the produce in transit, you will be able to recover
shipment contract when you are purchasing produce that will spoil quickly, such as lettuce or fruit.
ENHANCING YOUR LECTURE—
WHO BEARS THE RISK OF LOSS—
THE SELLER OR THE BUYER?
The shipment of goods is a major aspect of commercial transactions. Many issues arise when an unforeseen
CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST 491
event, such as fire or theft, causes damage to goods in transit. At the time of contract negotiation, both the seller and
the buyer should determine the importance of risk of loss. In some circumstances, risk is relatively unimportant (such
CHECKLIST TO DETERMINE THE RISK OF LOSS
The UCC uses a three-part checklist to determine risk of loss:
2. If the contract is silent as to risk, and either party breaches the contract, the breaching party is liable for risk of
loss.
3. When a contract makes no reference to risk, and neither party breaches, risk of loss is borne by the party having
control over the goods (delivery terms).
IF YOU ARE THE SELLER
If you are a seller of goods to be shipped, realize that as long as you have control over the goods, you are liable for
any loss unless the buyer is in breach or the contract contains an explicit agreement to the contrary. When there is no
IF YOU ARE THE BUYER
From the buyer’s point of view, it is important to remember that most sellers prefer “F.O.B. seller’s business” as a
delivery term. Under these terms, once the goods are delivered to the carrier, the buyer bears the risk of loss. Thus, if
conforming goods are completely destroyed or lost in transit, the buyer not only suffers the loss but is obligated to pay
the seller the contract price.
CHECKLIST FOR THE SELLER OR THE BUYER
2. If risk is extremely important, the contract should expressly state the moment risk of loss will pass from the seller
3. If an express clause is not agreed on, delivery terms determine passage of risk of loss.
4. When appropriate, either party or both parties should consider procuring insurance.
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TEACHING SUGGESTIONS
1. Students have difficulty understanding that title is relatively unimportant under the UCC. Before explaining that
Emphasize the importance that possession has in this context.
2. Despite the difficulty, students should be encouraged to learn the UCC rules governing identification, risk of loss,
and insurable interest. These rules are indispensable to anyone selling or buying goods under contracts subject to the
3. Parties can agree to many things in their contracts, but some of the principles imposed by the UCC cannot be
avoided or changed. Parties cannot agree not to follow the duty of good faith and fair dealing, for example. Many of
the obligations apply only in the absence of an agreement to the contrary, however. That is, if the contract is silent,
the UCC rules apply. In this way, the UCC is comparable to the rules of a game—the rules are the rules, unless the
players agree to make their own.
Cyberlaw Link
Are the UCC’s principles regarding the topics discussed in this chapter changed when a contract for a sale of goods
is entered into in cyberspace? If so, in what ways?
DISCUSSION QUESTIONS
1. What is identification? For title to pass from seller to buyer, goods must be distinguished from similar goods—that is, they
must be identified. Frequently, identification is only a matter of designating specific items (for example, by serial number), but
when goods exist in a larger mass (1,000-case lots, for instance), identification can be made only by separating goods from the
mass. There are exceptions. An agreement to buy “all [of a seller’s] hen chickens” would likely be held sufficient, for example,
2. When and where does title pass? Parties can expressly agree to when and under what conditions title will pass. If they do
not, title passes when and where the seller delivers the goods, according to the contractual delivery terms. Under a shipment
contract, a seller is to ship goods by carrier (a trucking company, a railroad), and title passes at the time and place of shipment.
Under a destination contract, a seller is to deliver goods to a specific destination (designated by the buyer), and title passes
3. What title does a buyer acquire from a seller with voidable title? A buyer of goods acquires the title that the seller had or
had the power to transfer, and a buyer of a limited interest acquires rights only to the extent of the interest bought.
Nevertheless, a seller with voidable title can transfer good title to a good faith purchaser for value because an owner cannot
recover goods from a good faith purchaser for value (for example, if a buyer pays for a watch with a bad check and then sells the
watch to an unsuspecting third party, the owner—the original seller—cannot recover the watch from that third party).
4. When does risk of loss pass from seller to buyer? Risk does not necessarily pass with title. The parties can generally
control when risk passes from seller to buyer by agreement (if goods exist and have been identified). Otherwise, risk generally
passes when a seller delivers, or tenders delivery. Under a shipment contract, risk passes when goods are delivered to a carrier.
(Generally, all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the contract.) Under a
destination contract, risk passes when goods are tendered to a buyer at a specified destination. When goods are to be picked
5. For purposes of the entrustment rule, what is “a buyer in the ordinary course of business”? A buyer in the ordinary course
is a person who buys in good faith from a person who deals in goods of that kind. The buyer cannot know that the sale violates
the ownership rights of a third person. (For example, a customer who unknowingly buys another customer’s bike from a bicycle
shop gets good title to the bike against the original owner.) A good faith buyer obtains only those rights held by the person who
entrusted the goods. (In the above example, if the other customer had stolen the bike, the buyer would have acquired title
good only against the thief, not against the original owner.)
6. When does risk pass in a sale on approval? Risk passes in a sale on approval when the buyer accepts the offer.
7. Who bears the risk of loss when a contract is breached? Generally, the party in breach bears the risk. If a seller breaches
494 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
8. When does a buyer have an insurable interest in goods? A buyer has an insurable interest in goods the moment they are
identified to the contract by the seller. (For example, a crop is identified to a contract when it is planted or begins to grow, and
thus, a buyer who contracts in March to buy a crop to be harvested in October obtains an insurable interest in the crop when it
is planted in April.)
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Have students examine standard form contracts to identify risk of loss provisions, insurance provisions, and shipping
terms. Ask them to interpret the terms and determine what a party who signs one of the contracts is agreeing to. Select a sales
order and a purchase order and ask students which form, in a battle of the forms, would prevail. Who would bear the risk of
loss? Who could insure the goods?
2. Ask students to find and read St. Paul Fire and Marine Insurance Co. v. Toman, 351 N.W.2d 146 (S.Dak. 1984). The case
involves the loss by fire of a house recently sold. Briefly, the facts are as follows: James Toman advertised a small house on his
farm for sale. The ad stated that the buyer was to remove the house from Toman’s land, but under terms to be negotiated. On
September 23, Van Collins bought the house. Collins had no immediate plans to remove the house, and no specific time for
removal was discussed. Collins knew before the sale that Toman was still occupying the house on a part-time basis and that it
Have students answer the following questions:
a. Why did the court consider the contract for the sale of the house a contract for a sale of goods (instead of a contract
for a sale of real estate)? St. Paul claimed that the sale of the house was a sale of real property to which the UCC does not
apply. The court pointed out that under UCC 2–107(2) a contract for the sale of “things attached to realty and capable of
severance without material harm thereto . . . is a contract for the sale of goods . . . even though [the subject matter]
forms part of the realty at the time of contracting.”
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d. Did the court conclude that “tender of delivery” of the house had been made? What was the court’s reasoning? The
court concluded that Toman “never made the ‘tender of delivery’ of the house [because] Collins knew that Toman was
occupying the house at least on a part-time basis; he further knew . . . that the removal of the house would have to be
negotiated with Toman.”
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 7: Henry Ganno bought a 12-foot beam weighing 100 pounds at a Lumbermen’s Building Center store in
Fife, Washington. The store put the beam is Ganno’s truck but did not otherwise secure it, as per a sign that stated it was store
policy not to secure loads. On a public street, the beam fell off the truck. As Ganno attempted to retrieve it, another vehicle hit
it, causing it to strike Ganno’s leg and shatter his kneecap. Ganno filed a suit in a Washington state court against Lanoga Corp.,
which owned the store, alleging negligence. The court granted a judgment in Lanoga’s favor. Ganno appealed. In Ganno v.
Lanoga Corp., a state intermediate appellate court affirmed. Under UCC 2–509(3), “where the seller is a merchant, the risk of
loss passes to the buyer on receipt of goods.” Here, Ganno received the beam from Lumbermen’s at its place of business. The
risk of loss passed to Ganno when Lumbermen’s loaded the beam onto his truck
On what basis might it be contended that Ganno, if anyone, was the negligent party in this case? Ganno assumed that
the Lumbermen’s employee secured the beam after loading it into the truck. Ganno did not get out of the truck to check the
security of the load before driving off. Ganno’s reliance on his own false assumption was not due to anything that Lumbermen’s
did. Ganno’s mistaken assumption was the result of his own negligence
Could Ganno successfully argue that Lumbermen’s owed a duty to Ganno as an invitee on Lumbermen’s property? No.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is “risk of loss” under the UCC? Under the UCC, risk of loss is the question of who risks a financial loss if goods are
2. When does risk pass (a) under a shipment contract? Under a shipment contract, risk passes when goods are delivered to a
carrier. (Generally, all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the contract.) (b)
Under a destination contract? Under a destination contract, risk passes when goods are tendered to a buyer at a specified
destination. (c) When the buyer is to pick up the goods and the seller is a merchant? When goods are to be picked up by a
REVIEWING—
TITLE AND RISK OF LOSS
In December Mendoza agreed to buy the broccoli grown on 100 acres of Willow Glen’s 1,000-acre broccoli farm.
The sales contract specified F.O.B. Willow Glen’s field by Falcon Trucking. The broccoli was to be planted in February
and harvested in March of the following year. Ask your students to answer the following questions, using the
information presented in the chapter.
1. At what point is a crop of broccoli identified to the contract under the Uniform Commercial Code? Why is
identification significant? Identification takes place when specific goods are designated as the subject matter of a
2. When does title to the broccoli pass from Willow Glen to Mendoza under the contract terms? Why? Under the
3. Suppose that while in transit, Falcon’s truck overturned and spilled the entire load. Who bears the loss, Mendoza
or Willow Glen? If a seller is required or authorized to ship goods by carrier but is not required to deliver them to a
4. Suppose that instead of buying fresh broccoli, Mendoza had contracted with Willow Glen to purchase one
thousand cases of frozen broccoli from Willow Glen’s processing plant. The highest grade of broccoli is packaged under
the “FreshBest” label, and everything else is packaged under the “FamilyPac” label. Further suppose that although the
contract specified that Mendoza was to receive FreshBest broccoli, Falcon Trucking delivered FamilyPac broccoli to
498 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Mendoza. If Mendoza refuses to accept the broccoli, who bears the loss? According to the contract between Willow
Glen and Mendoza, Willow Glen was required to deliver the FreshBest broccoli to Falcon Trucking, after which the risk
of loss would pass to Mendoza. If Willow Glen delivered the wrong grade of broccoli to Falcon, Willow Glen failed to
perform its obligation and breached the contract. Consequently, Willow Glen would bear the loss, at least until the
defect is cured.
DEBATE THIS:
The distinction between shipment and destination contracts for the purpose of deciding who will bear the risk of
loss should be eliminated in favor of a rule that requires the buyer to always buy insurance for the goods being
shipped. One thing is certain if this rule was put into effect and that is that courts would no longer have to grabble
If buyers always had to buy insurance to cover losses during the shipment of goods they had purchased, buyers
would sometimes pay too much for insurance because sellers might, for example, use carriers with poor accident
records. Moreover, buyers might not be able to insure purchased goods if those buyers had no control over how,
when, and where the good were to be shipped.
ANSWERS TO QUESTIONS—
SPECIAL CASE ANALYSIS
Case No. 20.2
Spray-Tek, Inc. v. Robbins Motor Transportation, Inc.
United States District Court,
Western District of Wisconsin, 2006.
426 F.Supp.2d 875.
(a) Issue: What contract provision was at the heart of the dispute between the parties to this case and why? Spray-
Tek, Inc., contracted with Niro, Inc., for the design and manufacture of a customized dryer for $1,161,500. Niro agreed
to ship the dryer “F.O.B. points of manufacture in the U.S.A.” from its facility in Hudson, Wisconsin, to Spray–Tek’s
facility in Bethlehem, Pennsylvania. Niro arranged for Robbins Motor Transportation, Inc., to pick up, transport, and
CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST 499
until the goods arrive at their destination, at which point the risk and the title to the goods passes to the buyer.
(c) Applying the Rule of Law: How did the court apply this rule to interpret the provision at the center of this case?
The court held that the contract between Spray-Tek and Niro established Spray-Tek as the owner of the dryer when it
was damaged. One provision in the contract provided that Spray-Tek would bear the risk of loss of the dryer after its
delivery to the shipping point if delivery “F.O.B. shipping point” was specified. Another of the contract’s terms of sale
specified “F.O.B. points of manufacture in the U.S.A.” Thus, “[h]ere the shipping point and the manufacturing point
were identical. Accordingly, the F.O.B. points of manufacture language contained within plaintiff’s contract
demonstrates that plaintiff bore the risk of loss once the drying chamber departed from Niro’s Hudson, Wisconsin
facility.”
(d) Conclusion: Did the court resolve the dispute between these parties with respect to determining who suffered the
loss and how much that loss was? Explain. Yes and no. The salient issue was whether a contract that provides for the