12 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
________________________
Seller
________________________
Address
_________________________________________________________________________
SALE OR RETURN
Date:_______________
To:______________________
Buyer
_____________________
Address
To whom it may concern:
Seller
________________________
Address
The goods described on the attached order or invoice no. __ are sent to you for examination or inspection only. The goods remain
the property of the seller and are to be returned to the seller on demand. Title to the goods does not pass until a bill is rendered for their
D. RISK OF LOSS WHEN A SALES OR LEASE CONTRACT IS BREACHED
1. When the Seller or Lessor Breaches
If goods are so nonconforming that a buyer or lessee has the right to reject them, risk of loss will
not pass until—
a. When Acceptance Is Revoked
If a buyer or lessee accepts and later discovers a latent defect, acceptance can be revoked.
b. Leases
Article 2A provides a similar rule for leases [UCC 2A–220(1)(b)].
2. When the Buyer or Lessee Breaches
When a buyer or lessee breaches, the risk immediately shifts to the buyer or lessee—
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 13
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 19, includes a specific (insurance) clause indicating when risk of loss will pass to
the buyer (see annotation 18 to that exhibit).
FOR CRITICAL ANALYSIS
Why would buyers of goods that are to be shipped internationally ever agree to shipment
contracts—which subject them to liability for any loss or damage to the goods while they are in
transit?
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
B. INSURABLE INTEREST OF THE SELLER OR LESSOR
14 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
A seller or lessor has an insurable interest in goods as long as he or she has title. After title passes, a
seller who has a security interest in goods retains an insurable interest [UCC 2–501(2)]. A lessor retains
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 15
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 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 as when ten boxes of copier paper are being sold), and the delivery terms should
simply reflect costs and price. In other circumstances, risk is extremely important (such as when a fragile
CHECKLIST TO DETERMINE THE RISK OF LOSS
The UCC uses a three-part checklist to determine risk of loss:
1. If the contract includes terms allocating risk of loss, those terms are binding and must be applied.
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 explicit agreement, the UCC uses the delivery terms in your contract as a basis for
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
16 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
suffers the loss but is obligated to pay the seller the contract price.
CHECKLIST FOR THE SELLER OR THE BUYER
1. Prior to entering a contract, determine the importance of risk of loss for a given sale.
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.
2. If risk is extremely important, the contract should expressly state the moment risk of loss will pass from
the seller to the buyer. This clause could even provide that risk will not pass until the goods are “delivered,
TEACHING SUGGESTIONS
1. Students have difficulty understanding that title is relatively unimportant under the UCC. Before ex–
plaining that title is important to individuals, but it is of only small importance in determining rights under a
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 con-
3. Ask students to assume that they are buying produce for a supermarket. What different approaches
might they 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,
4. 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
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 17
18 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
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
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
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
4. What is “risk of loss” under the UCC? Under the UCC, risk of loss is the question of who risks a financial loss
5. When does risk pass (a) under a shipment contract? Under a shipment contract, risk passes when goods
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 19
stated in the contract.) (b) Under a destination contract? Under a destination contract, risk passes when goods
6. When does risk pass (a) when the buyer is to pick up the goods and the seller is a merchant? When
the goods. (b) When the buyer is to pick up the goods and the seller is not a merchant? If the seller is a
nonmerchant, risk passes on the seller’s tender of delivery. (c) When a bailee holds the goods? If a bailee holds
7. 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
8. When does risk pass in a sale on approval? Risk passes in a sale on approval when the buyer accepts the
offer. Acceptance can be made expressly, by any act inconsistent with the trial purpose or the seller’s ownership
9. Who bears the risk of loss when a contract is breached? Generally, the party in breach bears the risk. If a
seller breaches by delivering goods so nonconforming that a buyer has the right to reject them fired flags instead of
10. 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
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
20 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
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
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
b. What was the basis for St. Paul’s claim that Toman had no insurable interest in the house? What did
the court say in response to St. Paul’s claim? St. Paul claimed that passage of title to Collins negated any
c. Did the court consider Toman a merchant? What difference did it make? The court concluded that
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]
e. Who did the court decide should bear the cost of the loss of the house? The trial court’s judgment was
affirmed. The state supreme court concluded that although title to the house had passed from Toman to Collins,
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 21
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 2: Timothy Allen commissioned a custom motorcycle from Indy Route 66 Cycles, Inc., based in
Indiana. Indy built it and issued a “Certificate of Origin.” Later, federal law enforcement officers arrested Allen on drug
charges and seized the Indy-made cycle from the garage of Allen’s sister Tena. The government alleged that the
In United States v. 2007 Custom Motorcycle, the court granted the motion to strike. Under UCC 2–401(2)],
“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.” Testimony by Indy’s former vice president Vince Ballard was “inconclusive.” Ballard
implied that Indy delivered the cycle to Allen and asserted that Indy kept it in storage. But the cycle was found in Tena
Allen’s garage. This “strongly indicates that claimant delivered it to Allen.
Is it ethical for the government to seize goods that arguably constitute the proceeds of a crime even if
those goods are not in the possession of the criminal? Yes. Ethics has to do with the fairness, justness,
rightness, or wrongness of action. A crime is illegal and generally unethical—a crime is not fair to its victims, whether
Suppose that Indy had given the “Certificate of Origin” to Allen and had kept the cycle. Would the
result have been different? Possibly not. That goods have not been delivered to the buyer can be determinative that
title has not passed. In the context of this case, however, Indy might still have had to prove its ownership of the cycle.