Chapter 22 Title, Risk of Loss, and Insurable Interest Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Overview • LO22-1: What is the concept of title? How does it pass? • LO22-2: What is insurable interest? • LO22-3: What are the different kinds of sales contracts, and how does each type affect title passing, risk of loss, and insurable interest? 22-2 Chapter 22 Hypothetical Case • Daisy Jennings either is or was the owner of a beautiful two-carat diamond ring Last Wednesday, she took her ring to A Cut Above Jewelry Sales and Service, Inc ("A Cut Above") for repair of its setting John Dagenhart, A Cut Above's proprietor, assured her that after the repair, Jennings's treasure would look "as good as new." The next morning, Amy Wolton, a sales clerk, arrived for work at A Cut Above She periodically assisted her husband at the shop, especially during peak times By mistake, Wolton placed Jennings's ring in the estate jewelry case for sale Later that day, Mandy Turner came to A Cut Above looking for yet another addition to her burgeoning diamond ring collection Turner chose Jennings's ring for purchase, and Wolton rang up the sale At the time of purchase, Turner did not know that the ring belonged to Jennings Wolton paid $3,500 for the ring Six months ago, when Jennings last had the ring appraised, its value was assessed at $3,750 On Saturday afternoon, Jennings came in to A Cut Above to pick up her repaired diamond ring Dagenhart was perplexed as to the whereabouts of the ring, but he soon found out in a telephone conversation with Wolton, who was not in that day Via phone, Wolton apologized profusely to both Dagenhart and Jennings for her mistake Neither Dagenhart nor Jennings elected to forgive • Who has rightful ownership of the two-carat diamond ring: Daisy Jennings or Mandy Turner? 22-3 Chapter 22 Hypothetical Case • Federated Parcel Service, Inc is a common carrier with operations across the globe, including deliveries in all fifty of the United States Holly McGuire, owner of McGuire Cards and Collectibles, Inc., has made arrangements for Federated to deliver a mintcondition Mickey Mantle baseball card to the home of James Horton, who recently was the top bidder for the card in an online auction hosted by ePort, Inc Per the terms of the contract between McGuire Cards and Collectibles and Horton, McGuire Cards and Collectibles has the delivery obligation Horton has already paid the $58,000 contract price for the card using the online pay service PayBuddy Two weeks pass, and Horton is anxious that the card has not arrived Horton contacts McGuire, who states that Federated should have already delivered the card to his home Horton tracks his shipment online, and discovers that Federated states the card was delivered last Monday to his residential address, 660 Ash Street, San Francisco, California • Who is responsible for the lost or stolen card? Federated Parcel Service, Inc., the carrier? McGuire Cards and Collectibles, Inc., the seller? Holly McGuire, the corporate seller's owner? James Horton, the buyer? 22-4 Categories of Title • Good title: Acquired from someone who already owns the goods free and clear • Void title: Not true title • Example: Purchase of stolen goods • Voidable title: Occurs in certain situations in which contract between original parties would be void, but goods have already been sold to third party 22-5 UCC Article Rules Regarding Title Acquisition • Good title: Acquired from someone who has rightful ownership • Void title: Results when someone acquires possession of stolen goods • Voidable title results when: • • • • Buyer deceived seller regarding his/her identity Buyer wrote bad check Buyer committed criminal fraud in securing goods Buyer and seller agreed title would not transfer until later time • Buyer is a minor 22-6 Acquiring Good Title • General rule: If third-party purchaser makes good-faith purchase for value, he/she gets good title (not void/voidable title) • If owner entrusts possession of goods to merchant who deals in goods of that kind, merchant can transfer all rights in the goods to a buyer in the ordinary course of business 22-7 UCC Terminology Regarding Transfer of Title • Ownership: Transfer of title • Encumbrance: Goods used as collateral for debt • Loss: Refers to which party has risk of loss when goods damaged/destroyed • Insurable interest: Right to insure goods against any risk exposure 22-8 Types of Sales Contracts • Simple delivery: Buyer and seller contract, buyer gets goods at time of sale or some time later by seller's delivery • Title transfers to buyer when contract executed • Risk of loss transfers to buyer when buyer takes possession • Buyer has insurable interest upon receiving title • Common-carrier delivery: Buyer and seller contract, seller then places goods with common carrier • Shipment contract: Title transfers to buyer at time and place of shipment; buyer bears risk of loss while goods in transit • Destination contract: Seller bears risk of loss until seller delivers goods to stipulated destination 22-9 Types of Sales Contracts (Cont'd) • Goods-in-bailment: Identifies goods in storage • Rules regarding passage of title, risk of loss, and insurable interest vary, depending on whether seller has negotiable title • Conditional sales • Sale-on-approval: Title and risk of loss with seller until buyer notifies seller of approval • Sale-or-return: Buyer has insurable interest once goods identified in contract; title and risk of loss transfer depend on whether goods in bailment, delivered by common carrier, or delivered by seller 2210 Shipping Terms Specifying Requirements for Delivery • FOB (free on board): Selling price includes transportation costs, and seller has risk of loss to either place of shipment, or place of destination • FAS (free alongside): Seller, at seller's expense, delivers goods alongside ship before risk transferred to buyer • CIF or CF (cost, insurance, and freight; cost and freight): Seller places goods in possession of carrier before risk passes to buyer • Delivery ex-ship (delivery from carrying vessel): Risk of loss passes to buyer when goods leave ship 2211 Risk of Loss upon Breach of Contract • Seller in breach (by failing to deliver goods): • Buyer may accept nonconforming goods as is, or reject goods (subject to seller's right to cure) • Risk of loss remains with seller until buyer accepts goods, or deficiencies corrected • Buyer in breach (buyer refuses to accept conforming goods and goods later lost or damaged): • Risk of loss depends on type of contract between buyer and seller 2212 Chapter 22 Hypothetical Case • Fine Furniture, Inc is a furniture manufacturer located in Norfolk, Virginia Fine Furniture enters into a contract with Jaguar Interiors, LLC in Jacksonville, Florida, agreeing to sell Jaguar Interiors 1,000 dining-room chairs at a total contract price of $100,000 The contract's shipping term designates "F O B Destination," and stipulates that Darnell Shipping International will transport the furniture from Norfolk to Jacksonville Darnell Shipping has retained the services of a ship steward, Joe Birchtree, to captain the ship en route to Jacksonville Birchtree has history of alcohol abuse, but his professional record is clear of any mishaps On a clear day, with calm waters, blue skies, and the absence of wind, Birchtree runs the ship aground, and all the cargo is ruined as a result of water damage Evidence indicates that Birchtree was intoxicated at the time of the accident • Which company held title to the chairs when the ship ran aground: Fine Furniture or Jaguar Interiors? Who bears the loss of the chairs? Ultimately, does Darnell Shipping bear legal responsibility for the chairs? 2213 Chapter 22 Hypothetical Case • Regina Flay contracts to purchase a bedroom set from Upside Bedrooms, a bedroom furniture retailer The bedroom set in question will be shipped to Flay directly from the warehouse of the set's manufacturer, Priority Furniture • What type of contract is this sales contract: simple delivery, common-carrier delivery, goodsin-bailment, or conditional sales? Explain your response in detail 2214 ... of that kind, merchant can transfer all rights in the goods to a buyer in the ordinary course of business 22-7 UCC Terminology Regarding Transfer of Title • Ownership: Transfer of title • Encumbrance: