Ch 22 Ownership, Risk, and Warranties Flashcards
Chapter Introduction
-An interest is a legal right in something
Legal Interest and Title
Historically, courts settled disputes about legal interest by looking at one thing: title. But the drafters of the UCC concluded that “title” was too abstract an answer for the assorted practical questions that arose.
Existence and Identification
(Existence, Identification)
[Existence]
-Goods must exist before title can pass.
[Identification]
-Goods must be identified to the contract before title can pass
-The parties may agree in their contract how and when they will identify the goods.
Passing of Title
-Title may pass in any manner on which the parties agree (UCC §2-401).
If the parties do not agree on passing title, §2-401 decides. There are three possibilities:
1. When the goods are being moved,
2. When the goods are not being moved and a contract calls for delivery of ownership documents,
3. When the goods are not being moved and the contract does not call for delivery of ownership documents,
Insurable Interest
-A buyer obtains an insurable interest when the goods are identified to the contract (UCC §2-501)
- The seller retains an insurable interest in goods as long as she has either title to the goods or a security interest in them (UCC §2-501).
Imperfect Title
(Bona Fide Purchaser, Entrustment)
[Bona Fide Purchaser]
-A person with voidable title has power to transfer valid title for value to a good-faith purchaser, generally called a bona fide purchaser or BFP.
* voidable title: Limited rights in goods, inferior to those of the owner.
The collector can prove that he is a bona fide purchaser by showing two things:
1. That he gave value for the goods and
2. That he acted in good faith.
[Entrustment]
-UCC §2-403(2), any entrusting to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business.
(Deals in Goods of That Kind.)
(In the Ordinary Course of Business.)
* buyer in the ordinary course of business (BIOC): One who acts in good faith, without knowing that the sale violates the owner’s rights
Risk of Loss
- UCC §2-509(4) states that the parties may allocate the risk of loss any way they wish.
Shipping Terms
- FOB place of shipment.The seller must deliver the goods at the place named and bears the expense and risk of shipping.
- CIF. The price includes in a lump sum: the cost of the goods and the insurance and freight to the named destination.
- C&F. The price includes in a lump sum: the cost of the goods and freight, but not insurance.
When the Parties Fail to Allocate the Risk
(When Neither Party Breaches, When One Party Breaches)
-When neither party has breached the contract, the risk of loss generally passes from seller to buyer when the seller has transported the goods as far as he is obligated to. When a party has breached, the risk of loss generally lies with that party.
[When Neither Party Breaches]
There are three possibilities:
1. the contract required the seller to ship the goods, or
2. the contract involved a bailment, or
3. other cases.
(If the Seller Must Ship the Goods)
-In a shipment contract, the risk passes to the buyer when the seller delivers the goods to the carrier.
(If There Is a Bailment)
-bailment, meaning that one person or company is legally holding goods for the benefit of another.
* bailor, the one who owns the goods,
* bailee, the one with temporary possession.
- If the contract requires a bailee to hold the goods for the buyer, the risk passes when the buyer obtains documents entitling her to possession, or when the bailee acknowledges her right to the goods.
(Other Cases)
[When One Party Breaches]
We now look at how the Code allocates risk when one of the parties does breach. Again there are three possibilities:
1. seller breaches and buyer rejects;
2. seller breaches, buyer accepts, but then revokes; or
3. buyer breaches.
(Seller Breaches and Buyer Rejects.)
* nonconforming goods: Merchandise that differs from what is specified in the contract
- When the buyer rejects nonconforming goods, the risk of loss remains with the seller until he cures the defect or the buyer decides to accept the goods.
(Seller Breaches, Buyer Accepts, but Then Revokes.)
-When a buyer accepts goods but then rightfully revokes acceptance, the risk remains with the seller to the extent that the buyer’s insurance will not cover the loss.
(Buyer Breaches)
- When a buyer breaches the contract before taking possession, it assumes the risk of loss to the extent that the seller’s insurance is deficient.
Warranties
- warranty: Contractual assurance that goods will meet certain standards
Express Warranties
(Affirmation of Fact or Promise, Description of Goods, Sample or Model, Basis of Bargain)
- express warranty: One that the seller creates with his words or actions.
The UCC establishes that the seller may create an express warranty in three ways:
1. with an affirmation of fact or a promise,
2. with a description of the goods, or
3. with a sample or model.
In addition, the buyer must demonstrate that what the seller said or did was part of the basis of the bargain
[Affirmation of Fact or Promise]
-Any affirmation of fact—or any promise—can create an express warranty
-A statement is more likely to be an affirmation of fact if:
* It is specific and can be proven true or false.
* It is written
* Defects are not obvious.
* Seller has greater expertise
[Description of Goods]
-Any description of the goods can create an express warranty.
[Sample or Model]
-Any sample or model can create an express warranty.
[Basis of Bargain]
-The seller’s conduct must have been part of the basis of the bargain
*included the statements or acts in their bargain.
Implied Warranties
(Implied Warranty of Merchantability, Implied Warranty of Fitness for a Particular Purpose, Two Last Warranties: Title and Infringement)
-Implied warranties are those created by the UCC itself, not by any act or statement of the seller.
[Implied Warranty of Merchantability]
- Unless excluded or modified, a warranty that the goods are merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind
* Merchantable: Goods that are fit for the ordinary purpose for which they are used.
This rule contains several important principles:
* Unless excluded or modified means that the seller does have a chance to escape this warranty
* Merchantability requires that goods be fit for their normal purposes
* Implied means that the law itself imposes this liability on the seller even if it is not written down.
* A merchant with respect to goods of that kind means that the seller is someone who routinely deals in these goods or holds himself out as having special knowledge about such goods.
[Implied Warranty of Fitness for a Particular Purpose]
- Where the seller at the time of contracting knows about a particular purpose for which the buyer wants the goods, and knows that the buyer is relying on the seller’s skill or judgment, there is (unless excluded or modified) an implied warranty that the goods shall be fit for the purpose.
* Particular purpose
* Seller’s skill.
* Exclusion or modification
[Two Last Warranties: Title and Infringement]
-The seller of goods warrants that her title is valid and that the goods are free of any security interest that the buyer knows nothing about, unless the seller has clearly excluded or modified this warranty.
- unless otherwise agreed, a seller who is a merchant warrants that the goods are free of any rightful claim of copyright, patent, or trademark infringement.
Warranty Disclaimers
(Oral Express Warranties, Written Express Warranties, Implied Warranties,
- disclaimer: Statement that a particular warranty does not apply
[Oral Express Warranties]
-Under the Code, a seller may disclaim an oral express warranty.
[Written Express Warranties]
-If a seller includes an express warranty in the sales contract, any disclaimer is definitely invalid.
[Implied Warranties]
-A seller may disclaim the implied warranty of merchantability provided he actually mentions the word merchantability and makes the disclaimer conspicuous.
-To make life easier, the Code permits a seller to disclaim all implied warranties by conspicuously stating that the goods are sold “as is” or “with all faults.”
-Many states, though, prohibit a seller from disclaiming implied warranties in the sale of consumer goods.
Remedy Limitations
(Consequential Damages)
-The seller may also limit the buyer’s remedy
- limitation of remedy clause: Contract clause allowing parties to limit or exclude applicable UCC remedies
[Consequential Damages]
* Consequential damages, however, are different. They are losses stemming from the buyer’s particular circumstances.
-An exclusion of consequential damages is void if it is unconscionable.
-If the buyer is a consumer who suffers a personal injury, a court is nearly certain to reject an exclusion for consequential damages.
Privity
(Personal Injury, Economic Loss)
-When two parties contract, they are in privity.
[Personal Injury]
-Where a product causes a personal injury, most states permit a warranty lawsuit even without privity.
[Economic Loss]
-If the buyer is a business, the majority of states require privity.
-By contrast, when the buyer is a consumer, more states will permit a suit against the manufacturer, even without privity.
