Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 20 Performance of Sales and Lease Contracts Chapter 20 Performance of Sales and Lease Contracts

20 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Introduction  Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts.  Article 2 adopts concise rules for risk of loss that are not tied to title.  Parties to the sales contract have the right to insure the goods against loss if they have an insurable interest in the goods.

20 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Identification of Goods  Distinguishing the goods named in the contract from the seller’s or lessor’s other goods.  Identification of goods can be made at any time and in any manner explicitly agreed to by the parties to the contract.

20 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Passage of Title  Once the goods exist and have been identified, title to the goods may be transferred from the seller to the buyer.  Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts.

20 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Passage of Title (continued)  Under UCC 2-401(1), title to goods passes from seller to the buyer in any manner and on any conditions explicitly agreed upon by the parties. Shipment contracts Shipment contracts Destination contracts Destination contracts

20 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss  Risk of Loss: No Breach of Sales Contract  Risk of Loss: Conditional Sales  Risk of Loss: Breach of Sales Contract  Risk of Loss: Lease Contracts

20 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: No Breach of Sales Contract  Carrier Cases: Movement of Goods Unless otherwise agreed, goods that are shipped via carrier are considered to be sent pursuant to a shipment contract or a destination contract. Unless otherwise agreed, goods that are shipped via carrier are considered to be sent pursuant to a shipment contract or a destination contract.

20 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: No Breach of Sales Contract (continued)  Carrier Cases: Movement of Goods (continued) Shipment Contract – requires the seller to ship goods conforming to the contract to a buyer via a carrier. Shipment Contract – requires the seller to ship goods conforming to the contract to a buyer via a carrier.  The buyer bears the risk of loss during transportation. Destination Contract – requires the seller to deliver conforming goods to a specific destination. Destination Contract – requires the seller to deliver conforming goods to a specific destination.  The seller bears the risk of loss during transportation.

20 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: No Breach of Sales Contract (continued)  Noncarrier Cases: No Movement of Goods A sales contract may stipulate that the buyer is to pick up the goods, either at the seller’s place of business or another specified location. A sales contract may stipulate that the buyer is to pick up the goods, either at the seller’s place of business or another specified location. Who bears the risk of loss if the goods are destroyed or stolen after the contract date and before the buyer picks the goods up from the seller? Who bears the risk of loss if the goods are destroyed or stolen after the contract date and before the buyer picks the goods up from the seller?

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: No Breach of Sales Contract (continued)  Noncarrier Cases: No Movement of Goods (continued) Merchant–Seller Rule: If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received. Merchant–Seller Rule: If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received. Nonmerchant–Seller Rule: Nonmerchant- sellers pass the risk of loss to the buyer upon “Tender of delivery” of the goods. Nonmerchant–Seller Rule: Nonmerchant- sellers pass the risk of loss to the buyer upon “Tender of delivery” of the goods.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: No Breach of Sales Contract (continued)  Noncarrier Cases: No Movement of Goods (continued) Goods in the Possession of a Bailee (e.g., a warehouse) – goods sold by a seller to a buyer are sometimes in the possession of a bailee. Goods in the Possession of a Bailee (e.g., a warehouse) – goods sold by a seller to a buyer are sometimes in the possession of a bailee.  If such goods are delivered to the buyer without moving them, the risk of loss passes to the buyer.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Conditional Sales  Sale on Approval There is no actual sale unless and until the buyer accepts the goods. There is no actual sale unless and until the buyer accepts the goods. In a sale on approval the risk of loss and title remain with the seller. In a sale on approval the risk of loss and title remain with the seller.  They do not pass to the buyer until acceptance.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Conditional Sales (continued)  Sale or Return Contract The seller delivers goods to a buyer with the understanding that the buyer may return them if they are not used or resold within a stated or reasonable period of time. The seller delivers goods to a buyer with the understanding that the buyer may return them if they are not used or resold within a stated or reasonable period of time. The risk of loss and title transfer to the buyer when he or she takes possession of the goods. The risk of loss and title transfer to the buyer when he or she takes possession of the goods.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Conditional Sales (continued)  Consignment A seller (the consignor) delivers goods to a buyer (the consignee) for sale. A seller (the consignor) delivers goods to a buyer (the consignee) for sale. The consignee is paid a fee if he or she sells the goods on behalf of the consignor. The consignee is paid a fee if he or she sells the goods on behalf of the consignor. A consignment is treated as a sale or return under the UCC. A consignment is treated as a sale or return under the UCC.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Breach of a Sales Contract  Seller in Breach A seller breaches a sales contract if he or she tenders or delivers nonconforming goods to the buyer. A seller breaches a sales contract if he or she tenders or delivers nonconforming goods to the buyer.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Breach of a Sales Contract (continued)  Buyer in Breach Buyers breach a sales contract if they: Buyers breach a sales contract if they:  Refuse to take delivery of conforming goods,  Repudiate the contract, or  Otherwise breach the contract

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Lease Contracts  The parties to a lease contract may agree as to who will bear the risk of loss of the goods if they are lost or destroyed.

Copyright © 2004 by Prentice-Hall. All rights reserved. Risk of Loss: Lease Contracts (continued)  If the parties do not so agree, the UCC supplies risk of loss rules: Ordinary Lease – risk of loss is retained by the lessor Ordinary Lease – risk of loss is retained by the lessor Finance Lease – risk of loss passes to the lessee Finance Lease – risk of loss passes to the lessee Tender of delivery of goods fails to conform to the lease contract – the risk of loss remains with the lessor or supplier until cure or acceptance Tender of delivery of goods fails to conform to the lease contract – the risk of loss remains with the lessor or supplier until cure or acceptance

Copyright © 2004 by Prentice-Hall. All rights reserved. Sales by Nonowners  Void Title A thief acquires no title to the goods he or she steals. A thief acquires no title to the goods he or she steals.  Voidable Title Title that a purchase has if the goods were obtained by: Title that a purchase has if the goods were obtained by:  Fraud  A check that is later dishonored  Impersonating another person

Copyright © 2004 by Prentice-Hall. All rights reserved. Sales by Nonowners (continued)  Good Faith Purchaser for Value A person to whom good title can be transferred from a person with voidable title. A person to whom good title can be transferred from a person with voidable title. The real owner cannot reclaim goods from a good faith purchaser for value. The real owner cannot reclaim goods from a good faith purchaser for value.

Copyright © 2004 by Prentice-Hall. All rights reserved. Sales by Nonowners (continued)  Good Faith Subsequent Lessee A person to whom a lease interest can be transferred from a person with voidable title. A person to whom a lease interest can be transferred from a person with voidable title. The real owner cannot reclaim the goods from the subsequent lessee until the lease expires. The real owner cannot reclaim the goods from the subsequent lessee until the lease expires.

Copyright © 2004 by Prentice-Hall. All rights reserved. Sales by Nonowners (continued)  Buyer in the Ordinary Course of Business A person who in good faith and without knowledge that the sale violates the ownership or security interests of a third party buys the goods in the ordinary course of business from a person in the business of selling goods of that kind. A person who in good faith and without knowledge that the sale violates the ownership or security interests of a third party buys the goods in the ordinary course of business from a person in the business of selling goods of that kind. A buyer in the ordinary course of business takes the goods free of any third-party security interest in the goods. A buyer in the ordinary course of business takes the goods free of any third-party security interest in the goods.

Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Passage of Title in Sales by Nonowner Third Parties and Sales of Goods Subject to Security Agreements (1 of 2) Type of Transaction Title Possessed by Seller Innocent Purchaser Purchaser Acquires Title to Goods Goods acquired by theft are resold. Void title. Good faith purchaser for value. No. Original owner may reclaim the goods. Goods acquired by fraud or dishonored check are resold. Voidable title. Good faith purchaser for value. Yes. Purchaser takes free of claim of original owner.

Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Passage of Title in Sales by Nonowner Third Parties and Sales of Goods Subject to Security Agreements (2 of 2) Type of Transaction Title Possessed by Seller Innocent Purchaser Purchaser Acquires Title to Goods Goods entrusted by owner to merchant who deals in that type of good are resold. No title. Buyer in ordinary course of business. Yes. Purchaser takes free of claim of original owner. Creditor possess security interest in goods that are sold. Good title. Buyer in ordinary course of business. Yes. Purchaser takes free of creditor’s security interest.