SALES
18
19
Formation & Terms
of Sales Contracts
Warranties &
20
Performance of
Sales Contracts
Product Liability
21
Remedies for Breach of
Sales Contracts
CHAPTER 18
Formation &
Terms of
Sales Contracts
Introduction
• Sale of Goods = Transfer of ownership of
personal property in exchange for money,
other goods or the performance of
services.
• UCC Article 2 applies to transactions in
goods
– Code applies where sale of goods is the
predominant part of the transaction
• Leases- UCC Article 2A
Introduction
• Sale of Goods?
– Heart of Texas Dodge, Inc. v. Star Coach,
L.L.C., p.303
• A contract to customize a truck was found to be a
contract for services and labor with only the
incidental furnishing of equipment and materials;
because the predominant element was the
furnishing of services and labor, the contract was
not one for the sale of goods and is not governed
by the UCC..
Introduction
• Sale of Goods?
– Question 1 at end of chapter
• No. the court noted that the UCC applies only to transactions in goods
and not to service contracts. Where the transaction is viewed a mixed
sales and service contract, the courts look to the main purpose of the
agreement. Here, the courts focus on whether the predominant factor is
service, with goods only incidentally involved, or the sale of goods,,
with labor only incidentally involved. In this case, the goods involved
were available only to licensed applicators such as Capitol and could not
have been purchased by the Abelmans. They did not contract with
Capitol to buy gold Crest Termite, but rather the sole purpose of the
contract was for Capitol to provide the service of ridding their home of
termites. Accordingly, the contract was not one for the sale of goods and
there was no express or implied warranty. Abelman v. Velsicol Chemical
Corp., 15 UCC Rep.2d 93 (Cir. Ct. Md. 1991).
Introduction
• Higher Standards for Merchants
– Buyer reliance
– Merchants generally more knowledgeable
• Code Requirements
– Good faith
– Commercially reasonable manner
Terms of Sales Contracts
• Gap Fillers (for omitted terms)
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Common trade practice
Commonly used terms
Unless contract specifies otherwise
Price
• Reasonable Price at Delivery
• Good faith required where 1 party allowed to fix
– Contractual Quantity Terms
• Output/Requirements (e.g. all of a crop
produced)
– Limited to actual or good faith reasonable amount
Terms of Sales Contracts
• Gap Fillers (for omitted terms)
– Exclusive Dealing
• Requires best efforts to supply & to sell
– Delivery
• Usual default: Single shipment lot to seller’s
place of business
– Time
• Default: reasonable time
Title & The Code
• Code Changes
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Title
Risk of Loss
3rd Party Claims
Insurable Interest
• Buyer Rejection
• General Title Rules
– Physical Delivery
– Delivery Without Moving
Goods
– Negotiable Document of
Title
Title & The Code
• Physical Delivery
– Butler v. Beer Across America, p.307
• Where the sales invoice and shipping documents
provided that the sale was FOB the seller who was
located in Illinois and the beer was brought to Alabama
by a common carrier, the sale was considered to have
been made in Illinois and title passed from the seller to
the buyer at the time the beer was tendered to the carrier.
• Note that the main impact of the sale having taken place
in Illinois was that the case against the seller had to be
brought in Illinois.
Title & The Code
• Physical Delivery
– Example:Under 2-407(2), title to the vehicle passed to the
buyers at the time and place when the seller completed his
performance with reference to the physical delivery of the
goods. The fact that the dealer retained the Certificate of
Title pending receipt of full payment for the car was
effective under Section 2-401(1) only as the reservation of a
security interest in the vehicle. O’Donnell v. American
Employers Insurance Co., 622 N.E.2d 570 (Ct. App. Ind.
1993)
Title & the Code
• Delivery without moving goods
– Title passes at time & place of contracting, if goods
identified (by surrounding circumstances)
• Negotiable Document of Title
– (e.g Bill of Lading)
– Title passes with delivery of document
• Buyer rejection
– Title reinvests in seller
Title & the Code
• Delivery without moving goods
– Title passes at time & place of contracting, if goods identified (by
surrounding circumstances)
• Question 2 at end of chapter
– No. If delivery is to be made without moving the goods and no
documents of title are involved, title passes at the time of
contracting if the goods are identified at the time of contracting
(Section 2-401[3][b]). It is not necessary that the goods be in a
deliverable state in order to be identified to the contract.
Because the Kinsvater boat was identified at the time the parties
contracted for sale, because there was no requirement for
documents of title for boats in this state, and because delivery
was to be made without the seller moving the boat, title passed
to Clouser at the time of the contracting. Transamerica has
confused title with risk of loss. Russell still had the risk of loss
because he retained possession of the boat. Title, however, had
already passed to Clouser. Russell v. Transamerica Insurance
Co., 322 N.W.2d 178 (Ct. App. Mich. 1982).
Title & Third Parties
• Protection of Innocent Buyers
– Transfer of Voidable Title- Good Faith
Purchaser, For Value
• Reason: Place Burden of Loss on Party who had best
opportunity to avoid harm (true owner vs. good faith
buyer)
• Alsafi Oriental Rugs v. American Loan Co., p.308
– Where an individual, through fraudulent representations,
convinced a rug dealer to give her possession of some oriental
rugs “on consignment,” the individual had voidable title to the
rugs and the power to transfer good title to a good faith purchaser
for value.
– Is this an equitable result? Who was in the best position to avoid
the harm in this case?
Title & Third Parties
• Protection of Innocent Buyers
– Transfer of Voidable Title- Good Faith
Purchaser, For Value
• Sutton v. Snider, p. 310
– Where the owner of a motorcycle
entrusted possession of his motorcycle
to a dealer on consignment and the
dealer sold the motorcycle to a third
person, that individual received good
title to the motorcycle as a buyer in
the ordinary course of business and the
original owner was not entitled to
recover the motorcycle from him.
Title & Third Parties
• Protection of Innocent Buyers
– Transfer of Voidable Title- Good Faith
Purchaser, For Value
• Question 3 at end of chapter.
– Yes. Under 2-403 of the Code a “person with voidable title has
power to transfer good title to a good faith purchaser for value”
even though the voidable titleholder obtained the goods by
deceiving the transferor as to the identity of the purchaser and that
deception was punishable as criminal fraud. Here, Gude obtained
a voidable title to the merchandise, and he could pass on good
title to Simpson if Simpson was able to show he was a good faith
purchaser for value. Club Pro Golf Products, Inc. v. Simpson, 7
UCC Rep.2d 425 (Cir. Ct. Va. 1988).
Title & Third Parties
• Protection of Innocent Buyers
– Buyer in Ordinary Course of Business (i.e.
from a dealer in that type of goods)
• Reason: To promote confidence in
commercial transactions
– Entrusting Goods
• e.g. Watch to jeweler for repair
• Remedy: Sue for conversion
Title & Third Parties
• Protection of Innocent Buyers
– Buyer in Ordinary Course of Business (i.e.
from a dealer in that type of goods)
• Question 4 at end of chapter
– No. Jones does not have to surrender the vehicle to Mitchell
even though the dealer had never paid Mitchell or received a
title from her. Jones was a buyer in the ordinary course of
business because he purchased a used car in good faith from a
merchant dealing in used cars. Section 2-403(2) protects a
buyer in the ordinary course against a true owner in every case
where the owner has entrusted goods to a merchant who deals
in goods of that kind Jones v. Mitchell, 2001 WL 1299237
(Ct. Civ. App. Ala. 2001).
Risk of Loss
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Overview
Terms of Agreement- Tender of Delivery
Shipment Contracts
Destination Contracts
Goods in Possession of 3rd Party
Risk Generally
Breach of Contract/Risk of Loss
Insurable Interest
Shipment Contracts
• Free On Board (FOB)
– Goods to carrier passes risk of loss to buyer
• Free Alongside (FAS)
– Goods delivered alongside of vessel, passes risk of
loss to buyer
• Cost, Insurance, & Freight (CIF)
– Seller retains risk of loss (to insure)
• Cost & Freight (C&F)
– Seller no obligation to insure
Destination Contracts
• Destination Contracts - Seller retains risk of
loss until reach specified destination
– FOB Destination
– Ex-Ship
• Seller retains risk until unloaded from ship used
– No Arrival, No Sale
Goods in Possession of 3rd Parties
• Risk passes to buyer when buyer has the power
to take possession
– Harmon v. Dunn, p.312
• Where goods that are the subject of a contract for sale re
held by a bailee to be delivered without being moved, the
risk of loss passes to the buyer on acknowledgment by the
bailee of the buyer’s right to possession of the goods.
Goods in Possession of 3rd Parties
• General rule, where no other rules apply, risk
passes with receipt
– Example: Where the seller is a merchant dealing in goods of the
kind sold, the risk of loss passes to the buyer on his receipt of
the goods under UCC Section 2-5099999(3). Here, the seller
was a merchant and still had possession of the goods when they
were stolen. Under these circumstances, Wheel Sports Center
was still responsible for the motorcycle. Ramos v. Wheel Sports
Center, 409 N.Y.S.2d 505 (Cir. Ct. N.Y.C. 1976).
Risk of Loss
• General rule, where no other rules apply, risk passes
with receipt
– Question 5 at end of chapter
• No. Under section 2-509 of the Code, risk of loss passes from the
buyer from a merchant on the buyer’s receipt of the goods. Here,
Legendary Homes never received the goods; thus the risk of loss
remained with Ron Mead. Receipt of goods means taking physical
possession of them. The court concluded that the act of the
deliveryman of placing the goods in an unlocked garage in a house
under construction and then locking the door did not give
Legendary Homes the opportunity to take physical possession of
them. Ron Mead T.V. & Appliance v. Legendary Homes, Inc., 746
P.2d 1163 (Okla. Ct. App. 1987).
Risk of Loss
• General rule, where no other rules apply, risk passes
with receipt
– Question 7 at end of chapter.
• Yes. Where no shipment of the goods or holding of the goods by a bailee is
involved, if the seller is not a merchant, the risk of loss passes to the buyer on tender
of delivery. The risk of loss does not turn on who is the title holder. Here, there was
no effective tender of delivery. Putrell had not removed the items from either the
mobile home or the shed that she was required to remove and had not surrendered
the keys to the shed. As the trailer and shed had not been put at Burnett’s
disposition without being fettered with the items of personal property, there was no
tender of delivery within the meaning of the Code. Consequently, the risk of loss
remained with her. However, there was a strong dissent who argued that the fact
Putrell had left some personal effects in the mobile home was not sufficient to
conclude that delivery had not been tendered. She had permission to enter the
mobile home only for a specific, limited reason. From the point in time that title
was transferred and the keys given to Burnett, delivery was tendered and only a
bailment for personal property existed. Burnett v. Putrell, 1992 Ohio App. Lexis
3467.
Goods in Possession of 3rd Parties
• If breach, burden on breaching party
• Possible mitigation of risk: Insurance where
insurable interest
Sales on Trial
• Sale/Return
– Where primarily for resale
– Title & Risk of Loss on Buyer
• Example: The transaction was a “sale or return” under Section 2326(1)(b) because the language of the invoice indicated that a sale
had occurred but that B & B would take back unsold goods after
90 days. Accordingly, Collier had title to and the risk of loss of
the goods while they were in his possession. Collier v. B & B
Sales, Inc., 471 S.W.2d 151 (Tex. Ct. App. 1971).
Sales on Trial
• Sale/Return
– Where primarily for resale
– Title & Risk of Loss on Buyer
• Question 6 at end of chapter
– YMCA. The case is controlled by section 2-327 (2),
which provides in part as follows: “. Under a sale or
return unless otherwise agreed “(a) the option to return
extends to the whole or to any commercial unit of the
goods while in substantially their original condition,
but must be exercised seasonably; and (b) the return is
at the buyer’s risk and expense.”Seaway Candy, Inc. v.
Cedar Rapids YMCA, 283 N.W.2d 315 (Sup. Ct. Iowa
1979).
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Sales on Trial
• Sale on Approval
– Risk does not pass to Buyer until accepts
• Sale on Consignment or Memorandum
– Consignor retains title & risk of loss
• Note: if no notice, consignee’s creditors may attach
Sales on Trial
• Sale on Consignment or Memorandum
– In Re Corvette Collection of Boston, Inc., p. 315
• Goods delivered on consignment are deemed to be on
sale or return and thus they are subject to the claims of
the consignee’s creditors unless the consignor has
complied with the requirements of Article 9 of the
UCC, posted a sign pursuant to a state signage law
(which Alabama does not have) or establishes that the
consignee is generally known by his creditors to be
selling the goods of others (which could not be
established in this case).
Sales on Trial
• Sale on Consignment or Memorandum
– Question 8 at end of chapter
• Yes. Under section 2-326(3) of the UCC, goods delivered on
consignment are deemed to be on sale or return. Thus by deeming the
consignee a purchaser of the goods, the consignor is precluded from
asserting an ownership claim to the goods vis-à-vis the consignor’s
creditors. A consignor can avoid having the consigned goods being
subject to the claims of the consignee’s creditors only if he (1) complies
with an applicable law providing for his interest to be evidenced by a
sign; (2) establishes that the person conducting the business is generally
known by his creditors to be selling the goods of others; or (3) complies
with the filing provisions for secured transactions. In this instance,
Jackson is not protected because Alabama has no sign law, only one of
the Auclair’s creditors, at best, had knowledge of the consignment, and
Jackson had not complied with the filing requirements for secured
transactions. In Re Auclair, McGregor v. Jackson, 131 B.R. 183 (Bankr.
M.D. Ala. 1991).