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18.5 Summary and Exercises

Summary

Two significant questions lurk in the background of any sale: (1) when does title pass? and (2) who must bear the risk of loss if the goods are destroyed or damaged through no fault of either party?

In general, title passes when the buyer and the seller agree that it passes. If the buyer and the seller fail to specify the time at which title passes, Article 2 lays down four rules: (1) under a shipment contract, title passes when the seller places the goods with the carrier; (2) under a destination contract, title passes when the goods are tendered at the place of delivery; (3) under a contract calling for delivery of documents of title, title passes when the seller tenders documents of title, even if the goods are not physically moved; and (4) when no physical delivery or exchange of documents is called for, title passes when the contract is signed.

The buyer and the seller may also specify who must bear the risk of loss. But if they do not, Article 2 sets out these four rules: (1) when the seller must ship by carrier but not to any particular destination, risk passes to the buyer when the seller delivers the goods to the carrier; (2) when the goods must be transported to a particular destination, risk passes when the carrier tenders them at that destination; (3) if the goods are held by a bailee who has issued a negotiable document of title, risk passes when the buyer receives the document; (4) in other cases, risk of loss turns on whether the seller is a merchant. If he is a merchant, risk passes when the buyer receives the goods; if he is not a merchant, risk passes when the seller tenders the goods. These rules are modified when either of the parties breaches the contract. In general, unless the breach is cured, the risk of uninsured losses lies on the party who breached.

Either party may insure the goods if it has an insurable interest in them. The buyer has an insurable interest in goods identified to the contract—for example, by marking them in some manner. The seller has an insurable interest as long as he retains title or a security interest.

In fixing passage of title and risk of loss, the parties often use shorthand terminology whose meaning must be mastered to make sense of the contract. These terms include F.O.B.; F.A.S.; ex-ship; C.I.F.; C.F.; no arrival, no sale; sale on approval; and sale or return. Use of these terms in a contract can have a significant effect on title and risk of loss.

Sometimes goods are sold by nonowners. A person with voidable title has the power to transfer title to a good-faith purchaser for value. A merchant who deals in particular goods has the power to transfer all rights of one who entrusts to him goods of the kind. And a rightful owner may be estopped by his own acts from asserting title against an innocent purchaser.

Exercises

  1. Betty from Baltimore contracts to purchase one hundred purple llama figurines from Sam of Syracuse. Sam is to send the goods by carrier and is not required to deliver them to Betty’s Boutique, their destination. He ships them by train, which unfortunately crashes in Delaware. All the figurines are destroyed. Whose loss is it? Why?
  2. In Exercise 1, assume that the train did not crash but that Sam’s creditors attempted to seize the goods before their arrival. May the creditors do so? Why?
  3. Hattie’s Head Shop signed a written agreement with the Tangerine Computer Company to supply a Marilyn, a supercomputer with bubble memory, to total up its orders and pay its foreign agents. The contract provided that the computer was to be specially built and that Tangerine would deliver it by carrier to Hattie’s ready to install no later than June 1. Tangerine engineers worked feverishly to comply with the contract terms. On May 25, the computer stood gleaming in Tangerine’s shipping department. That night, before the trucks could depart, a tornado struck the factory and destroyed the computer intended for Hattie’s. Whose loss is it? Why?
  4. In Exercise 3, assume that the tornado did not strike but that Tangerine’s creditors attempted to seize the computer. May they? Why?
  5. On February 18, Clancy, who was in debt, took his stereo to Lucy’s repair shop. Because Lucy and Clancy were old friends, Lucy didn’t give him a receipt. On February 19, hounded by creditors, Clancy sold the stereo on credit to Grover, who was to pick it up on February 21 at Lucy’s, pay Lucy the repair bill, and pay the balance of the purchase price to Clancy. Who is entitled to the radio if, on February 20, Clancy’s creditor appears with the sheriff to seize the stereo from Lucy? Why?
  6. Assume in Exercise 5 that, instead of the attempted seizure of the stereo by the creditor, Lucy’s shop and the stereo are destroyed by fire on February 20. Must Grover still pay Clancy for the stereo? Why?
  7. Cleo’s Close-Outs, a wholesaler of discounted merchandise, offered Randy’s Retailers a chance to buy all the contents of a shipment of bathtub toys just received. Cleo estimated that she had between five hundred and six hundred rubber ducks and wrote on October 21 offering them to Randy for only one dollar each if Randy would pick them up at Cleo’s. Randy received the letter in the mail the next day and mailed his acceptance immediately. In the wee hours of the following morning, October 23, a fire consumed Cleo’s warehouse, melting the ducks into an uneven soup. Assuming that Cleo was a merchant, who bears the loss? Why?
  8. Plaintiff, a manufacturer of men’s clothing in Los Angeles, contracted to sell a variety of clothing items to Defendant, Harrison’s clothing store in Westport, Connecticut, “F.O.B. Los Angeles.” Plaintiff delivered the goods to Trucking Company and received a bill of lading. When the goods arrived at Defendant’s store about two weeks later, Mrs. Harrison, Defendant’s wife, who was in charge of the store at the time, requested the truck driver to deliver the goods inside the door of the shop. The driver refused and ultimately drove away. The goods were lost. Defendant refused to pay for the goods and raised as a defense that “the Plaintiff refused to deliver the merchandise into the Defendant’s place of business.” Who wins and why?Ninth Street East, Ltd. v. Harrison, 259 A.2d 772 (Conn. 1968).
  9. Jackson owned a number of guns and asked his friend Willard, who ran a country store, if Willard would let Jackson display the guns in the store for sale on consignment. Willard would get some compensation for his trouble. Willard agreed. Subsequently Willard’s creditors seized assets of the store, including the guns. Jackson protested that they were his guns, not Willard’s, and that the latter’s creditors should keep their hands off them. Given no other facts, who wins?
  10. Plaintiff advertised his car for sale. Roberts stopped by to look at it. He took it for a short test drive, returned to Plaintiff’s house, and said, “I like it, but my wife needs to look at it before I buy it. I’ll be back in less than half an hour.” Roberts took the car and never returned. Plaintiff called the police, who later found the car in a neighboring state. Defendant had bought it from Roberts, who had presented him with forged registration papers. Plaintiff then sued Defendant to get the car back. Who wins?

Self-Test Questions

  1. In a sale-on-approval contract

    1. the goods are intended primarily for the buyer’s use
    2. the goods are intended primarily for resale
    3. the risk of loss is on the buyer
    4. the buyer obtains title upon receipt of the goods

  2. As a general rule

    1. goods cannot be sold by persons with voidable title
    2. a rightful owner cannot be estopped from asserting title against an innocent purchaser
    3. a merchant cannot transfer the rights of a person who entrusts goods to him
    4. a person with voidable title has the power to transfer title to a good-faith purchaser for value

  3. In general, title passes

    1. to a buyer when the contract is signed
    2. when the buyer and the seller agree that it passes
    3. to a buyer when the seller receives payment for goods
    4. under none of the above conditions

  4. When a destination contract does not specify when title is to pass, it passes

    1. when the goods are shipped
    2. when the contract is signed
    3. when the buyer pays for the goods
    4. when the seller tenders delivery

  5. In a C.I.F. contract

    1. the seller must obtain insurance
    2. the buyer must obtain insurance
    3. the seller has fewer duties than with a C.F. contract
    4. title passes to the buyer when the seller tenders delivery

Self-Test Answers

  1. a
  2. d
  3. b
  4. d
  5. a