The Sales Contract: Transfer of Title and Risk of Loss

CHAPTER 16 The Sales Contract: Transfer of Title and Risk of Loss

KEY POINTS IN THE CHAPTER  If the contract does not specify when title and risk of loss pass from buyer to seller, the courts will refer to the rules set out in Article 2 of the UCC to determine liability. Determining when risk of loss passes is more important than determining when title passes. The rules in this chapter are those found in Article 2 of the UCC. Who suffers the risk of loss (seller or buyer) will depend upon whether the sales contract has been breached at the time of the loss. If a breach has occurred, risk falls on the party committing the breach.  When a merchant sells to a consumer at the merchant’s place of business, risk of loss passes to the buyer when the buyer takes possession of goods; risk of loss passes when the seller has tendered delivery if the seller is not a merchant.  In a sale FOB shipping point (shipment contract), risk of loss passes to the buyer on proper delivery of the goods to an independent (for-hire) carrier. In a sale FOB destination (destination contract), risk of loss passes a reasonable time after the buyer has been notified that the goods are available for pick-up at the destination point.  In a sale on approval, risk of loss and title stay with the seller until the buyer approves. In a sale or return, the buyer takes the risk of loss and assumes ownership at the time of the sale, but has a right to cancel the sale within a specified period of time.  The bulk sales law allows creditors to void a bulk sale (within a six-month period) if the bulk sale buyer does not notify them at least ten days before the sale takes place. The majority of states have repealed Article 6 because modern commercial practices make it difficult for merchants to sell the assets of their business and abscond with the cash they receive.  Auction sales involving goods costing $500 or more must be in writing.  In a cash-only sale, the seller may retain possession of the goods until they are paid for by sending them to the buyer COD.  As a general rule, a purchaser obtains only such title to goods as the seller had. For example, a thief, who does not get any title, cannot pass legal title on to a purchaser. There are two exceptions to this general rule under the UCC: (1) A buyer with a voidable title can legally transfer a valid title to a third party who purchased in good faith and gave value. (2) Any merchant with temporary possession of goods can transfer a valid title to a buyer in the ordinary course of business.

MULTIPLE-CHOICE QUESTIONS Circle the letter of the best answer. 1. Goods that are not in existence and not yet identified are called a. personal goods. b. real goods. c. future goods. d. unsatisfactory goods. 2. Mincer bought an electric saw from Brown’s Hardware Store. Because the saw needed minor adjustments, he left it with the dealer. Risk of loss passed to Mincer when he a. made the agreement. b. picked up the saw. c. felt that the saw was satisfactory. d. accepted the risk of loss. 3. Figmont, of Albany, New York, ordered fifty calculators from Mund Calculator Company, terms FOB Atlanta, Georgia. The calculators were damaged in transit from Atlanta to Albany. Who suffers the loss? a. Figmont. b. Figmont and Mund Calculator equally. c. Figmont suffers 25 percent, and Mund 75 percent. d. Mund Calculator. 4. Lannigan bought an onyx ring and left it with the jeweler to be sized. Before it was sized, Tanzer came into the store to purchase an onyx ring. Because Lannigan’s ring was the only onyx ring Tanzer liked, the jeweler sold it. Can Tanzer keep the ring? a. Yes. A merchant who has temporary possession of goods can transfer a valid title. b. Yes. A merchant who has temporary possession of goods can transfer a voidable title. c. No. A buyer obtains no better title to goods than the seller. d. No. A buyer with a voidable title cannot transfer a valid title. 5. Barnes went to Caines Furniture Store to buy a sofa. The store was sold out but agreed to call the factory and have one made up. This transaction is a. a present sale. b. void. c. a contract to sell. d. a sale of identified goods. 6. If the requirements of the bulk sales law under Article 6 of the UCC are not met, creditors may have the right to declare a bulk sale a. void. b. voidable. c. inadequate. d. performed. 7. Johnson bought a portable radio from Hughes without realizing that the radio was stolen. Johnson received a. a valid title. b. no title. c. a voidable title. d. an informal title.

8. A bill of sale is a. a storage document. b. used in a sale or return. c. written proof of ownership of goods. d. a document that shows a person is keeping goods beyond the approval date. 9. When he bought a new boat, Johnson was given the choice of delivery FOB shipping point or FOB destination. Of these terms, delivery FOB destination is to Johnson’s legal advantage because a. risk of loss passes to him when the boat is delivered to the carrier. b. shipping expenses are paid by the buyer on delivery. c. Johnson will not sustain a loss if the boat is damaged in transit. d. all losses caused by damage to the boat will fall on the carrier. 10. Kimball charged a lamp at the Ames Department Store and asked that it be delivered to her house on the next delivery run. The lamp was damaged while being loaded onto the company’s delivery truck. Which of the following statements best describes Kimball’s legal position? a. The risk of loss has not yet shifted to Kimball, so Ames must bear the loss of the lamp. b. The risk of loss shifted to Kimball at the moment the Ames employees were loading the lamp onto the truck, so Kimball must bear the loss. c. Kimball must accept delivery of the lamp even though it is damaged because she charged it. d. Kimball does not have to pay because the lamp is considered to be future goods.

MATCHING QUESTIONS Use the following terms to identify the phrases below. On the line next to each phrase, write the letter of the term that is most closely related to it. 1. _____ A promise to transfer title to a buyer a. Identified goods at some time in the future b. Sale or return 2. _____ A method of shipping that allows the c. Contract to sell seller to retain possession of the goods until the buyer pays the price d. COD and any delivery charges e. Title 3. _____ Goods to be sold that have been f. FOB selected by the seller and the buyer g. Future goods 4. _____ A sale of goods in which title passes from the seller to the buyer at the h. Sale on approval time the parties make the contract i. Present sale 5. _____ A burden assumed by either the j. Risk of loss buyer or the seller in a sales contract for damage or destruction of the goods

SHORT-ANSWER QUESTIONS Answer each of the following questions in the space provided. 1. What is the importance of identifying goods in a contract? ______2. In determining risk of loss in a sales contract, why is it important to determine whether or not there had been a breach of contract at the time the loss occurred? ______3. List two exceptions to the general rule that a purchaser obtains only such title to the goods as the seller had. ______

CASE PROBLEMS Read the case problems below. For each problem, answer yes or no, and then explain your answer in the space provided. 1. Rogers ordered some electrical equipment from Cobb in Dayton, Ohio. The equipment was shipped to Utica, New York, terms FOB Utica, New York. An accidental fire destroyed the equipment soon after it left Dayton. Must Rogers bear the loss in this case? ______2. Gornig bought a dozen sport shirts from Rock’s Men’s Shop, paid for them, and asked the merchant to hold the shirts in the store until he could pick them up the next day. During the night, a fire destroyed the store and its contents. Gornig demanded his money back, claiming that he had not yet taken physical possession of the shirts. Is Gornig entitled to the money? ______

3. Roman, a consumer, purchased a VCR from a merchant on ten days’ approval. Five days later, the VCR was stolen. Was Roman responsible for the loss? ______4. Otterman purchased an oriental rug in good faith from a house-to-house salesperson. Later he sold the rug to Redstone. Philips proved that the rug had been stolen from her before it was sold to Otterman. Did Philips have a legal claim to the rug? ______5. Klein sold his entire ice cream business—merchandise and equipment—to Hartman. Hurst, a creditor of Klein, sought to have the sale set aside, claiming that as a creditor, he was entitled to notice of the sale. Was Hurst correct? ______6. Tomari, a manufacturer’s representative, and Gould, a real estate agent, entered into a written contract for the sale of Tomari’s minivan to Gould for $8,000 cash. Tomari agreed to tune up the motor on the van, which he did, and on the night of August 1 phoned to tell Gould that the van was ready for pick-up. Upon pick-up, Gould was to make payment. Gould replied to Tomari by saying: “I’ll be there in the morning to pick up the van and to pay you the $8,000.” The next morning, however, Gould held an unexpected meeting with a potential client and decided to pick up the van later in the week. On the night of August 2, the van was destroyed by fire of unknown origin. Neither Tomari nor Gould had any comprehensive insurance (which would have included protection from fire) on the van. Who must bear the loss? ______