I9

CHAPTTR
ffitt*nffidffik*fitffi

CHA P TE R O UT T I NE r r inillNG 0BlEcTlvll

66Now, it isof YOU TO
BEABLE
SHOULD
*IDENTIFICATION AFTER READINC CHAPTER,
THIS
moment
gteat OFTITLE
Aruswrn FoLLowlNG
THE QUESTIoNS:
-PASSACE
thatwell'drawn I What is tl'resignificanceof iclentilyinggoodsto a
IR IS KO FL O S S
contract?
lawsshould -INSURABLEINTEREST If the partiesto a contractdo not expresslyagreeon
themselves what determineswhet.r
rl-r.,-tiitle to gooclsPasses,
allthe
define title passes?

they
points Risk of lossdoesnot necessarilypasswitl-rtitle lf tl're
partiesto a contractdo not expresslyagreewher.rrisk
can
possibly p"rr., tfie goodsare to be delivereclwiti-rout
"nd by the seller,wirerl doesrisk p:rss?
andleaveasfew movement

asmaybetothe Unclerwhat circuurstances will the seller'stitle to

gooclsbeing be
solcl voicl?Wher-r cloesa sellerhave
ofthe
decision voiclabletitle?
?
judges.l l
At what point cloesthe br-ryerarcquirean insurable
Ari*otlc,38'1-322 I
tr.c:.t interestin gooclssubiectto a salescorltr:ict?Cern
( C r c c kp h i l o s o P l rcr )
both the bJryeraud tl-reseller have an insurable
interestin the goodssimultaneously?

from the selierto the

s;rleof gooclstransfersownershiprigl'rtsin (title to) the goods
lruy"r. bf,.", a salescontract it siittttl before the acttral goods
": llllllt:^"tlj
butthe orangesmay notbe
example,arsalescontrer.tfo,orr,rg.r r-r-rigiib.signeclirt.May,
,.rffi" pi.fir-rganclshipment thingstai] 1t:lry:l:::y:::
rl,ltitOiobtr' Arlynumberof
a'rclthetimethe are
goods actuallv i.to
tra.sferrecl
;ffi;; ii;;;l?;;;'.ir^'.i rr signed
oranges
tl.rebuyer'spossession. F ire, floid, or frost n-raydestroythe orangegroves'or the
o,cctirunder a leasecontract'
,r.iryfrJ iost or clarragedin transit.The sameproblen'rs'rray
g.;rr,r" of thesepoirlbiliU.r, it is importar-itto know the rights and liabilities of the par-
gooclsare actually received
ties betweenthe tirne the contract is ftrn-ied anclthe tin-iethe
bv the buyer or lessee.
(UCC), title-the right of own-
Beforethe creationof tl-reUniform Comnercial Code
all issuesof rightsand.remcdtes
.rrhif -*^. the centralconceptin saleslaw, co.trolling
titl; is still relevantunder the UCC'
niti-ri prrti., to a salescontraci. In some situations,
for cleterminingwho has title. Tl-rese ruleswill be discussed
and tl'reUCC l-iasspecialrr,rles
454mffi i' the sectionsthai follow. In most situationf however, the tlCC l-rasreplacedthe con-
CONTRACTS
ANDLEASE
SALES
 455
EIEEU
TITLE
ANDRISK
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ceptof title with threeother concepts:(l) identification,(2) risk of loss,and (3) ir-rsurable
interest.By breaking down ihe transferof ownership into these three components,the
draftersof the UCC l-iaveessentiallyfollowed Aristotle'sadvice in the chapter-opening
qr-rotationanclcreatedgreaterprecisionin the law governingsales-leavir-rgas few points
of law as possible"to the decisionof the jr-rdges."
In leasecontracts,of course,the lessor-owner of the goodsretainstitle. Hence, the
UCC's provisionsrelatingto passageof title do not apply to leasedgoods.Other concepts
discussedin this chapter,thougl-r,ir-rcludingider-rtification,
risk of loss,anclinsurableinter-
est,relate to leasecontractsas well as to salescontracts.

in specificgooclscan passfron the seller or lessorto the buyer or les-

Beforeany ir-rterest
see,the goodsmlrstbe (1) in existenceand (2) identifiedasthe specificgoodsdesignated
in the contract,Identification takesplace when specificgoodsare designatedas the sub- rDENnFtcAnoN
iect matter of a salesor leasecontract. Title and risk of loss cannot passfrom seiler to In a saleof goods,
theexpress
I r ,r r r ,.r . r , ,r , , | ,. r,.,1^r^r^-^^r_^^r^ desi gnati onofthegoodsprovi ded
Dlly er ull t e S S t l l e g o o ( 1 5 ar e lo e n tllle o to tlle co n Ua Ct. tn S l l l el l tl ol l eC . tl tl e to l ease0 goo0s for i i the contract.
remainswith tlie lessor-or, if the owneris a third party,with tl-iatparty.The lesseedoes
not acquiretitle to leasedgoods.)Identificationis significantbecauseit givesthe buyeror
lesseethe rigl'rtto insure (or to have an insurableinterestin) tlie goodsand the right to
recoverfroni thircl partieswho damagethe goocls.
In their contract,the partiescan agreeon when identificationwill takeplace,but iden-
tificatiorris effectiveto passtitle and risk of lossto the br-ryeroriy after tl-iegoodszrrecon-
to be in existence.If the partiesdo r-rotso specifr,however,the UCC provisions
'iclerecl
discrrssed lreredeterminewhen iclentification takesplace IUCC 2-501(l\.2A=2171.

Exi st ing
G oods
Iithe contractcallsfor the saleor leaseofspecificand ascertainedgoodsthat are alreadyin
eristence,ider-rtification
takesplaceat the time the cor-itract is made.For example,yoll con-
fractto purchaseor lease a fleet of five carsby the vel-iicle
identificationnurrbersof the cars.

F uturG
e oods
If a saleinvolvesunborn animalsto be born within tlvelvemonths after contracting,iden-
Sticationtakesplace when the animalsare conceived.If a leaseinvolvesany unborn ani-
mals,iclentificationoccurswhen the animalsare conceived.If a saleinvolvescropsthat are
:o be harvestedwithin hvelvemonths (or the next harvestseasonoccurring after contract-
ing, whicheveris longer),iclentificationtakesplacewhen the cropsare pianted;otherwise,
identificationtakesplace wl-renthey begin to grow. In a saleor leaseof any other ftrture
:oods, identificationoccurswhen the goodsare shipped,marked,or otherwisedesignated
rv the selleror lessoras the goodsto which the contractrefers.

Go ods t f a L a r g eM
ThatA rePa r o r ass FUNCIBLE GOODS
Goodsthat arealikeby physical
\' a generalrr-rle,goodsthat are part of a larger massare identified when the goodsare nature,by agreement, or by trade
usage (for example,whea! oil, and
-rarked,shipped,or somehowdesignatedby the selleror lessoras the particulargoods wine that are identicalin typeand
::,at are the subjectof the contra61.lrExnnnpLrTg.ll A buyer orders1,000casesof beans quality).Whenownersof fungible
: ,m a 10,000-case the 1,000casesof beansfrom the 10,000- goodshold the goodsas tenants
lot. Until the sellerseparates
in common,title and riskcan pass
-,:.elot, title and risk of lossremain with the seller.E withoutactuallyseparatingthe
\ common exceptionto tl-risrule involvesfungible goods.Fungible goods are goods goodsbeingsoldfrom the mass
::,at are alike by physicalnature, by agreement,or by trade usage.Typical examplesare of fungiblegoods.
456I@
ANDLEASE
SALES CONTRACTS
SHIPMENT CONTRACT
A contractfor the saleof goods
in whichthe selleris required or
authorized to shipthe goodsby
canier.Thesellerassumes liability
for
any lossesor damageto the goods
untilthey are deliveredto the canier.
DESTINATION CONTRACT
A contractfor the saleof goods
in whichthe selleris required or
authorized to shipthe goodsby
carrierand tenderdeliveryof the
goodsat a particulardestination" The
sellerassumes for anylosses
liability
or damageto the goodsuntilthey
aretenderedat the destination
soecifiedin the contract.
DOCUMENT OFTITTE
A paperexchanged in the regular
courseof business that evidences
the rightto possession of goods
(forexample, a billof ladingor a
warehousereceipt).
specificgradesor typesofwheat, oil, and rvine,usuallystoredin largecontainers.Ifthese
goodsare held or intended to be held by ownersas tenantsin cotnnlon (ownershaving
fointiy orvnedsharesundivided frorn tl'reentire mass),a seller-ownercalt Passtitle ar-rdrisk
of lossto the buyer witl'ror-rt an actualseparation.The buyer replacesthe sellerasan owner
i n c o m m o n | U CC 2-105(4)1.
lrExAMptE-r9:1 Aivarcz, Brauclel,and Carpenterare farmers.They deposit,resPec-
tively, 5,000br-rshels, 3,000busl'rels, and 2,000 bushelsof grain of the samegradeand
quality in a grain elevator. 'fhe tl'rreebecorne ownersin coinnton, with Alvarez owning
50 percentof the 10,000bushels, Braudel 30 percer-rt, 20 percent.Alvarez
and Carper-rter
contractsto sell her 5,000 br-rshels of grain to Tamtrr;because the goods arc fungible,she
can passtitle and risk of loss to Tarnur without physicallyseparatingtlie 5,000bushels.
Tamur now becomesan owner in comrnon with Braudei:rnd Carpenter. E
Olce goodsexistand are identified,the provisionsof UCC 2-401 apply to the passage of
of UCC
titie. In virtuallyall subsectior-is Z-40I,the words "unless otherwise cxplicitlyagreed"
21ppear, ilreaningthat anyexplicitunderstar-rding behveenthe buyerand the sellertleterrnines
wher"rtitle passes. Without an expiicit agreemcnt to the cor-rtrary,title passesto the buyer at
the time and the place the sellerperforms by delivering the goocls IUCC 2-401(2)]. Fbr
cxarrple, if a persor.r buys cattle:rt a livestockauction, title will pass to the buyer when the
c:lttlcare physicallydelivereclto hirn or her (unless,of cottrse, the parties agreeotl-icrwise).1
Co
t De stin a tio
S h i p m eannd n n tr a cts
Unlessotherwiseagreecl,deliveryarrangenentscan determitrer'vhentitle p:rsses froin the
seller to the buyer. hi a shipment contract, the seller is requireclor atrtirorizeclto ship
goodsby carrier,such as a tmcking colrpany. Under a shipmerttcotthalct,the selleris
s to
reqrrireclorly to cleliverconforming gooclsinto the hanclsof a c:rrrier,ancl title P2lsse
thc brryerat the tinre erncl placeof shipn'rent] UCC 2-401(2)(a)l Gencrally,all contracts
are asstLnted to be shipntentcontractsif nothingto tlrc contraryis statedin the contract.
In a destinationcontract, the selleris requiredto cleliverthe gooclsto a particularclesti-
nation,usr,rally clirectlyto the buyer,but sorletirnesto anotherpartydesignatedby the br-rycr.
Title persses to the buyerwhen tl'regooclsaretenderedat that clestinatiorIUCC 2-401(2)(b)1.
As yorrwill ieacliii Chapter 20,tenderof deliveryoccnrswhen the sellerplacesor holdscon-
forming goodsat the buyer'sdisposal(with any necessnry notice),enablingthe buyerto take
p o s s e s s i oIUrrC C 2-503(l )l .
t o ve m eonftth eGo o d s
D e l i v e rwyi th o uM
When ihe salescontractdoesnot call for the sellerto ship or delivcr the goods(when the
buyer is to pick up the goods),the passage of title clependson whetherthe sellermust
deliver a document of title, such as a bill of lading or a warehousereceipt,to tl-iebuyer.
Abilt of laditzgis a receiptfor gooclstirat is signedby a carrier and servesas a contractfor
the transportatior-r of the goods.A warehousereceiptis a receipt issuedby a warehouserfor
goodsstoreclin a warehouse.
Wlren a clocurnentof title is required, title passesto the buyer when and wherethe
documentis deliyered.Thus, if the goods are stored in a warehouse,title passesto tlie
buyer when the appropriate documents are delivered to the br-ryer.The goods never
nove. In fact, the buyer can chooseto leavethe goodsat the sarnewarehousefor a period
of tin're,anclthe buyer'stitle to thosegoodswill be unaffected.
l. See,for example,In re Stewart,274BankL.503 (W.D.Ark.2002)
 457EUqEtr
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\\'hen no documents of title are required and delivery is made without rnoving the
:oods, title passesat the time and place the salescontractis made, if the goodshave
-:lreadvbeen identified. If the goodshave not been identified, title does not passuntil
:ientificationoccurs.ITEXAMPLE te'rl Juansellslumber to Boclan.'l'heyagreethat Bodan
:iill pick up the lumber at the lulnberyard.If the lumber l'rasbeer-r identified(segregated,
narked, or in any other way distinguishedfrom all other lurnber), title passesto Bodan
-.,,henthe contract is signed.If the lumber is still in large storagebins at the lumberyard,
:tle doesnot passto Bodanr-rntilthe particularpiecesof lumber to be soldunderthis con-
:act are identifiedIUCC Z-401(3)].E

s leas es
Sal eor by N o n o w n e r s
Problemsoccur when persol-ls who acquire goodswith imperfecttitles attempt to sell or
.easethen'r.Sections2-402 and 2-401 of the UCC clealwith the rishts of two partieswho
-.ri clairn to tlte sautegoods.soldwith imperfecttitles.Gerrerally.
. lr,ry"rr.q,iir., at least
',,.hatevertitle the seller has to the eoodssold.
The UCC also protects, p"rroit who leasessuch goodsfron'i tl'rebuyer. Of collrse,a
iesseedoesnot acquirewhatevertitle the lessorhasto the goocls. A lesseeacqtrires a right
:o possessancl use the goocls-that is, a leaseholdinterest.A lesseeacquireswhatever
leaseholdinterestthe lessorl'rasor hasthe powerto transfer,strbjectto the leasecontract
L'CC2A-303,2A-)04,2L70rl.
\bid Title A buyer tnay unknowinglypurchasegoodsfrorn a sellerwho is not the owner
of the goods.If the selleris a thief, the seller'stitle is vold-legally, no title exists.Thus,
the buyer acquiresno title, anclthe real owner can reclaim the goodsfrom the buyer. If
Two freight trains collided
the goodswere only leased,the sameresultwould occur becausethe lessorhasno lease-
head-on and deroiled neor Modera.
hold irrterestto transfer Colifornio. One of the troins
Fn-fivtPlE1ed If Saki stealsdiamondsowneclby Maren, Saki has a void title to those was corrying cement from San
diamonds. If Saki sells tl-re clian-rondsto Shannon, Maren can reclaim them from Bernardino to the Bay Area, and the
Shannon even though Shannon acted in good faith and honestlywas not awarethat the other wos toking oil from Richmond
goodswerestoler-r. E (Article2A containssimilarprovisionsfor leases.) to Borstow How would o court
decide who held title to the goods
\bidable Title A sellerhasvoidabletitle if thegoodsthat sheor he is sellingwereobtained ot the time they were destroyed?
bi'fraud, paid for with a check that is later dishonored,pr-rrchased from a minor, or pur- (AP Photo/EricPaulZamora/
chasedor-rcredit when the seller was insolvent.(Under the UCC, a person is insolvent tne rresnoBeel
ri'henthat personceases to "pay his lor her] debtsin tl-reordinarycourseof businessor can-
INSOTVENT
not pay his [or her] debtsasthey becomedue or is insolver-rt within the meaningof federal Underthe UniformCommercial
bankruptcylaw" IUCC l-201(23)].) Code,Section1-201(23),a term
a personwho ceasesto
describing
pay"his [or her]debtsin the ordinary
Good Faith Purchaserc. In contrastto a sellerwith vold title, a sellerwith voidabletitle
courseof business or cannotpayhis
has the power to transfergood title to a good faith purchaserfor value. A good faith [or her]debtsasthey becomedue or
purchaser is one who buys without knowledgeof circumstancesthat would make a per- is insolventwithinthe meaningof
son of ordinary pruder-rceinquire abor-rtthe validity of the seller'stitle to the goods.One federalbankruptcy law."
GOODFAITHPURCHASER
who purchasesfor talue giveslegaily sufficient consideratioir(value) for the goodspur- A purchaser who buyswithoutnotice
chased.The real, or original, owner cannot recovergoodsfrom a good faith purchaserfor of anvcircumstance that would cause
value IUCC 2-403(])1.2Ifthe buyer of the goodsis not a goodfaith purchaserfor value, a personof ordinaryprudenceto
inouireasto whetherthe sellerhas
then the actual owner of the goodscan reclaim them from the br-ryer(or from the seller, validtitle to the goodsbeingsold.
if the goodsare still in the seller'spossession).
The disputein the following casearosefrom the transferof a car without its docurnent
of title to a third party who never suspectedthat the seller would turn or-rtto be a thief.

2. The real ownercould,of course,suethe personwho initiallyobtainedvoidabletitle to the goods

458
llNtrIm
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SALES CONTRACTS

SuperiorCourt,897 A.2d 1247 (2006)'

Pennsylvania

Eurorefusedto deliverthe documentof title.

ANDFACTS Consequently,
BACKGROUND
In Julv2001,EuroMotorcars, an Figueroawas convictedof stealingthe checkand paid Banc
auto dealershipin Bethesda, Maryland, agreed to sella used EmpireFireand Marinelnsurance
$1o.oooin restitution.
2000 Mercedes-Benz 5430for $56,500to an intermediary Company, Banc'sinsurer, state
filed a suit in a Pennsylvania
PatrickFigueroa,whosejob was to buy and sellcarsamong courtagainstBancand Euro,askingthe courtto determine
dealers.The partiesunderstood that Eurowould turn overa Empire'sobligationto its insured.Thecourtorderedthe
documentof titleto the Mercedes when the pricewas paid. Mercedes to be soldand awardedBancthe $40,000in
BancAuto,Inc.,a dealerin Manheim,Pennsylvania, agreedto proceeds.Euroappealedto a stateintermediate appellate
buy the carfrom Figueroa for $56,500, plus a percentage of that Bancwas not entitledto the funds
court,asserting
the vehicle.Banc
Banc'sprofitin reselling issued a checkto becauseEurostillpossessed the documentof title.
Figueroa.Figueroa cashedthe checkbut did not pay Euro.

. . . opinion
0F THECOURT
l N T H EWO R D S 'p u d g e l:
b y K L E IJN,

{c * x llt order to possess voiclablctitle, one rr.nrstobtain gooclsthrough the assentof

the original owncr, but not necessarily acquire good title. Void title, or.rthe otirer l.rancl,
clerivesfron'ra sitnation where tl.re goods were not obtair-red through the assentof the orig-
i1al owner.In comrnon :rpplication, this means if goods are stolenand resold,no good
title can be tr:rnsferrccl because tlie thicf has never hacl proper title to the gooclsand so
canrrotpassgoocl title to another. However, if the goods are obtained throtLghthe consent-
of tlrc oiigittil owner, even though that original owner mdy have been fraudulentlyinduced
to part with the goods, title is nterely voidahle and a btLyer in good faith may still obtain title
to the goods.f Empliasis added. I
liuro's clainr herc is essentiallythat it still helcl legal ownersi'iipof the c:rr becaruse it
still held title to the car, nevcr l.r:rving transferrecl that title to either Figuerozr or any other
entity. x * *
* * * Iiuro propositionthat to owr-t,:tncl thereforeliavethe ability
fciteslthe generzrl
to the autouobile. * * * We have
to clispose of, an autorrobile, zr pcrson must have title
no argurnentwith the gcnerzrlpropositionput forth by Euro; certerinlytitle to a vehicle
eventuallymust be transferrecl to the new owner.Rather,it is in the applic:itionof the ger-i-
eral principle to the spccific facts of this matter where Euro rttns afottl.
* * * While the Comrnerci:rl] Code doesnot specifically;rlterthe notion
fUniform
that title is an irrportant factor in determinir-rg ownership,it did alter trotionsof how and
when title passes fiom seller to purchaser.
Regarclingthe por,verto transfer,l3 lPennsylvania Cor-rsolidated Statutes(Pa.C.S.)
Section] 2403 fPennsylvani:r's version of UCC 2-+031 states, in relevant part:

(a)A purchaser ofgoocls acqLrires all titlewhich]ristralsferorhaclor hadpowerto transfer except

thata purchaser of a limite d interest, acqr.rires rights only to the extent of the interestpurchased.
A persorwith voidabletitle hasporverto transfera goocltitleto a goodfaithpurchaser for v:rlue.
Whengoodshavebecndelivered undera tr:rnsaction of purch:rse thepurchaser hassuchpower
eventhough:
(1) thetransferor wasdeceived asto the identityofthe ptrrchaser;
(2) the deliveryrvasir-rexchange for a checkwhicli is laterclishonored; or
(,1)the deliverl,rvasprocuredthroughfraudpunishable aslarcenous underthe criminallar'v.
(b) Any entmstingof possession of goocls to a merchantwho dealsin goodsof that kind gives
hin-rthepowerto transfer all rights of tl-reentruster to a buyerin the orclinary courseof business.
 459
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t9. l- Cont inued

CASE

The Code fr,rrtherdescribesthe passingof title in Section 2401(2):

explicitlyagreedtitle passes
t.lnlessotl.rerwise to the buyerat the tir.r.re
and placeat r'vl.rich
the
sellercompletes his perfonnance rvith reference to the physicalclelivery of the goods,x x x
eventhougha clocument tin-reanclplace* * *
of title is to be deliveredat a clifferent

Readingthesesectionsof the Cocle together,it is apparentthat Euro transferred,at a

nrinimurn, voidabletitle to Figr-reroa when it deliveredthe Mercedcsto l'riur pursuantto
iheir salesagreement.The fact that Euro clairnsto have been cleceivecl as to the r-rltimate
Drlrchaseris irnrnaterial,as is any contention that Figueroa obtained the car througl'ra
iaud whicl-rwaspunishableunder the crirninallaw.Once Euro volur-rtarily delivcreclthe
;.rr to Figueroa,Figueroaobtair-recl the title, despiterot liavirg any documentof title, and
'.r;rsfree to disposeof the car to a buyer in good faith. Tl'rus,Iiuro's argurnentthat itwas
.till the legalownerof the car fails.
* xxx
* * *( A bona
fide purchaser[isl one wlrc buys sontethingfor value without notice of
:nother's claim and withor-Ltactual or constrtLctive notice of any defect in title. * x *
u)enerally,a bona fide purchaser'srights to the propertyare not affectedby the transferor's
*aud againsta tltird party. I'h.ere is no evidencethat Banc Auto ever acteclin any way
,therthan honestlyconcerningthis trans:rction, nor is there any eviclenceto show that
Bancshouldhavebeen in arryway suspicious of this tr:rnsaction
asopposeclto the niyriad
arlong
.f otlier similartransactior.rs
f thesepartiesl. f Enrphasis added.I

ANDREMEDY
DECISI0N rnestate
intermediate FORCRITICAI.
ANATYSIS- EthicaI
appellatecourtheldthat Eurohad transferred voidabletitle to COnSideratiOn GiventhatEuroMotorcars
hod
fie Mercedes to Figueroawhen Eurogavethe carto him. had prior dealings with Figueroaon a number of occasions
Thus,Euro'spossession of the documentof title had no effect and did not suspectthat Figueroawould commit theft, was the
on Banc'saward.Thecourtaffirmedthe lowercourt'srulingin result in this cosefoir? Why or why not?
Banc'sfavor.

Yoidable Title and Leases. 'l-he same rules apply in circurrstancesinvolving leases.A
.:)sor with voidabletitle hasthe power to transfera valid leaseholdinterestto a good faith
,r-:seefor value.The real owner cannot recovertlie goocls,exceptasperrriittedby the terrns
.f the lease.The real owner can, however,receiveall proceedsarisingfrorn the lease,as
'..tll as a transferof all rights, title, and inierest as lessorunder the lease,including the
..ssor'sinterestin the retr:rnof the goodswhen the leaseexpiresIUCC 2A-305(1)].

The Entrustment Rule According to UCC 2-40)(2), entrusting goodsto a merchant

',.ho deals in goodsof that kind givesthe rr-ierchantthe power to transferall rights to a
of buslnass.This is known as tl-reentrustment rule. A buyer ENTRUSTMENT
:'tler in the ordinary cotLrse RULE
Code
::'ithe ordinarycourseof businessis a personwho-in goodfaith and without knowledge Underthe UniformCommercial
Section2-403(2),a rulestatingthat
:lat the saleviolatesthe rigl'rtsof another party-buys goodsin the ordinary coursefrom if goodsare entrustedto a merchant
, merchant(otherthan a pawnbroker)in the businessof sellinggoodsof that kind f UCC who dealsin goodsof that kind,the
,-r01(e)l merchanthasthe oowerto transfer
thosegoodsand all rightsto them to
The entrustmer-rtrule basically allows innocent br-ryersto obtain legitiniate title to a buyerin the ordinarycourseof
purchased from merchants even if the n-ierchantsdo not have good title. business.
-lods
TExAMPIE trE Janleavesher watchwith a jewelerto be repaired.The jewelersellsboth
leu' and usedwatches.The jewelersells|an'swatch to Kim, a customerwho doesnot
460
lw
ANDLEASE
SALES CONTRACTS

EEMsEl Thepurposeof holding
mostgoodsin inventoryis to turn
thosegoodsinto cashbYselling
them.Thatis one of the reasons
for the entrustmentrule.
kr-rowthat the jeweler has no rigtrt to sell it. Kirn, as a good faith buyer, getsgoocltitle
j
againstJan'sclaim of ownership.
Note, however,that Kim obtains only those rights held by the person entrustingthe
goocls(here,far-r).Supposeinsteadthat fan had stolentl'ie watch fron'rGreg and tiren left
itv,,itl-rth" jewelerto be repaired.The jewelerthen sold it to Kim. Kirn wor-rldobtain good
title againstJan, who entrustedthe watcl-rto tl-rejeweler,br,rtnot againstGreg (the real
o*rr.f , who neither er-rtrusted the watch to Jan nor authorizedJar-rto entrustit. E
Red Elyis,an artworkby Andy Warhol, wasat the center of the disputeover title in the
followinecase.

to personalpropcrty)to obtaindamages
3. Jan,of course,c:rnsuc the jervelerfor the tort of conversion(or trespass
ecpivalentto the cashvalueofthe watch(seeChapter4).

lindholmv,Brant
SuDremeCourtof Connecticut,283 Conn.65, 925 A.2d 1048 (2007).

to search
AND FACTS hiredanattorney
BACKGRQUND (an
theArtLossRegister
ln 1987.KerstinLindholmof databaseof stolenand missingartworks)and
international
Greenwich,Connecticut, bought a silkscreen by AndyWarhol other sources.No problemswere found,but Brantwas
art dealer,for cautioned thatthis providedonly"minimalassurances."Brant's
titled RedElvisftom AndersMalmberg, a Swedish
to the attorneydrafteda formalcontract,which conditionedpayment
$30o,ooo.In 1998,Lindholm loaned Red E/ws
Cuggenheim Museumin NewYorkCityfor an exhibition to tour on the deliveryof RedElvisto a warehousein Denmark'The
Europe.PeterBrant,who was on the museum's board of exchangetook placein April2ooo.aLindholmfiled a suit in a
trusteesand alsoa Creenwich resident, believed that Lindholm Connecticut statecourtagainstBrant,allegingconversion,
wasthe owner.StellanHolm, a Swedish art dealer who had amongotherthings.Thecourtissueda judgmentin Brant's
works with Brant, told him, favor.Lindholmappealedto the Connecticut SupremeCourt.
boughtand sold otherWarhol
however,that Malmberghad bought it and would sell it for $2.9
Brant's
rerused
Malmberg
minion. request toprovide acopy or L li::Tffi::'ff.:?fl"ill,Li;:H,ffi:tJ:',i
f:,n"n:ilfli:l'i;t#'
and himself
an invoicebehrueenLindholm on the ground that Lindholm comptaint
fileda criminal Malmberg
against In 2003,a
in sweden.
such documents normally and customarily are not disclosed in swedishcourtconvictedMalmberg court
of "grossfraudembezzlementl'The
art deals. To determine whether Malmberg had good title, Brant awardedLindholm $4.6millionandotherrelief.

lN THEW0RDS0F THEC0URT. . . suLLtvAN,J.

[lustice]

* x x "A personbuys goodsin the ordinary courseif the saleto tl-repersorrcomports

witl'r the ,rsdal or customarypracticesin the kind of businessin which the seller is
* * *" to-
er-rgagedor with tl-ie seller's own usnal or cnstomary practices ].accorclir-rg
Connecticut General StatutesAnr-rotatedSection 42a-l-20I(9), Connecticut's version of
L IC C 1 -2 0 1 (9 )l .A personbuysgoodshgoodfai thi therei
f s" l nnestyi nfacta ndt heobser -
vanceof reasonablecommercialstandardsof fair dealing" in the conductor transrrctioncon-
cerned[underSection42a'1-201(20)J. lEmphasisadded'I
We are required,therefore,to determinewhether the defendantfollowed the usual or
ctrstonarypracticesand observedreasonablecommercial star-idards of fair dealing ir-rthe
x * * The defendantpresenteclexperttesti-
art indr-rstryin his clealingswith Malmberg.
rrony th:rt the vastrnajorityof art transactions,in which the buyer has no reasollfor con-
cern aboutthe seller'sability-toconveygoodtitle, are "completedon a handshakeand an
exchangeof an invoice." It is not customaryfor sophisticatedbuyersar-rrlsellersto obtain
a sigr-redinvoice from the origir-ialseller to the dealer prior to a transaction,nor is it an
ordi,raryor customarypractice to requestthe underlying invoice or corroboratinginfor-
matiorrasto a dealer'sauthority to conveytitle. Moreover,it is not cttstonarl to approach
 46rE@
TITLE
ANDRISK
OFIOSS

1 9. 2- Cont inued
C ASE

:1'r ou'nerof an arhvorkif the owrier regularlyworked with a particularart dealerbecause

,rv inquiriesabout an art transactioncustomarilyare presentedto the art dealerrather
,i-'andirectly to the fownerl. It is customaryto rely upon representations
made by respected
j;alers regardingtheir authority to sell worksof art. A dealercr-rstomarily
is not reqr-rired
to
::esent an invoice establisirinewhen and from whom he boueht tl-rearhvorkor the con-
j.ti o rs o f lhe pr r r c has e.
, Emp l ra s ias d d e dI.
\\'e are compelleclto conclude, however,that the sale from Malmberg to the defen-
l-rnt nas unlike tl-revastrnajorityof art transactions. * * * Under snch crrcurnstances, a
..:ndshakeand an exchangeofinvoice is not sufficientto conferstatusas a buyer in the
rclinarycourse. * * *

* * x A merchantbuyer I'rasa heigl'rtenedduty of inquiry when a reasonablemerchant

','ould l-ravedoubtsor questionsregardingthe seller'sauthorityto sell. * * * In the present
:.ise.tlre defendanthaclconcernsabout Mahnberg'sability to conveygoodtitle to Red Elvis
,.ecause he believedthat Lindhohn might havehad a claim to the painting.The defendant
,iso ii'asconcerneclthat Malmberg had irot yet acquiredtitle to the painting * t' *
Becatrseof his concern that Lindholm rnight make a clairn to Red Elvis,the defendant
:-,oktl-reextraordinarystepof hiring counselto conclnctan investigationanclto negotiate
* * * Snch searchestypically are not conductecl
-i tbm.ralcontract of saleon his behalf.
JLrringthe courseof a normal art transactionand, therefore,providedthe defenclantwith
_itleastsomeassurance that Linclholml-radno claimsto the painting.
\loreover, * x * botl'rMahnberg ancl Holm had reputationsas honest,reliable, and
:nrshvorthyart dealers.x " x The defenclantl-radlittle reasonto doubt Malmberg'sclaim
:hat he was the owner of Red Elvis, ar-rdany doubts that he did have reasonablywere
:llai'ed fdirrinished]by relying on Holn-r'sassrlrances that Malmberg had bought the
painting frorn the plaintiff * * x
The defer-idant's concernswere further allayedwhen MalrnbergdeliveredRed Elvisto a
* * * warehousein Denmark,the deliverylocationthe partiesl-radagreedto ir-rthe contract
,ri sale.At the tirne of tl-resale,the paintir-rg
wason loan to the Gr-rggenheirn, whosepolicy it
tas to releasea paintingon loan only to the true owner,or to sorneonethe true ownerhad
authorizedto takepossessior-r. r( * * We concludethat tl-rese stepsweresufficientto conforrn
to reasonablecommercialstandardsfor the sale of arhvorkunder the circnrnstances ancl,
therefore,that the defendar-rt l-radstahlsasa buyer in tl-reordinarycourseof business.

ANDREMEDY
DECISI0N rtreconnecticut
supreme F0RCRITICAI
ANAtYSIS- Global
Courtaffirmedthe judgmentof the lower court.The state theinternotionol
COnSideratiOn Considering
supremecourtconcluded, "on the basisof all the locales in this case, why was Lindholm oble to bring on oction
circumstancessurrounding this sale,"that Brantwas a buyerin agoinst Brant in Connecticut?
the ordinarycourseof business and,therefore, took all rights
to RedElvisunderUCC2-403(2).

Why should a buyer in the ordinory course of businessprevoil over on original owner of
goods?Casesinvolvingthe entrustmentrule often pit one innocentparty (the original
ownerof goods)againstanotherinnocentparty(a purchaser of the goodswho qualifiesas
"a buyerin the ordinarycourseof business"). Supposethat Oki takesher vacuumcleaner
for repairsto a dishonestmerchantwho is also in the businessof sellingnew and used
462IlEIIfi@
ANDLEASE
SALES CONTRACTS
A semi truck overturned on a New
Mexico highway, spilling its corgo of
fresh produce. If the produce wos
sold under a shipment contract and
the seller wos required or outhorized
to ship the goods by corrier (but not
required to deliver them to o
po rti cuIar fin oI destin ati on), when
would the risk of loss possto the
buyer of the produce?
(OttmarLiebert/Creative Commons)
vacuumcleaners.lf the merchantsellsOki'svacuumcleanerto a buyer in the ordinary
courseof business, the buyertakesgoodtitle to the vacuumcleaner.Eventhoughboth Oki
and the buyerhavebeen equallyvictimizedby the dishonestmerchant,the buyer'sclaim
to the cleanerwill takepriority.Whyis this?Whydidn'tthe draftersof the UCCgivethe orig-
inal owners of the property(goods)priorityin these situations? The answeris that the
underlyingpolicyof the UCCis to promotecommerceand a free marketplace, and protect-
ing Oki'spropertyrightsinsteadof the rightsof the buyerin the ordinarycourseof business
would not furtherthis goal.a
tr
Unclerthe UCC, risk of lossdoesnot necessarily passwith title. When risk of losspasses
from a selleror lessorto a buyer or lesseeis generallycleterminedby the contractbehveen
the parties.Sometirnes,the contract statesexpresslywhen the risk of losspasses. At oti-ier
times, it doesnot, and a court rnust interpret the performanceand delivery terrnsof tf ie
contractto deterrninewhether the risk has passed.
withMovement
Delivery Cases
0f the6oods-Carriet
When the agreementdoesnot statewhen risk of losspasses,tl'recourts apply the follow-
ing rulesto casesinvolvingmovementof the goods(carriercases).
Contract Terms Specificdeliveryterms in the contractcan deterrrine wiren risk of loss
passesto the buyer. The terms that have traditionallybeen r-rsedin contractswithin the
United Statesarelistedand definedir-rExhibit l9_1. IJnlessthe partiesagreeothewise,these
terrnsdeterminewhich party will pay the costsof deliveringthe goodsand who bearsthe
riskofloss.
Shipment Contracts In a shipment contract,if the selleror lessoris requiredor autho-
rized to ship goodsby carrier (but is not reqr,riredto deliver them to a particularfinal des-
tination),riskof losspasses to the buyeror lesseewhen the goodsare dr-rlydeliveredto the
c a rri e rIU C C 2 -319(l )(a), 2-509(l )(a),2A -219(2)(a)1.
FEIAMET rrsl A seller in 'Ibxas sells five hundred casesof grapefrr-ritto a buyer ir-i
New York, F.O.B. Hor-rston(free orr board in Houston-tl-rat is, tl're
buyer pays the trar-rsportation chargesfrom Houston). The contract
authorizesshipmentby carrier;it cloesnot requirethat the sellerten-
der the grapefruit ir-rNew York. Risk passesto the buyer when con-
forming gooclsare properly placeclin the possessionof the carrier. If
the goods are damaged in transit, the loss is the buyer's. (Actually,
buyershave recourseagainstcarriers,sr-rbject to certain lirnitations,
and buyers usually insure the goodsfrom the time the goodsleavethe
sel l er.)E
The following case illustrateshow the application of a contract's
delivery term can affect a buyer's recovery for goods damaged in
translt.
rule ard a discussiolofthc
4. F-oran exampleofa court'sapplicationofthe entrustrnent
policyunderlyingthe provisionsin UCC 2-'103(2),seeMadrid v. BloomingtonAutoCo.,
782N .tr.Zd386(l nd.A pp.2003).
 465ffivfff{Trr{
TITLE
ANDRISK
OFLOSS

ixlijiixjl{iiiillli
termslistedanddefinedin thisexhibithelpto determine
Thecontract andwhenriskof losswill
whichpartywill bearthecostsof delivery
passfromthesellerto the buyer.

F.O.B.(free on board)-lndicatesthat the sellingprice of goods includestransportationcoststo the specificF.O.B.place

named in the contract.The sellerpaysthe expensesand carriesthe riskof lossto the F.O.B. placenamed IUCC2-319(l)].
lf the namedplaceis the placefrom which the goodsare shipped(for example,the seller'scityor placeof business), the
contractis a shipmentcontract.lf the named placeis the placeto which the goodsare to be shipped(for example,the
buyer'scity or placeof business),the contractis a destinationcontract.

F.A,S.(freealongside)-Requires that the seller,at his or her own expenseand risk,deliverthe goodsalongsidethe
carrierbeforerisk passesto the buyerIUCC2-319(2)].

C.l.F.or C.&F.(cost,insurance, among otherthings,that the seller"put the

and freightor just costand freight)-Requires,
goodsin the possession of a carrier"beforeriskpassesto the buyerIUCC2-320(2)]. (Theseare basicallypricingterms,
and the contractsremain shipmentcontracts, not destinationcontracts.)

Delivery ex-ship (deliveryfrom the carryingvessel)-Meansthat riskof lossdoes not passto the buyeruntil the goods
are properlyunloadedfrom the ship or other carrierIUCC2-3221.

ffispray'Tt|t;|nc.v.RobbinsMotorTtansportation,|nc'
875 (2006).
UnitedStatesDistrictCourt, WesternDistrictof Wisconsin,426 F.Supp.2d

9233,100. Spray-Tek fileda suitin a federaldistrictcourtagainst

Spray-Tek, Inc.,is engagedin the Robbinsundera federalstatuteknownas the "Carmack
business of commercial dehydration of food-flavoring, Amendment"a to recoverthe replacement costand other
pharmaceutical, and chemicalproducts. In 2003,Spray-Tek expenses. A plaintiffmustshowthreeelementsto recover
contracted with Niro,Inc.,for the designand manufacture of a underthe Carmack Amendment:(l ) deliveryof goodsto a
customized dryerfor $1,161,500. Niroagreedto shipthe dryer carrierin goodcondition,(2) theirarrivalin damagedcondition,
"F.O.B. pointsof manufacture in the U.S.Aj'from its facilityin and (5) proofof the amountof damages. Spray-Tek fileda
Hudson,Wisconsin, to Spray-Tek's facilityin Bethlehem, motionfor summaryjudgment.Robbinsargued,amongother
Pennsylvania. Niroarranged for RobbinsMotorTransportation, things,that Spray-Tek was not entitledto recoverybecauseit did
lnc.,to pickup the dryeron October18,2OO4. Robbins not own the dryerduringits transport.
acknowledged in the bill of lading that it received the dryer "in
apparentgoodorderl'On October28,while in transitthrough
a. TheCarmack Amendment is partof thelnterstate
Commerce Actand
Baltimore, Maryland, the dryerstruckan overpass and fell off can be found at 49 U.S.C.Section14706.lts purPoseis to removesome
Robbins's truck.lt was declareda totalloss.Niromadea of the uncertainty a carrier's
surrounding whenan interstate
liability ship-
replacement, deliveredit, and billedSpray-Tek an additional mentof goodsis damaged.

0 F THECOUnT... S HA B ADis
l N TH EWORDS Z , t ric t J u d g e .
DefendantlRobbins]concedesti'iatit receivedthe clrl,ingchamberin gooclcondition.
first elcmcnt of its prima facie cztseflegallv sufficicLrt
.\ccorcliriglv,plaintiff's ISpray-Tek's]
* * x
case]is
*established.
It is undisputedthat the dri'ir1gchamber rvasdarnageclrvhen it stntck an overpassand
becan'iedislodgedfrom clefendant'svehicle. Additionally, it is undisputeclthat after the
accidentthe clning chan-rber rvasinspcctedar-rddeclareda total loss.* * *
An * * * argument defend:intassertsconcerningplaintiff'ssecondelement of its
it owned the drving charnberduring C A S E1 9 , 5 - C o n t i n u e sn e x t p a g e
prima facie caseis that plaintiff cannot derr-ronstrate
464l!Eili!@
SALES
ANDTEASE
CONTRACTS

CA SE1 9.5 -Con tinu ed
transport.However,tl-recor-rtract plaintiff enteredinto with Niro establishes that ii wastl-re
owner of tl-iedrying chamber when it wasdarnaged.The contractprovidedthat the terms
of sale were "F.O.B. points of manufacture in the U.S.A." According to x x * David
Brandwho sewesasplaintiff'svice-president and generalmanager"F.O.B.pointsof rnan-
ufacture" meansthat the drying chamber becameplaintiff's propertyonce it was"placed
on board the deiiverytrr-rckat its point of manufacturein Hudson, Wisconsin."
Mr. Brand'sassertiontr '( * is reinforcedby the provisionin the contract concerning
risksof loss.* * * The "F.O.B.pointsof manufacture"language* x x demonstrates that
plaintiff bore the risk of loss once the drying chamber departedfrorn Niro's Fh,rdson,
Wisconsin facility. * * * Accordingly, plaintiff establishedthe second elernent of its
prima facie case.
Finally, defendantasserts plaintiff cannot rr-ieetits br-rrdenof establishingthe third ele-
rnent of its prima facie casebecauseit failed to demonstratewhat "it is obligatedto pay
for the dryer."However,x x x Niro invoicedplaintiff $213,100.00for the replacement
dryer.Accordir-rgly, plair-rtiffestablishedthe tl'rird element of its prima facie casebecause
i ts a rn o u n to fd a nragesi s $233,100.00.
Plaintiff n'ret its burden of establishing a prima facie case r-rndertire Carnack
Aurendment.* * * Defendantconcedesit failed to prodr-rce any evidenceestablishing
that damageto the shipmentwasdue to one of the exceptedcallses.

D t C l Sl0 NANDRE ME DY
rnecourt
issued
a summa ry contractuallimitationon the amountof damages,involved
judgmentin Spray-Tek's
favoron this issue.The court genuinequestionsof materialfactto be resolvedat trial.
determinedthat therewas no disputeas to the firstand
secondelementsrequiredfor recovery underthe Carmack W HAT
IF THEFACTS
W ERE
DIFFEREN T ?
Amendment:the dryerwas deliveredin good conditionto Would the outcomeof this casehave been differentil
Robbins,
and on its arrival,it was damaged.Thecourt the controctbetween Sproy-Tekond Nirohad specified"F.O.B
concluded,however,that otherissues,includinga possible Bethlehem,Pennsylvania"?Exploin.

tr
Destination Contracts hi a clestinationcontract,the risk of losspasses to the buyer or le.-
seewhen the goodsare tenclcrecl to the btryeror lesseeat the specificcl
destinationILIC('
2 -3 1 9 (1 Xb ),2 * 509(l )(b), 2A -219(2)(b)1.In E xar.npl e1e.6,i f thc contractha cl be. :
F.O.B. New York, the risk of losscluringtransitto New York woulclh:rvebeen the seller -

D e l i v e rwyi t h o uM
t o ve m eonftth eGo o d s
'l'he UCC alsoaddresses situationsir which the selleror lessoris requireclneitherto .l :
nor to deliver the goocls.Frequently, the buyer or lesseeis to pick up the goodsfron i: -
BAITEE selleror lessor,or the goodsarehelclby a bailee.Under the UOC, a bailee is a parh's1r
Underthe UniformCommercial by a bill of lading,warehousereceipt,or other documentof title, acknowledges possessic:
Code,a pafi who, by a bill of lading,
warehousereceipt,or other of goods and/or to
contracts delivertlien'r.
A warehotrsingcompany, for exarnple,or a tnrc.-
'
documentof title,acknowledges ing conpar-rytl-ratnormally issuesdocumentsof title for the gooclsit receivesis a baile.
possession of goodsand/or contracts
to deliverthem.
Goods Held by the Seller If the gooclsare l-reldby the seller,a documentof title tir. -
ally is not useil.If the selleris not a merchant,the risk of lossto goodshelclby ihe sei-.
passes to the buyer on tenderof deliteryIUCC 2-509(3)].If the selleris a nierchant.r:,'
of lossto goodsI'reldby the sellerpassesto the buyer when the bttyer actually takespl:'''
ical possession of the goodsIUCC 2-509(3)]. IsExAMPtE te.rl Henry Ganno purcha,.'

in detailin Chapter43.
5. Bailnentswill be discussed
 465nrfiIrrr,l
TIITEANDRISK
OFLOSS

,Lrnrber at a lurriberyarcl, and an empk;1ee at the lutnbcri,ardloadsit or-rtoGanno'strttck

rith a forklift.Once the truck is loaded,the risk of losspasses to Clannobecattsehe has
:aker-rphvsicalpossession of the goods.hr the eventthat Ganno suffersa lossdrir,ingau':r),
:rorr the lLrmberyard, he-not the lumberyarcl-will bearthc burden of that loss.oH
In resl>ect to leases,the risk of losspasses to the lesseeon tLrclessee's receiptof the
:oods if the lessor-or supplier, in a finance lease (see Chapter lB)-is :r uerchant.
()therwise,the risk passesto the lesseeoIr tender of clelivc11IUCC 2A-2l9(c)].
=ExAIr,tpLE tr.8l EriksonCrane leasesa Lrelicoptcr frorn fevis,Ltd., rvhich is in thc busi-
:ressof rentingaircraft.Wrile Eriksor'spilot is on the rvayto Iclahoto pick rrp the partic-
.rlarhelicopter,the l-relicopter is darnageddr-rring:rn nnexpectecl storrn.In this situatiort,
Tc.risis a nerchantlessor,so it woirlcll>e:rrthe risk of lossto the leasedhelicopteruntil
I.-rikson took possession of the hclicopter.E

CloodsHeld by a Bailee Wl-rena baileeis holclinggooclsfor a pcrsolrwho hascontractecl

- scllthen anclthe gooclsareto be deliverecl witliout beingnroved,the goodsarc usually
--'rrescntecl by :r negotiableor nclnnegotiable clocunent<-rftitle (a bill of ladingor a warc-
liliffifilnl| A business that is to
,rser:cceipt). IUskof lossp:rsses to the buyer when (1) the lnycr rcccivcsa tregotiablc
make delivery at its own place has
(2) the baileeacknowleclgcs
, rrrrrcntof title for the goocls, thc buycr'sriglrtto posscss tltc control of the goods and can be
- ,cls,or (3) tlrc lruyer receivcs a nonnegotiablc clocurnellt of title or a writing (rcc<lrcl) exoected to insure its interest ln
them. The buver has no contro l of
.:cti rrg tlic luilc c t oc leli v e rth c g o o c l s a rz d h a s l v td ttr easoncLbl eti nrctoprcsettttl rcdoc- the goods and w i l l l i kel ynot carry
rcnt to thc l>ailccanclclerrrarrcl tlie goods.Ol>viously, if thc baileetefitseskr hortor-thc i nsuranceon goods that he or she
.rruicrrt,thc r.iskof lossrcnuins rvitlrthc sellerltlcCl 2-503(4Xb),2-50c)(2). does not Dossess.
\\'ith rcspcctto lcascs,if gooclsheld by a l;ailee arc to l>c clclivcrcclwithotrt bcing
,rccl,tlic riskof losspasscs to the lessccon acknowleclgrtrent by tlic bailccof thc lesscc's
. .:rt kr posscssion of the gooclsI UCC 2A-ZI 9(2)(b)l. 'l'hese nrles arc suttttttarize
cl in thc
,tcebt Sunlnlrlrybclow.

: . , . u r t o t t . l 'o ta g d A rp ., 1 )t) \Vr L' lr \pp.

. I l( I, s( | P.lJ l\( l t 2t) l) l)

Deliverywithout Movementof the Goods

CON CE P T D ES C RP
I T IO N
Go o d sN ot Repr es ente d Unlessothenruise agreed,if the goodsare not representedby a documentof title,title and
b y a D oc um entof T it le riskoassas follows:
l. Titlepasseson the formationof the contract[UCC2-401(3xb)l
2. lf the selleror lessor(or supplier, riskpasses
in a financelease)is a merchant, to the
buyeror lesseeon the buyer'sor lessee'sreceiptof the goods.lf the selleror lessoris a
nonmerchant,riskpassesto the buyeror lesseeon the seller'sor lessor'stenderof
deliveryof the goodsIUCC2-s09(3),2A-219(c)].

Go o d sRepr es ent ed Unlessotherwiseagreed,if the goodsare represented by a documentof title,title and

b v a Doc um entof T it le risk passto the buyerwhen:
t . The buyerreceivesa negotiabledocumentof title for the goods,or
2. The baileeacknowledges the buyer'srightto possessthe goods,or
3. The buyerreceivesa nonnegotiable documentof title and has had a reasonable time to
presentthe documentto the baileeand demandthe goods[UCC2-503(4)(b),2-509(2)l'

L e a se d6 oods Held withoutbeingmoved,the riskof loss

lf leasedgoodsheld by a baileeareto be delivered
b y a Ba ilee passesto the lesseeon acknowledgment by the baileeof the lessee'srightto possession
of the goods[Ucc 2A-2te(2)(b)].
466IlNIIffi
SALES
ANDLEASE
CONTRACTS
A worehouseholding goods
as a boilee. Suppose that Versotile
Products, Inc., controcts with a seller
to purchasegoods thot are held
at this worehouse.When does the
riskof loss possto the buyer in
o boilment situotion?
(TimWilson,/Creative Commons)
SALEORRETURN
A type of conditionalsalein which (usuallya merchant) purchasesgooclsprimarily for resale,but has the right to return part
title and possessionpassfrom the
sellerto the buyer,but the buyer
retainsthe optionto returnthe
goodsduringa specifiedperiodeven
thoughthe goodsconformto the
contract.
CONSIGNMENT
in whichan ownerof
A transaction
goods(the consignor)deliversthe
goodsto another(the consignee) for consignee
the consigneeto sell.Theconsignee doesnot sell the goods,they may simply be retr,rrned
paysthe consignoronlyfor the
goodsthat aresold by the
consignee.
SALEON APPROUAL
A type of conditionalsalein which
the buyermaytakethe goodson
a trial basis.Thesalebecomes
absoluteonlywhen the buyer
approvesof (or is satisfiedwith)
the goodsbeingsold.
C o n d i t i o nSa
a l le s
Buyers and sellerssometimesform salescontractsthat are conditioned eitl'reron the
approvalof the goodsor on the buyer'sresaleof tl-regoods.Unclersuch conhacts,
br-ryer's
of the goods.Sometimes,hclwever,questionsariseasto whether
the buyer is in possession
the buyer or seller should bear the lossif, for example,the goodsare darnagedor stolen
while in the possessionof the buyer.
Sale-or-ReturnContracts A sale or return is a type of contract by which the buyer
or all o[the goods(r-rndothe sale)in iieu of paymentif the goodsfail to be resold.Basically,
a saleor return is a saleof goodsin the present,which may be undone at the buyer'soption
within a specifiedtime period.When the buyer receivespossession at the time of the sale,
title and risk of losspassto the buyer.Title and risk of lossrernainwitl'rthe br-ryerr-rntilthe
buyer returnsthe goodsto the sellerwithin the time period specified.If the buyer fails to
return the goodswithin this time period, the sale is finalized.The return of the goodsis
made at the buyer'srisk and expense.Goods held r-rndera sale-or-return contractare sttb-
ject to the claims of the buyer'screditorswhile they are in the buyer'spossession.
The UCC heatsa consignmentas a saleor return. Under a consignment,the owner of
goods(the consignor) deliversthem to another(t\e consignee) for the consigneeto sell.If the
sellsthe goods, tl-reconsignee
must pay the consignor for them. If the consignee
to the consignor.While the goodsare
in the possession of the consignee,the consigneeholdstitle to tllem, and creditorsof the con-
signee will prevail overthe consignorin any actionto repossess the goodsIUCC 2-726(3)).
Sale-on-ApprovalContracts When a seller offersto seil goodsto a buyer and permits
the buyer to take the goodson a trial basis,a sale on approval is usually made. The term
saleherc is a misnomer,as only an offerto sell hasbeen made, along with a bailment cre-
ated by the buyer'spossession. (A baihnent is a temporarydelivery of personalproperty
into the careof another-see Chaoter4J.)
Tl-rerefore,title and risk of losslfro- .rur., beyonclthe buyer'scontrol) ren'rainwith
the selleruntil the buyer accepts(approves)the offer.Acceptancecan be made expressly,
by any act inconsistentwith the trial purposeor the seller'sownership,or by the buyer's
 4679w
OFLOSS
ANDRISK
TITLE

=lcctionnot to return the goodswithin the trial period. If the buyer doesnot wish to
the buyer may notify the seiler of that fact within the triai period, and the return
":iept,
,.,-rrd.at the seller'sexpenseand risk IUCC 2-727(1)1.Goodsheld on approvalare not
'.
.-rbiectto tl'reclairnsof the buyer'screditorsuntil acceptance.
transactioninvolvesa contractfor
It is often difficLrltto deterrninewhether a particr-rlar
a contract for a saleor return, or a contract for saie.The [-]CC states
" :ale on approval,
:h-rt 'r-rnless "if
otherwiseagreed) the goodsare clelivered prirnarily for use,"the transac-
"if
:: ,p is a saleon approval; the gooclsare cleliveredprin'rarily for resaie,"the transaction
,. a saleor teturn IUCC Z-326(l)1.

s he na S a l e0sr l e a s e( o n tr a ct
Ri sko f Los W ls Br e a ch e d
-\ salesor leasecontract can be breacheclin many ways,and the transferof risk operates
differentlydependingon whicl'r party breaches.Cenerally, the party in breaci'rbearsthe
risk ofloss.

When the Seller or LessorBreaches If the goodsare so ilonconforrningthat the br-ryer

hasthe right to reject then'r,tl'rerisk of lossdoesnot passto the buyer until the defectsare
cured (that is, until the goodsare repaired,repl:rced,or discounteclin price by the seller)or CURE
until the buyer acceptstl-regooclsin spiteof tlieir clefects(thus waivingthe right to reject). Underthe UniformCommercial
Code,the rightof a partywho
l'iEIIffiFiE tagl A br-ryerordersten white refriger:rtors frorn :r seller,F.O.B.the seller'splant. tendersnonconforming performance
The seller ships amber refrigeratorsinsteacl.The amber refiigerators(nonconforrning to correctthat oerformance within
goocls) are damagecl in transit.The risk of loss falls on the seller.Hacl the seller shipped the contract
oeriod.
rvhite refrigerators(conforming goods)insteacl,the risk wouid have fallen on the buyer
,ucc 2-5r0(1)l
m
If a buyeracceptsa shipmer-rt of goodsancllaterdiscovers a defect,acceptancecan be
revoked. Revocation allows the buyer to passthe risk of lossbzrck to the seller,at leastto
tlre erterrtthat the buyer's insurance does not cover the iossIUCC 2-510(2)1.
In regardto leases,Article 2A statesa sirlilar mle. If the lessoror strppliertenclersgoocls
that are so nonconforrling that the lesseehas the right to rejcct therri, the risk of loss
remainswith the lessoror the supplieruntil cure or accepterrrce IUCC 2A-220(l)(a)l. If
the lessee,afteracceptance, revokes his or her acceptance of nonconforning goods,the
revocationpasses the risk of lossbacl<to the selleror supplier, to the exter-rt
that tl'relessee's
insurance does not cover the lossIUCC 24-220(l)(b)].

When the Buyer or LesseeBreaches The general rule is that when a buyer or lessee
shiftsto tl-rebuyer or lessee.'l'his rule has
breachesa contract,the risk of lossimn-rediately
three importantlimitations:
I The selleror lessormust alreadyhaveidentifiedthe contractgoods.
2 The buyer or lesseebearsthe risk for only a commerciallyreasonabletime after the
selleror lessorhaslearnedofthe breach.
5 The buyer or lesseeis liable only to the extent of any deficiency in the seller'sinsur-
ance coveragef UCC 2-510(7),2A-220(2)1.

Partiesto salesand leasecontractsoftenobtain insurancecoverageto protectagainstdamage,

loss,or destructionof goods.Any partypurchasinginsurance,however,musthavea sufficient
interestin the insured itern to obtain a valid policy. Insurancelaws-not the UCC-
determine sufficiency.The UCC is helpful, however,becauseit contains certain rules
regardinginsurableinterestsin goods.
468ltrgm!@
SALES
ANDLEASE
CONTRACTS

A freeze can destroy on oronge
grove. In o controd for o sole of
the oronges,when does the buyer
obtoin on insuroble interest?
(APPhoto/Cary Kazanjian)
INSURABLE INTEREST
In regardto the saleor leaseof
goods,a propertyinterestin the
goodsthat is sufficientlysubstantial
to permita partyto insureagainst
damageto the goods.
of theBuyer0r Lessee
Interest
Insutable
A buyer or lesseehasan insurable interestin identifiedgoods.The
rnoment the contractgoodsare identifiedby the selleror lessor,the
buyer or lesseehas a specialpropertyinterestthat allowsthe buyer
or lesseeto obtain necessaryinsurance coveragefor those goods
evenbeforethe riskof lossl.ras passeclIUCC 2-501(1),2A-ZlB(l)1.
Under the rule statedin UCC 2-501(l)(c), br-ryers obtain an
insurable interest in crops by identification, which occurs when
the cropsare planted or otherwisebecomegrowingcrops,provided
that the contract is for "the sale of crops to be harvestedwithin
twelve months or the next normal harvestseasonafter contracting,
whichever is longer." trExAMptEteTdl In March, a farmer sells a
cotton crop that l-rehopesto harvestin October.When the crop is
planted, the buyer acquires an insurable interest in it because
those goods(the cotton cron) are identified to the salescontract beh.veenthe seller and
th o h ,,.r "t fJl
lnsurable of theSeller
lnterest 0r Less0r
A sellerhasan insurableir-rterest in goodsif she or he retainstitle to the goods.Even after
in the goods(a right to secure
title passesto the buyer, a sellerwho has a securityir.rterest
payment-see Chapter25) still hasan insurabieinterestand can insurethe goods[UCC
2-501(2)1.Hence, both a buyer and a sellercan have an insurableinterestin identical
eoodsat the sametirne. Of course.the buver or seller rnr-rst sustainan actual lossto have
fue right to recoverfronr an insurancecompany.In regardto leases,the lessorretainsan
insurerbleinterestin leasedgoodsr,rntilthe lesseeexercisesarnoption to buy and the risk
of losslraspassedto the lessJeIUCC 2A-2lBt3r]. rsee tlre ApplicatiottFeattrre at the encl
of this chapterfor ftrrther discussionof insurancecoverageand other neasurestliat buy-
ersand sellerscan taketo protectagainstlosses.)

Sellers frequently retain a security interest in goods because the buyer has not
yet paid for the goods at the time of delivery. A seller who has a security interest
in goods can still insure those goods, even though title has passed to the buyer.
A businessthat sells and ships goods should usually maintain ad€quate
insurance on all goods sold at least until it is assured that the buyer will pay fot
the goods. Remember that losses can still occur after the goods have been
delivered to the buyer. Do not assume that the buyer's insurance will pay for
losses the seller sustains.Insuranceis essentialto protect against loss.

In December, Mendoza in Marchof the followingyear.Usingthe information

harvested
agreedto buy the presentedin the chapter,answerthe followingquestions.
broccoligrown on l0O
I At what point is a crop of broccoliidentifiedto the contract
acresof WillowGlen's
underthe UCC?Explain. Why is identificationsignificant?
1,000-acrebroccoli
WillowGlen'sfield by
farm.ThesalescontractspecifiedF.O.B. I Whendoestitle to the broccolipassfrom Willow Glento
The broccoliwas to be plantedin February
FalconTrucking. and Mendozaunderthe terms of this contract?Why?
 469gtrEEg
AND
TITLE RISK
OFLOSS

5upposethat while in transit,Falcon's

truckoverturned
and highestgradeof broccoliis packaged underthe "FreshBest"
:pilledthe entireload.Who bearsthe loss,Mendozaor label,and everything underthe "FamilyPac"
elseis packaged
,',lllowGlen? that Mendozawas to
label.Althoughthe contractspecified
receiveFreshBestbroccoli,FalconTruckingdelivered
Suppose that insteadof buyingfreshbroccoli,
Mendozahad
FamilyPac broccolito Mendoza.lf Mendozarefuses to accept
:ontracted with WillowGlento purchase one thousandcases
who bearsthe loss?
the broccoli,
:f frozenbroccolifrom WillowGlen'sprocessing plant.The

-I
lre sltiu rue rrtof g0 o( ls lf YouAretheSeller
i' ,r nrajor aspectof
Ifyou area sellerofgooclsto bc shippecl, rcalizethat aslong
- ::rnrercialtr:rnsactions.
',1-,r1.issrrcsarisewhen atr asyou havccontrol overthe goods,yor.rare liablc for atiy loss
nnlesstl-rebuyer is in breachor the contrerct cotrt:rtusattt
.-l.rreseeu evetlt,such as
j
:.' or theft, cattsesd:rtnage
explicitagreementto the cortrar,v.Wlien thereis no cxplicit
- :oocls in transit. At the agreement,thc cleliveryternrsitr yor.trcontractc:.rltscrveils rl
' ::,c of contractnegotiatior-r, both the selleranclthe buyer basisfor clctcrmining control.'l'hus,"F.O.ll.brtvcr'sbttsiless"
. ..uld cletcrmine the iurport:rtrce of riskof loss.Iu soure ternr,anclrisk of lossftlr goocls
is a clestination-clelivery
riskis Lelativelyttuiurportant (strchaswhert shippcclunclerthesetennsclocsnot passto the btryertrutil
-.:irrnrsteurces,
-::'.boresof copierpaperaIe beingsolcl), thereis a tenclerof cleliveryat the point of clestination.Any
anclthe clelivery
-::inssliouldsimplyreflectcostsand price. In other lossor d:irnagein transitfallson the scllerl>ecartse thc seller'
riskis extreurely inrportant(suchaswheu a hascontrolLrntilpropertenclerhasbccn rnacle.
,.:iumst:urces,
-.iiile pieceof ph:rrmaccr:tical testingcquipnentis being
. 'd,, and the parlieswill neeclan express agreeuentasto lf YouAretheBuyer
- .r nromentrisk is to passso that they can ilsure the goods From the bLryer''spoint of view,it is irnportantto reucul>er
,,cordingly. 'fhe poirt is thatriskshoulclbe consiclered that mostsellersprefer"F.O.B.seller's busincss" as:t clelivcry
^.torethe lossoccurs,not after. term. Under thcseterrns,oncethe goodsare clelivcrccl to tlre
-\ n.rajorconsicleration to risk is whcn to trsure
relatir-rg the
carrier, buycr bears the riskof loss. 'fhus, if conforming
:,'oclsagainstpr-rssible losses. Buyersand sellerssl'roulcl deter- gooclsare corrpletelyclesiroyed or lost ir-rtransit,the buyer
::,inethe pointat which theyhavean insurableir-rterest in the not only suffcrstl-relossbut is obligateclto paythe sellerthe
:' 'ocls:rndobtaininsurance coverage to protectthem against contractprrce.
- '.s frornthat point.

TODE TE R MIN
C HECKIIST O FI.OS S
R ISEK FORTHESEttERORTHEBUYER
CHECKTIST
The UCCusesa three-partchecklistto determinerisk I Priorto enteringa contract,determinethe impor-
of loss: tanceof riskof lossfor a givensale.
lf risk is extremelyimportant,the contractshould
I lf the contractincludesterms allocatingriskof loss, expressly statethe moment riskof losswill pass
thoseterms are bindingand must be applied. from the sellerto the buyer.Thisclausecould even
2 lf the contractis silentas to risk,and eitherparty providethat riskwill not passuntil the goodsare
breachesthe contract,the breachingpartyis liable "delivered,installed,inspected,and tested(or in run-
for riskof loss. ning orderfor a periodof time)."
3 When a contractmakesno referenceto riskand the lf an expressclauseis not agreedon, deliveryterms
goodsare to be shippedor delivered,if neitherparty determinepassageof riskof loss.
breaches, then the riskof lossis borne by the party When appropriate, eitherpartyor both partiesshould
havingcontroloverthe goods(deliveryterms). considerprocuringinsurance.

of an attorneywho is licensedto practicelaw in yourstate.

fhis Applicotionis not meantto substitutefor the services
470MiIiI@
ANDLEASE
SATES CONTRACTS

bailee 464 entrustmentrule 459 insurableinterest458

consignment466 fungiblegoods455 saleon approval465
cure 467 goodfaithpurchaser457 saleor return466
destinationcontract 456 455
identification shipment contract456
documentof title 455 insolvent457

ShipmentContracts In the absence

of an agreement, titleandriskpasson the seller's
or lessor's
delivery
of
(Sebpage456.) conforming goodsto the carrier[UCC2-319(l)(a),2-a0l (2)(a),2-509(1)(a),2A-210(z)(a)].
DestinationContracts ln the absenceof an agreement, titleandriskpasson the seller's
or lessor's
tenderof delivery
of
(Seepage456.) conforming goodsto the buyeror lesseeat the pointof destination [UCC2-519(lXb),
2-401(2)(b), 2-s0e( r xb), 2 A-21e(2)(b)1.
Delivervwithout In the absence of an agreement,if the goodsarenot represented
by a documentof title,title
Movem'entof the passes on the formationof the contract,andriskpasses whenthe goodsaredelivered to a
Goods merchant or whenthe selleror lessortendersdelivery to a nonmerchant.
SeetheConcept
(Seepages456-457.)
Summaryon page465forthe detailedrulesstatedin the UCC.
Salesor Leases Between the owneranda goodfaithpurchaser or betweenthe lesseeanda sublessee:
bv Nonowners
(Seepages457-462.) 1. Voidfitle-Ownerprevails IUCC2-403(l)].
2. Voidable fifle-Buyerprevails
IUCC2-403(l)].
3. Entrusting to o merchant-Buyer
or sublessee IUCC2-403(2),(3);2A-3O5(2)1.
prevails
Sale-or'Return Whenthe buyerreceives possession
of the goods,titleandriskof losspassto the buyer,butthe
Contracts the goodsto the seller.lf the buyerreturnsthe goodsto the
buyerhasthe optionof returning
(Seepage466,) titleandriskof losspassbackto the sellerIUCC2-326(3)1.
seller,
Sale-on-Approval Titleandriskof loss(fromcauses control)remainwith the selleruntilthe
beyondthe buyer/s
Contracts buyerapproves (accepts)
the offerIUCC2-327(1)1.
(Seepages466*467.)

Riskof loss Whena l. lf the selleror lessorbreaches bytendering nonconforming goodsthatarerejected bythe
Salesor Lease buyeror lessee, the riskof lossdoesnot passto the buyeror lesseeuntilthe defects arecured
Contractls Breached (unlessthe buyeror lesseeaccepts the goodsin spiteof theirdefects,
thuswaivingthe rightto
(Seepage467.)
reject)[UCC2-s I 0(l ), 2A-22o(1)|
2. lf the buyeror lesseebreaches the contract,
the riskof lossimmediately shiftsto the buyeror
lessee. Limitations to thisruleareasfollowsIUCC2-510(3),2A-22O(2)l:
a. Theselleror lessormustalreadyhaveidentified the contractgoods.
b. Thebuyeror lesseebearsthe riskfor onlya commercially reasonabletime afterthe seller
or lessorhaslearnedof the breach.
in the selle/sor lessor's
c. Thebuyeror lesseeis liableonlyto the extentof anydeficiency
insurance coverage.
InsurableInterest l. Buyersandlessees havean insurable interestin goodsthe momentthe goodsareidentified to
(Seepages467-468.) thecontractbytheselleror the lessor [UCC2-501(1),2A-218(l)].
2. Sellers
havean insurable interestin goodsaslongastheyhave(l ) titleto the goodsor (2) a
interestin the goods[UCC2-501(2)].Lessors
security havean insurableinterestin leased
goodsuntilthe lesseeexercises an optionto buyandthe riskof losshaspassed to the lessee
lucc 2A-2r8(5)1.