Prior Uniform Statutory Provision: Former section 7-504.
Changes: To include cross references to article 2A and for style.
1. Under the general principles controlling negotiable documents, it is clear that in the absence of due negotiation a transferor cannot convey greater rights than the transferor has, even when the negotiation is formally perfect. This section recognizes the transferor's power to transfer rights which the transferor has or has "actual authority to convey". Thus, where a negotiable document of title is being transferred the operation of the principle of estoppel is not recognized, as contrasted with situations involving the transfer of the goods themselves. (Compare section 2-403 on good faith purchase of goods.) This
section applies to both tangible and electronic documents of title.
A necessary part of the price for the protection of regular dealings with negotiable documents of title is an insistence that no dealing which is in any way irregular shall be recognized as a good faith purchase of the document or of any rights pertaining to it. So, where the transfer of a negotiable document fails as a negotiation because a requisite indorsement is forged or otherwise missing, the purchaser in good faith and for value may be in the anomalous position of having less rights, in part, than if the purchaser had purchased the goods themselves. True, the purchaser's rights are not subject to defeat by attachment of the goods or surrender of them to the purchaser's transferor (contrast subsection (b)); but on the other hand, the purchaser cannot acquire enforceable rights to control or receive the goods over the bailee's objection merely by giving notice to the bailee. Similarly, a consignee who makes payment to its consignor against a straight bill of lading can thereby acquire the position of a good faith purchaser of goods under provisions of the article of this code on Sales (section 2-403), whereas the same payment made in good faith against an unendorsed order bill would not have such effect. The appropriate remedy of a purchaser in such a situation is to regularize its status by compelling indorsement of the document (see section 7-506).
2. As in the case of transfer—as opposed to "due negotiation"—of negotiable documents, subsection (a) empowers the transferor of a nonnegotiable document to transfer only such rights as the transferor has or has "actual authority" to convey. In contrast to situations involving the goods themselves the operation of estoppel or agency principles is not here recognized to enable the transferor to convey greater rights than the transferor actually has. Subsection (b) makes it clear, however, that the transferee of a nonnegotiable document may acquire rights greater in some respects than those of his or her transferor by giving notice of the transfer to the bailee. New subsection (b)(3) provides for the rights of a lessee in the ordinary course.
Subsection (b)(2) and (3) require delivery of the goods. Delivery of the goods means the voluntary transfer of physical
possession of the goods. See amended section 2-103.
3. Subsection (c) is in part a reiteration of the carrier's immunity from liability if it honors instructions of the consignor
to divert, but there is added a provision protecting the title of the substituted consignee if the latter is a buyer in ordinary
course of business. A typical situation would be where a manufacturer, having shipped a lot of standardized goods to A on
nonnegotiable bill of lading, diverts the goods to customer B who pays for them. Under precode passage-of-title-by-appropriation doctrine A might reclaim the goods from B. However, no consideration of commercial policy supports this involvement of an innocent third party in the default of the manufacturer on his or her contract to A; and the common commercial practice of diverting goods in transit suggests a trade understanding in accordance with this subsection. The same result should obtain if the substituted consignee is a lessee in ordinary course. The extent of the lessee's interest in the goods is less than a buyer's interest in the goods. However, as against the first consignee and the lessee in ordinary course as the substituted consignee, the lessee's rights in the goods as granted under the lease are superior to the
first consignee's rights.
4. Subsection (d) gives the carrier an express right to indemnity where the carrier honors a seller's request to stop delivery.
5. Section 1-202 gives the bailee protection, if due diligence is exercised where the bailee's organization has not had time to act on a notification.
Point 1: Sections 2-403 and 7-506.
Point 2: Sections 2-403 and 2A-304.
Point 3: Sections 7-303, 7-403(a)(5), and 7-404.
Point 4: Sections 2-705 and 7-403(a)(4).
Point 5: Section 1-202.
Definitional Cross References:
"Bailee". Section 7-102.
"Bill of lading". Section 1-201.
"Buyer in ordinary course of business". Section 1-201.
"Consignee". Section 7-102.
"Consignor". Section 7-102.
"Creditor". Section 1-201.
"Delivery". Section 1-201.
"Document of title". Section 1-201.
"Duly negotiate". Section 7-501.
"Good faith". Sections 1-201 and 7-102.
"Goods". Section 7-102.
"Honor". Section 1-201.
"Lessee in ordinary course". Section 2A-103.
"Notification". Section 1-202.
"Purchaser". Section 1-201.
"Rights". Section 1-201.