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Chapter 21
Title, Risk, and Insurable Interest
INTRODUCTION
Before the Uniform Commercial Code (UCC), title was a central concept in sales law. The party who had title
bore the risk of a loss of goods (and could thus buy insurance against it). It was often difficult to determine when title
passed from seller to buyer, however, and thus which party had title at the time of a loss. The UCC divorced the
question of title from the question of the rights and obligations of buyers, sellers, and others (subsequent purchasers,
creditors). Title remains relevant under the UCC in some situations, and the UCC has rules for locating title.
In most situations, however, the UCC replaces the concept of title with other concepts: identification, risk of
CHAPTER OUTLINE
I. Identification
Before an interest in goods can pass from seller to buyer, the goods must exist, and they must be identified to
the contract [UCC 2–105(2)]. For passage of title, goods must be identified in a way that will distinguish them
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from all similar goods. Identification gives a buyer the right to obtain insurance on goods and the right to
recover from third parties who damage goods. Sometimes, identification allows the buyer to take goods from
the seller.
A. EXISTING GOODS
If a sale involves specific goods already in existence, identification occurs when the contract is made.
B. FUTURE GOODS
If a sale involves unborn animals to be born within twelve months, identification occurs when the animals
ENHANCING YOUR LECTURE—
CONTRACTS WITH FAIR TRADE PRICING
CAN PROMOTE ENVIRONMENTAL SUSTAINABILITY
Most sales contracts have price terms that are mutually agreed to by the buyer and seller. But sales
contracts can do more than that. Thanks to the Fair Trade movement, they can also benefit poor farmers in
developing nations and can promote environmentally sustainable farming practices.
THE FAIR TRADE MOVEMENT
The Fair Trade movement originated during the 1980s. Today, the Fair Trade Labelling Organizations
International determines minimum “fair prices that ensure that small producers can earn a living wage.” It
urges importers to pay these fair prices for the products they obtain.
Under the Fair Trade system, low-income farmers and artisans in developing countries form alliances with
importers and marketers in western Europe and North America. Participants must agree to certain basic
principles:
• Producers must receive a stable minimum price for their products.
• Producers will not use forced or child labor.
• Production methods will be environmentally friendly.
higher costs to their customers:
THE FAIR TRADE SUSTAINABILITY ALLIANCE
The Fair Trade Sustainability Alliance (FairTSA), a nonprofit organization that promotes socially
responsible development in emerging countries, has taken the fair trade concept to another level. FairTSA
attempts to ensure that the community development associated with its work is accountable and sustainable.
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In addition to promoting sustainable development, FairTSA monitors suppliers and certifies those that practice
ethical and accountable supply chain management.
FairTSA will certify a producer of any type of agricultural products. To win certification, a producer must
accept professional standards and be open for audits and inspections:
CRITICAL THINKING
vanilla. Often, showing socially aware customers that a retail outlet is concerned about helping poor people in
Why might marketing managers of large retail companies, particularly grocery chains, want to
purchase Fair Trade products? Increasingly, the buying public in the US and in Europe is willing to pay
C. GOODS THAT ARE PART OF A LARGER MASS
Problems may occur when goods exist in a larger mass, in which case identification can often be made
only by separating the goods from the mass. If owners hold fungible goods in common, title and risk can
pass without separation [UCC 2–105(4)].
CASE SYNOPSIS—
Case 21.1: BMW Group, LLC v. Castle Oil Corp.
BMW Group, LLC ordered No. 4 fuel oil from Castle Oil Corp. BMW paid the retail price for No. 4 fuel oil,
but Castle’s delivered product did not conform to the order—it appeared to have been mixed with waste oil.
Meanwhile, Mid Island L.P. and Carnegie Park Associates, L.P. ordered No. 4 and No. 6 fuel oil from Hess
Corp. but also received a blend containing waste oil. BMW and the other buyers filed a suit in a New York
state court against Castle and Hess, alleging that the defendants had delivered goods of lesser value that did
not meet the standards governing the parties’ contracts. The court dismissed the complaint on the ground that
the plaintiffs did not allege an injury caused by the use of the blended oil. The plaintiffs appealed.
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Notes and Questions
State and federal law allows and encourages the use of certain forms of used oil for fuel in high–
temperature industrial settings and other situations. Should the court in the BMW case have
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complained that the defendants delivered goods of lesser value that did not meet the governing standards
and charged breach of warranty and breach of contract. The court dismissed this complaint on the ground
that it did not allege any injury.
Thus, at the crux of this case were the parties’ contracts and the specific standards that applied to the
goods involved—the definition of heating oil in the Administrative Code of the City of New York, which
incorporated the requirements of the American Society for Testing and Materials, “as well as common
commercial usage, and * * * the UCC.” Any other policy of the state or federal government allowing or
encouraging the use of certain forms of used oil for fuel does not necessarily or automatically justify its use for
purposes of the parties’ contracts, and does not provide a basis for dismissal of the plaintiffs’ complaint.
The defendants did not inform the plaintiffs that the delivered oil was a blend. How does this
affect the ethics of the defendants’ conduct in this case? In certain circumstances, the blending of fuel
oils for the purposes of heating systems is not illegal, and may in fact be encouraged by state or federal
II. When Title Passes
If the parties do not expressly agree to when and under what conditions title passes, it passes at the time and
place at which the seller delivers the goods [UCC 2–401(2)], according to the delivery terms.
A. SHIPMENT AND DESTINATION CONTRACTS
Under a shipment contract, title passes at the time and place of shipment. Under a destination contract,
title passes when goods are tendered at the destination.
B. DELIVERY WITHOUT MOVEMENT OF THE GOODS
1. When a Title Document Is Required
2. When a Title Document Is Not Required
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C. SALES OR LEASES BY NONOWNERS
1. Void Title
If a seller or lessor is a thief, his or her title is void, the buyer or lessee acquires no title, and the
owner can reclaim the goods.
2. Voidable Title
If a seller or lessor obtained goods by fraud; with a check that is later dishonored; on credit, when
the seller or lessor was insolvent; or from a minor, the seller or lessor has voidable title.
a. Good Faith Purchasers
A seller with voidable title can transfer good title to a good faith purchaser for value—and the
b. Voidable Title and Leases
A seller with voidable title can transfer good title to a good faith lessee for value. The owner
3. The Entrustment Rule
Entrusting goods to a merchant who deals in goods of the kind gives the merchant power to
transfer all rights to a buyer or sublessee in the ordinary course of business [UCC 2–403(2), 2A–
305(2)].
CASE SYNOPSIS—
Case 21.2: Lindholm v. Brant
In 1987, Kerstin Lindholm of Greenwich, Connecticut, bought a silkscreen by Andy Warhol titled Red Elvis
from Anders Malmberg, a Swedish art dealer, for $300,000. In 1998, Lindholm loaned Red Elvis to the
Guggenheim Museum in New York City for an exhibition to tour Europe. Peter Brant, one of the museum’s
trustees, believed that Lindholm was the owner. Stellan Holm, a Swedish art dealer, told him, however, that
Malmberg had bought it and would sell it for $2.9 million. Malmberg refused to provide a copy of an invoice
between Lindholm and himself on the ground that such documents normally and customarily are not
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Notes and Questions
action to repossess it.
If the arrangement between Lindholm and Malmberg had been a consignment—that is, if Lindholm
had authorized Malmberg to sell Red Elvis rather than having authorized him only to arrange for its
loan—how would the legal relations among these parties have been different? The UCC views a
consignment as a sale or return subject to UCC 2–326. In that circumstance, if the consignee (Malmberg)
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Passage of Title
Cases involving the passage of title in a sales contract include the following.
• Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880 (N.D.Ill. 2002) (title passed to the
buyer at the time and place at which the seller physically delivered the goods—steel—despite the seller’s
reservation, in their contract, of a security interest in the goods).
• Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., 78 S.W.3d 619 (Tex.App.—Austin 2002) (title to
motor vehicles did not pass to the buyer on the physical delivery of the goods because the parties had agreed
that transfer of title was contingent on the seller’s receipt of payment).
• In re Pro Page Partners, LLC, 270 Bankr. 221 (E.D.Tenn. 2001) (title passed to the buyer at the time and
their contract, of a security interest in the goods).
• Right Touch of Class, Inc. v. Superior Bank, FSB, 536 S.E.2d 181 (Ga.App. 2000) (title to motor vehicle
III. Risk of Loss
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By agreement, parties can generally control when risk of loss passes from seller to buyer.
A. DELIVERY WITH MOVEMENT OF THE GOODS—CARRIER CASES
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1. Shipment Contracts
Under a shipment contract, risk passes when goods are delivered to a carrier [UCC 2–509(1)(a),
2. Destination Contracts
Under a destination contract, risk passes when goods are tendered to a buyer or lessee at the
specified destination [UCC 2–509(1)(b), 2A–219(2)(b)].
CASE SYNOPSIS—
Case 21.3: Person v. Bowman
Tammy Herring and Stacy Bowman signed a document titled “Bill of Sale—Purchase Agreement” that
required Herring to pay $2,200 for a horse named Toby. Until the price was paid in full, the document required
Herring to board Toby at Bowman’s Summit Stables in Puyallup, Wisconsin. Bowman would provide Toby’s
registration papers to Herring only when she paid in full. Before the price was paid, Tammy’s minor daughter,
Alex, was driving a buggy drawn by Toby when the horse reared and threw its passenger Diana Person from
the buggy. To recover for her injuries, Person filed a suit in a Wisconsin state court against Bowman, claiming
that Bowman owned the horse. The court ruled that Herring owned the horse. Person appealed.
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Notes and Questions
terminate the contract if Herring defaulted on the payments.
What did the contract between Herring and the Bowmans require Herring to do? What is the
significance of these provisions? The contract required Herring to keep the horse at the Bowmans’ stable,
make timely payments, and not remove the horse without permission, and it gave the Bowmans the right to
On the issue of liability, in whose favor did the court rule? Why? On the issue of liability, the court
ruled that Herring was liable for Person’s injuries. This ruling was based on the court’s determination that
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What theory of contract interpretation supported the court’s reasoning? The theory of contract
interpretation that supported the court’s reasoning in the Person case was the objective theory of contracts, or
Risk of loss does not necessarily pass with title. If the parties to a contract do not specify when
the risk of loss passes, and the goods are to be delivered without their movement by the seller, when
does the risk pass? If the seller holds the goods and is a merchant, the risk of loss passes to the buyer
Which of these situations existed in this case? Arguably, Stacy Bowman was a merchant, and the
B. DELIVERY WITHOUT MOVEMENT OF THE GOODS
1. Goods Held by the Seller
a. Merchants
If a seller is a merchant, risk passes only on a buyer’s taking possession of the goods. If a
b. Leases
The same rules apply to lessors (or suppliers under finance leases) and lessees [UCC 2A–
219(c)].
2. Goods Held by a Bailee
a. Negotiability of Title Document
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A document of title can be negotiable—in which case its recipient obtains it free of any claims
of the party that issued it. If the document is nonnegotiable, its recipient obtains only those
rights that its transferee had, subject to prior claims.
b. When Risk of Loss Passes
If a bailee holds goods for a seller and the goods are to be delivered without being moved, risk
passes when—
• The buyer receives a negotiable document of title for the goods.
ADDITIONAL BACKGROUND—
Delivery
When a seller, a buyer, and the goods that serve as the subject of their contract are located in the same
city, delivery does not present many problems. The buyer will pick up the goods, or the seller will deliver
them.
In many transactions, however, the seller, the buyer, and the goods are located in different cities.
Most sellers are not in the delivery business. Generally, a seller uses independent, common carriers
(trucking companies, shipping companies, railroads, airlines) to deliver goods. When a carrier receives goods
from a seller, the carrier issues a bill of lading to the seller. On the bill, the seller is usually identified as the
shipper (or consignor) and the buyer is named as the consignee. A bill of lading serves as the seller’s receipt
and as the contract between the seller and the carrier for transportation of the goods.
There are two forms of bills of lading—negotiable bills and nonnegotiable bills. Negotiable bills (or order
bills) are easily recognizable. On a negotiable bill, goods are consigned to the order of a party (usually the
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Most deliveries are made under nonnegotiable bills of lading. A nonnegotiable bill (or straight bill) is also
easily recognizable. Normally, somewhere on the nonnegotiable bill is printed the words “straight bill of
lading.” On a nonnegotiable bill, goods are simply consigned to a party (rather than consigned to the order of
C. CONDITIONAL SALES
1. Sale on Approval
Under a sale on approval, until the buyer accepts, the seller retains title and risk of loss (from
2. Sale or Return
Under a sale or return, when the buyer receives possession of the goods, title and risk pass, and
ADDITIONAL BACKGROUND—
Sale on Approval and Sale or Return Contract Forms
A sale on approval is not a sale until the buyer accepts (approves) the offer. A sale or return is a sale
that can be rescinded by the buyer without liability. The following are forms that a seller might use in one or
the other transaction.
SALE ON APPROVAL
Date:_______________
To:______________________
Buyer
_____________________
Address
To whom it may concern: