Ownership, Risk, And Warranties

Question 1

Existence

Answer 1

Goods must exist before title can pass

Example: A farmer may contract to sell corn even before it is planted, but title to the corn cannot pass until it actually exists

Question 2

Identification

Answer 2

Goods must be identified to the contract before title can pass - this means that the parties must have designated the specific goods being sold

The parties may agree in their contract how and when they will identify the goods; they are free to identify them to the contract in any way they want

Question 3

Rules For Identification When Parties Did Not Specify A Method

Answer 3

Identification occurs when the parties enter into a contract if the agreement describes specific goods that already exist

Example: If a dealer agrees to sell a yacht and the parties include the ID number in their contract, the goods are identified (even though the parties never use the term identify)

For unborn animals, identification generally takes place when they are conceived; for crops, identification normally happens when they are planted

For other goods, identification occurs when the seller marks, ships, or in some other way indicates the exact goods that are going to the buyer

Question 4

Passing of Title

Answer 4

UCC §2-401: Title may pass in any manner on which the parties agree; the Code allows the parties to control their affairs with common-sense decisions; the parties can agree, for example, that title passes when the goods leave the manufacturer’s factory or when they reach the shipper who will transport them or at any other time and place

Question 5

What Happens When Parties Do Not Agree How a Title Passes Over?

Answer 5

There are three possibilities per UCC §2-401

1. When the goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do; title passes when the seller completes its last contractually required step
2. When the goods are not being moved and a contract calls for delivery of ownership documents, title passes when the seller delivers those documents to the buyer; when the seller gives the buyer ownership documents, title passes
3. When the goods are not being moved and the contract does not call for delivery of ownership documents, title passes when the parties form the contract; title passes when the parties reach agreement

Question 6

Insurable Interest

Answer 6

Anyone buying or selling expensive goods should make certain that the goods are insured

If the person buying the policy lacks a real interest in the thing insured, the law regards the policy as a gambling agreement and considers it void

UCC §2-501: a buyer obtains an insurable interest when the goods are identified to the contract; the seller retains an insurable interest in goods as long as they have either title to the goods or a security interest in them

Question 7

Security Interest

Answer 7

Refers to cases in which the buyer still owes money for the goods and the seller can repossess the goods if payment is not made

Question 8

Voidable Title

Answer 8

Limited rights in goods, inferior to those of the owner; 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

It is generally easy for purchasers to show that they gave value; the real issue becomes whether the buyer acted in good faith

This is a title that is acquired under circumstances that permit the former owner to rescind the transfer and revert oneself with title, as in the case of mistake, common duress, undue influence, fraud in the inducement, misrepresentation, or sale by a person without contractual capacity (other than an individual under guardianship)

Question 9

How To Prove One is a Bona Fide Purchaser

Answer 9

1. That they gave value for the goods and
2. That they acted in good faith

Question 10

Entrustment

Answer 10

Covers cases in which the owner of goods voluntarily leaves them with a merchant. who then sells the goods without permission

UCC §2-403(2): any entrusting to a merchant who deals in goods of that kind gives them power to transfer all rights of the entrusted to a buyer in the ordinary course of business

Entrusting means delivering goods to a merchant or permitting the merchant to retain them

Question 11

Risk of Loss

Answer 11

When goods are damaged, the law may again need to decide whether it is the seller or buyer who must suffer the loss

UCC §2-509(4)

UCC states that the parties may allocate the risk of loss any way they wish; as long as the parties make their risk allocation clear, the Code will enforce their terms

Addresses the question of allocation of loss between seller and buyer where the goods have been damaged, destroyed, or lost without the fault of either seller or buyer

Question 12

Free on Board (DOB)

Answer 12

The seller is obligated to put the goods into the possession of the carrier at the place named

The seller bears the expense and risk until they are in the carrier’s possession - from that moment onward, the buyer bears the risk

Question 13

FOB Place of Destination

Answer 13

The seller must deliver the goods at the place named and bears the expense and risk of shipping

Question 14

Cost, Insurance, and Freight (CIF)

Answer 14

The price includes in a lump sum: the cost of the goods and the insurance and freight to the named destination

Question 15

C&F

Answer 15

The price includes in a lump sum: the cost of the goods and freight, but not insurance

Question 16

When Parties Fail to Allocate Risk

Answer 16

When neither party breached the contract, Section 2-509 determines the risk; when a party has breached the contract, Section 2-510 governs

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 they were obligated to; when a party has breached, the risk of loss generally lies with that party

To settle these cases, we need to know whether the contract obligated the seller to ship the goods or whether the goods were handled in some other way

Question 17

Three Possibilities When Neither Party Breaches

Answer 17

1. Seller to ship the goods: most contracts require the seller to arrange shipment of the goods; this is often considered to be a shipment contract
2. Contract involved bailment: a bailment is that one person or company is legally holding goods for the benefit of another; a bail or is one who owns the goods; **a bailee is 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 them to possession, or when the bailee acknowledges their right to the goods
3. Other cases: if the seller is a merchant, risk passes to the buyer on receipt - this means that a merchant is only off of the hook if the buyer actually accepts the goods; if the seller is not a merchant, risk passes when the seller tenders the goods, meaning that they make the goods available to the buyer

Question 18

Shipment Contract

Answer 18

In a shipment contract, the seller must deliver the goods to a carrier, which will then transport the goods to the buyer

The risk passes to the buyer when the seller delivers the goods to the carrier

Question 19

Destination Contract

Answer 19

The seller is responsible for delivering the goods to the buyer, and risk passes to the buyer when the goods reach the destination

Question 20

Nonconforming Goods

Answer 20

Merchandise that differs from that specified in the contract

A buyer has a right to reject such goods

Question 21

Seller Breaches and Buyer Rejects

Answer 21

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

Question 22

Seller Breaches, Buyer Accepts, but Then Revokes

Answer 22

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

Question 23

Buyer Breaches

Answer 23

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

Question 24

Warranty

Answer 24

A promise that goods will meet certain standards

Normally a manufacturer or a seller gives a warranty and a buyer relies on it

Contractual assurance that goods will meet certain standards

Sometimes, the law itself imposes a warranty on goods, requiring the manufacturer to meet certain standards whether it wants to or not

Question 25

Express Warranty

Answer 25

One that the seller creates with their words or actions

Whenever a seller clearly indicates to a buyer that the goods being sold will meet certain standards, they have created an express warranty

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

Question 26

Affirmation of Fact or Promise

Answer 26

Any affirmation of fact - or any promise - can create an express warranty

An affirmation of fact is simply a statement about the nature or quality of goods

A common problem in cases of express warranty is to separate true affirmations of fact from mere sale puffery or seller’s opinion, which creates no 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; an oral promise can create an express warranty; statements in a *written contract* are the likeliest of all to create a binding warranty
 -Seller has greater expertise: if the seller knows more than the buyer, their statements will be more influential with buyer and court alike

Question 27

Description of Goods

Answer 27

Any description of the goods can create an express warranty

The statement can be oral or written

A description might be a label on a bag of see or a tag on airplane parts, assuring the buyer that the goods have met safety tests

Question 28

Sample or Model

Answer 28

Any sample or model can create an express warranty

A sample can be a very effective way of demonstrating the quality of goods to a customer

However, a seller who uses a sample is generally warranting that the merchandise sold will be just as good

Question 29

Basis of Bargain

Answer 29

The seller’s conduct must have been part of the basis of a bargain

To prove an express warranty, a buyer must demonstrate that the two parties included the statements or acts in their bargain

Some courts have interpreted this to mean that the buyer must have relied on the seller’s statements; other courts have ruled that a seller’s statement can be part of the basis of the bargain even when the buyer has not clearly relied on it

Question 30

Implied Warranties

Answer 30

Those created by the UCC itself, not by any act or statement of the seller

Question 31

Implied Warranty of Merchantability

Answer 31

Buyers, whether individual consumers or billion-dollar corporations, are more likely to rely on this than any other section

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

Question 32

Merchantable

Answer 32

The goods are fit for the ordinary purposes for which they are used

Question 33

Important Principles for Merchantability/Merchantable

Answer 33

1. Unless excluded or modified means that the seller does have a chance to escape this warranty
2. Merchantability requires that goods be fit for their normal purposes
3. Implied means that the law itself imposes this liability on the seller even if it is not written down
4. A merchant with respect to goods of that kind means that the seller is someone who routinely deals in these goods or holds themselves out as having special knowledge about such goods

Question 34

Implied Warranty of Fitness for a Particular Purpose

Answer 34

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 (unless excluded or modified) an implied warranty that the goods shall be fit for the purpose

Key Points:

Particular Purpose: the buyer must be depending on the seller’s skill or judgment in selecting the product, and the seller must know it

Exclusion or Modification: the seller is allowed to modify or exclude any warranty of fitness

Seller’s Skill: the buyer must be depending on the seller’s skill or judgment in selecting the product, and the seller must know it

Question 35

Title Warranty

Answer 35

The seller of goods warrants that their 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 the warranty

Question 36

Infringement Warranty

Answer 36

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

Question 37

Disclaimer

Answer 37

A statement that a particular warranty does not apply

Question 38

Interest

Answer 38

A legal right in something

Question 39

Title

Answer 39

The normal rights of ownership

Question 40

BIOC

Answer 40

A buyer in the ordinary course of business generally takes goods free and clear of any security interest