This contract tip is about how title transfer works under the Uniform Commercial Code (UCC) and why your contract should have title to goods always pass at delivery.
If the contract says that a seller retains title after delivery, Section 2-401 of the UCC converts the seller’s interest in the goods to a security interest. There is no notice or choice. It is an operation of law.
Here’s how that plays out in the real world.
The seller thought it had title but doesn’t. Think about how that could affect a company’s operations. For example, are the statements to lenders or potential investors about a company’s assets inaccurate? It is not a good thing.
The inverse is true for buyers. If it has title but is not reflecting that status in its internal records, then its records are wrong. Also, bad.
Another big problem is that sellers are unlikely to take the proper steps to perfect the security interest when they don’t realize that is what they have.
Perfection is a process to make a claim stronger compared to others. Perfection requires registering the security interest with the proper U.S. state and within the required time.
Otherwise, the security interest is unperfected, and the seller’s rights will be secondary to those with perfected security interests.
Avoid this mess.
Have title pass at delivery.
Do you see this issue confused sometimes?
