Note
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Business Law CH21 S2025 LEW
Chapter 21: Risk and Insurable Interest
Definition of Identification
Identification: Express designation of specific goods mentioned in the contract.
Conditions for identification:
Goods must be in existence.
Goods must be identified to the contract.
Rights Granted to Buyers
For the buyer, identification gives two rights:
The right to claim goods from the seller if something goes wrong before delivery.
The right to insure the goods against loss or damage
Future Goods Identification
Rules for identifying future goods:
Unborn Animals: Identification upon conception.
Future Crops:
Crops harvested within twelve months: identified when planted.
If not referenced, when crops begin to grow.
Other Future Goods: When seller designates or ships goods related to the contract.
When title passes
Title passage applies once goods are existent and identified.
Explicit agreement can determine title transfer timing.
If not explicit, title passes at the time of delivery by seller.
Delivery Terms
Shipment Contract: the seller is required to ship the goods by carrier
Title passes when goods are delivered to the carrier; buyer bears risk post-delivery.
Destination Contract: The seller is required to ship the goods by carrier and deliver
Title passes when goods reach specified destination; seller bears risk until delivery.
Delivery without Movement
In cases where no shipping is required:
Title transfer relies on document of title (e.g., Bill of Lading, warehouse receipt).
Title transfers to buyer upon document delivery.
Understanding Title Voids
Void Title: When goods are sold unlawfully (e.g., stolen); no buyer acquires title.
The real owner can reclaim the goods from the buyer.
Voidable Title: Seller has obtained goods via fraud, dishonored checks, or seller insolvency.
Allows transfer to good faith purchasers.
Good Faith Purchaser
Definition: A buyer who acquires goods without knowledge of defects in seller's title.
The original owner normally cannot recover goods from a good faith purchaser for value.
However, if the buyer is not a good faith purchaser for value, the actual owner can reclaim the goods from the buyer or from the seller (if the goods are still in the seller’s possession).
If the transfer occurs by fraud, the transferee acquires a voidable title. A later good faith purchaser for value can acquire good title, and the original owner cannot recover the goods.
Entrustment Rule
The Entrustment Rule means if you give goods to a merchant who sells those types of goods, they can sell them to someone else as part of their normal business and transfer ownership.
The entrustment rule allows innocent buyers to obtain legitimate title to goods purchased from merchants even if the merchants do not have good title.
Risk of Loss
Under the U C C, risk of loss does not necessarily pass with title.
When risk of loss passes from a seller to a buyer is generally determined by the contract between the parties.
Delivery with Movement of Goods
Risk determination in shipment versus destination contracts:
Shipment: Risk shifts upon delivery to carrier.
Destination: Risk shifts when goods are tendered to buyer at specified destination.
Delivery without Movement
buyer picks up or goods are held by a bailee:
Merchant Status: ROL passes to buyer when delivery is completed
Nonmerchant: ROL passes to buyer when seller makes good available and tells the buyer that they are ready for pickup
When a bailee is holding goods that are to be delivered under a contract without being moved, the goods are usually represented by a document of title.
Risk of loss passes to the buyer when one of the following occurs:
The bailee acknowledges the buyer’s right to possess the goods.
The buyer receives a negotiable document of title for the goods (so title passes free of any claims).
The buyer receives a nonnegotiable document of title (so title passes subject to prior claims), and the buyer has had a reasonable time to present the document to the bailee and demand the goods.
Conditional Sales
"Sale on Approval" means the buyer tries out the goods before deciding to buy them. The term "sale" might be misleading because the buyer hasn't committed to buying; they're just testing the goods. The seller still owns the goods during the trial.
Title and risk of loss (from causes beyond the buyer’s control) remain with the seller until the buyer accepts (approves) the offer.
"Sale or Return" means the buyer gets the goods and ownership right away but can return them within a certain time if they choose, even if the goods are as expected. This is more like a typical sale but with a return option.
Risk of Loss When a Sales Contract is Breached
Generally, the party in breach bears the risk of loss.
If Seller Breaches
Risk of loss remains with seller until defects addressed or buyer accepts defects.
Acceptance can be revoked, returning risk to the seller.
If a buyer accepts a shipment of goods and later discovers a defect, acceptance can be revoked.
Revocation allows the buyer to pass the risk of loss back to the seller, at least to the extent that the buyer’s insurance does not cover the loss
If Buyer Breaches
General rule: Risk shifts to buyer immediately upon breach.
Limited by:
The seller must already have identified the contract goods.
The buyer bears the risk for only a commercially reasonable time after the seller has learned of the breach.
The buyer is liable only to the extent of any deficiency in the seller’s insurance coverage.
Insurable Interest
Insurable Interest: Any party purchasing insurance must have a sufficient interest in the insured item to obtain a valid policy. It is a significant property interest allowing insurance against damages.
Buyer: Gains insurable interest in identified goods before title/risk of loss transfer.
Seller: Retains insurable interest with title and still has security interest after title transfer.