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CHAPTER 20
TITLE, RISK, AND INSURABLE INTEREST
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 20.1—QUESTIONS (PAGE 389)
THE ETHICAL DIMENSION
How did the “usual and customary” methods of dealing in the art business help Malmberg deceive the
other parties in this case? What additional steps might those parties have taken to protect themselves
from such deceit? The apparently heavy reliance in the art industry on dealers and their representations
significantly helped Malmberg to deceive all of the parties in this case. As the Connecticut Supreme
Court noted, “in the art industry, it was the ordinary and customary practice that if an individual
regularly worked with a particular art dealer or an art dealer was identified on the identification label of
a loaned work of art, inquiries about an art transaction would be presented to the art dealer rather than
directly to the principal. Buyers ordinarily and customarily relied on representations made by respected
dealers regarding their authority to sell works of art. Purchases and sales of works of art were
documented solely by a single invoice from seller to buyer. It was also ordinary and customary to
proceed with the purchase of valuable works of art without requesting or receiving documentary proof
that the selling dealer had the authority to sell the work of art.”
CASE 20.2—QUESTIONS (PAGE 391)
1A. Would the result have been different if the contract between Spray-Tek and Niro had specified
“F.O.B. Bethlehem, Pennsylvania”? Explain. This provision would have made the contract a destination
contract. Title to the dryer and the risk of its loss or damage would have remained with Niro, the seller,
until the dryer was delivered to Spray-Tek. In that circumstance, the court would likely have ruled in
Robbins’s favor in this case.
2A. One of the elements to establish a carrier’s liability is showing that the goods arrived in damaged
condition. Should Robbins Motor Transportation have been absolved of liability in this case on the
ground that the drying chamber never arrived at its final destination? Why or why not? In fact, Robbins
CASE 20.3—QUESTIONS (PAGE 395)
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that the goods on consignment were not consumer goods but goods owned by a business
enterprise. How would that change in the facts affect the court’s decision? In that situation, Article 9 of
the UCC would come into play, and the rules governing secured transactions would apply—rules that
you will read about in a later chapter. Generally, if the consignor has not filed a financing statement
describing the goods, the creditors of the consignee will have claims to the goods—unless the
consignee’s creditors know that the consignee is engaged in the business of regularly selling the goods
of others on consignment.
THE LEGAL ENVIRONMENT DIMENSION
How does the answer to the question before the court affect the consignors? How the court answered
CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST 173
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Identification
Identification takes place when specific goods are designated as the subject matter of a contract. If a
sale involves crops that are to be harvested within twelve months (or during the next harvest season
occurring after contracting, whichever is longer), identification takes place when the crops are planted
or begin to grow. Identification is significant because it gives the buyer or lessee the right to insure (or to
have an insurable interest in) the goods and the right to recover from third parties who damage the
goods.
2A. Title
3A. Risk of loss
If a seller is required or authorized to ship goods by carrier but is not required to deliver them to a
particular final destination, as under the contract term (“F.O.B. Willow Glen’s field”) in this problem, the
risk of loss passes to the buyer when the goods are duly delivered to the carrier. Thus, Mendoza
assumes the risk when Willow Glen delivers the broccoli to Falcon Trucking.
4A. Breach of contract
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE END OF THE
CHAPTER
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 with trying to determine whether the movement of purchased
174 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
goods involved a shipment or a destination contract. Commerce would become more certain and more
fluid. Buyers would always know that they are responsible for buying insurance on any goods that they
have bought, no matter who is responsible for the shipment and where the goods are to be delivered.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
20-1A. Risk of loss
(Chapter 20—Pages 384–385 & 390)
Neither of Pride’s contentions is correct. Before title and risk of loss can pass from the seller to the
20-2A. QUESTION WITH SAMPLE ANSWER: Risk of loss
There is no question that the suit is in existence and identified to the contract. Nor do the facts indicate
that there was an agreement as to when title or risk of loss would pass. Therefore, these situations deal
with passage of title and risk of loss to goods that are “to be delivered” without physical movement of
20-3A. Sale or return
(Chapter 20—Pages 393–394)
Whether Zeke or Stasio is correct depends upon whether we are dealing with a sale on approval or a
sale or return. If this is a sale on approval, title and risk of loss remain with the seller until the buyer
20-4A. Risk of loss
(Chapter 20—Pages 385 & 390)
The court issued a summary judgment in favor of GMAC. The court explained that under UCC 2–106(1),
“A ‘sale’ consists of the passing of title from the seller to the buyer for a price.” UCC 2–401 provides in
20-5A. CASE PROBLEM WITH SAMPLE ANSWER: The entrustment rule
The court should allow Skaggs to keep the ATV, as the owner with “good” title to it. The principal parties
2–403, to transfer the title to a good faith purchaser for value. Maddox sold the ATV to Jordan, who
transferred it to Skaggs, a good faith purchaser for value. By then, of course, Maddox’s check had been
20-6A. Shipment and destination contracts
176 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
(Chapter 20—Page 385)
A sale, under UCC 2–106(1), is “the passing of title from the seller to the buyer for a price.” Under UCC
2–401(2): “Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the
seller completes his performance with reference to the physical delivery of the goods. . . . If the
contract requires or authorizes the seller to send the goods to the buyer but does not require him to
deliver them at destination, title passes to the buyer at the time and place of shipment.” In this case, the
parties’ contract was signed on September 29 in California and provided for delivery “on the date this
20-7A. A QUESTION OF ETHICS: Void and voidable title
(a) The court reasoned that under the UCC, title can be legally transferred to a good faith
purchaser for value even if the transferor did not have the authority to do so, and held that thus
Roberts, who obtained the car for value and in good faith, retained ownership of it. On West’s appeal, a
UCC 2-403(1) “when goods have been delivered under a transaction of purchase, the purchaser has such
power to transfer good title to a good faith purchaser for value even though the delivery was in
exchange for a check which is later dishonored, or the delivery was procured through fraud.”
Here, “Wilson obtained voidable title to the car despite the fact that he paid with a fraudulent
cashier’s check. As such, Roberts, a subsequent good faith purchaser for value, obtained good title to the
Corvette.”
(b) The Colorado Supreme Court acknowledged that the rule under UCC 2–403 that applied
in this case can result in a loss to an innocent party. “But a determination that West is entitled to
recover the car would also be a determination that Roberts, another innocent party, must relinquish a
CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST 177
vehicle that she purchased in good faith. The policy behind [UCC] 2-403(1) is to protect the party least
able to protect herself-the good faith purchaser for value.
“Where an owner has voluntarily parted with possession of his chattel, even though induced by a
criminal act, a [good faith] purchaser [for value] can acquire good title, under the theory that where one
of two innocent parties must suffer because of the wrongdoing of a third person, the loss must fall on
the party who by his conduct created the circumstances which enabled the third party to perpetuate the
wrong. The original seller is better positioned to take precautions to prevent loss than a later purchaser.
For example, West could have insisted upon cash or ensured that the check would clear before
relinquishing the car and title. On the other hand, to place the onus on the good faith purchaser to fully
investigate every purchase in order to determine whether it originated in fraud would unduly burden
trade.”
West might of course sue “Wilson” to recover.
ANSWER TO VIDEO QUESTION NO. 20–8
Risk of Loss
(a) Does Oscar have a right to refuse the shipment because the lettuce is wilted? Why or
why not? What type of contract is involved in this video? Oscar does not have the right to refuse
the shipment of wilted lettuce because, in the absence of any explicit contract terms to the
contrary, all sales contracts are assumed to be shipment contracts [UCC 2–401(2)(a)]. In the
video, Vinny confirms that the shipping form “doesn’t say anything.” This is therefore a
shipment contract. In a shipment contract, the risk of loss passes from the seller to the buyer on
219(2)(a)]. Here, the seller is an organic farmer who presumably delivered conforming goods
(non-wilted lettuce) to the trucking company. At that moment, title passed to Oscar. Thereafter,
the risk of loss.
(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 deliver conforming goods to the carrier in
order for title and risk of loss to pass to the buyer. If the goods are so nonconforming that the
buyer has a right to reject them, the risk of loss does not pass to the buyer until the defects are
cured [UCC 2–510(2)]. Here, Oscar discovers that the seller must have delivered the wrong type
of lettuce (iceberg instead of organic butter crunch) to the carrier. Because the goods are so
nonconforming, the risk of loss did not pass to Oscar. He will not have to pay for the shipment
because it was the wrong type of lettuce. Even though Oscar already accepted the shipment, he
can revoke his acceptance and pass the risk of loss back to the farmer-seller [UCC 2–510(2)].
(c) Assume that you are in Oscar’s position—that is, you are buying produce for a super-
178 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
market. 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
20-9A. 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 deliver the dryer. In dispute
over recovery for the total loss of the dryer while in transit was the contract provision for delivery
“F.O.B. points of manufacture in the U.S.A.” Because this case involved a suit between Spray-Tek and
Robbins, the question was whether, at the time that the damage occurred, the title and the risk of loss
had passed to Spray-Tek.
(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
CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST 179
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