Chapter 21: Sales Contracts: Domestic & Global Aspects of Formation, Title, & Risk of Loss

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 21:
Sales Contracts:
Domestic & Global Aspects of
Formation, Title, & Risk of Loss

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Learning Objectives
• Discern Article 2 of the Uniform
Commercial Code.
• Explain the sales contract.
• Describe the title to goods.
• Understand risk of loss.
• Recognize the application of the CISG.

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21.0 In the News
United Nations Convention on Contracts
for the International Sale of Goods
http://bvtlab.com/A99ae
Business lawyers involved in sales transactions
with parties from different countries need to
comprehend the United Nations Convention on
Contracts for the International Sale of Goods
(CISG).
• What is the significance of the CISG?

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21.1a Summary of Common-Law
Changes (Slide 1 of 9)
UCC Code Section 2 – Offer and Acceptance
204 All terms need not be included in negotiations for
a contract to result.
205 Firm written offers by merchants are irrevocable
for a maximum of three months.
206(1)a Acceptance may be made by any
reasonable means of communication and is
effective when deposited.
206(1)b Unilateral offers may be accepted either by a
promise to ship or by shipment.

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UCC Code Section 2 – Offer and Acceptance (cont.)
206(1)b Failure to reject may constitute an acceptance.
206(2) Acceptance by performance requires notice
within a reasonable time, or offer may be treated
as lapsed.
207 Variance in terms between offer and acceptance
may not be a rejection and may be an
acceptance.
305 The price need not be included in a contract.
311(1) Particulars of performance may be left open.

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UCC Code Section 2 – Consideration
203 Adding a seal is of no effect.
209(1) Consideration is not required to support a
modification of a contract for the sale of goods.

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UCC Code Section 2 – Voidable Contracts
403 A minor may not disaffirm against an innocent
third party.
721 Rescission is not a bar to a suit for dollar
damages.

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UCC Code Section 2 – Illegality
302 Unconscionable bargains will not be enforced.

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UCC Code Section 2 – Form of the Agreement
201 Statute of frauds
• $500 price for goods
• Written confirmation between merchants
• Memorandum need not include all terms of agreement.
• Payment, acceptance, and receipt limited to quantity
specified in writing.
• Specially manufactured goods
• Admission pleadings or court proceedings that a
contract for sale was made

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UCC Code Section 2 – Rights of Third Parties
201(4) An assignment of “the contract” or of “rights
under the contract” includes a delegation of duties.

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UCC Code Section 2 – Performance of Contracts
209 Claims and rights may be waived without
consideration.
307,612 Rules on divisible contracts
511 Tender of payment is a condition precedent (rather
than a condition concurrent) to a tender of delivery.
610,611 Anticipatory breach may not be withdrawn if the
other party gives notice that it is final.
614 Impracticability of performance in certain cases is
an excuse for nonperformance.

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UCC Code Section 2 – Discharge
725 The statute of limitations is four years, but
parties can reduce it by mutual agreement to
not less than one year.

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21.1b Scope of Article 2 of Code
• Article 2 applies to sales transactions in
goods.
• Article 2A typically applies to the lease of
goods.
• Article 2 will not apply if the subject matter
of the contract is service.
• If mixed, courts tend to apply Article 2 only
if the goods are predominant.

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21.1c Critical Thinking (Slide 1 of 2)
CASE: Kentwool
Does Article 2 of the UCC apply to a software
services contract? Court states that software
contracts often combine both “goods” and
“services”, and require case-by-case analysis to
determine which aspect is predominent. Per
agreement, defendant’s software was customized
for plaintiff’s specific needs, subject to updates
and available only for a fixed term. The provision
of services was found to be predominant in this
case and, therefore, the Code was held not
applicable.

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21.1c Critical Thinking (Slide 2 of 2)
• Why did the court determine that the
Code was not applicable to this
contract?
• Is it possible that the Code might apply
to a situation where software and
related services are parts of a contract?
If so, what conditions must exist for the
Code to apply?

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21.1c Definitions (Slide 1 of 2)
Goods
– Items of personal property (chattels) that
are of a tangible, physical nature
Sales transaction
– Involves an exchange of title to the goods
for a price
Merchant
– Professional businessperson dealing in
the subject matter of the sales contract

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21.1c Definitions (Slide 2 of 2)
Good faith
– Honesty in fact in the conduct or
transaction
Returned goods
– Sale on approval: Goods are delivered
primarily for use.
– Sale or return: Goods are delivered
primarily for resale.

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21.1d Abbreviations (Slide 1 of 2)
F.O.B. (free on board)
F.O.B. the place of shipment
Seller is obligated to place the goods in
possession of a carrier so that they may be
shipped to the buyer.
F.O.B. the place of destination
Seller is obligated to cause the goods to be
delivered to the buyer.

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21.1d Abbreviations (Slide 2 of 2)
F.O.B. vessel, car, or other vehicle
Seller must at his/her own expense and risk
load the goods on board.
F.A.S. (free alongside) vessel
Seller is required at his/her own expense
and risk to drive the goods alongside the
vessel in the manner usual in the port or on
a dock designated and provided by buyer.
C.I.F. - Price includes the cost of the goods,
insurance, and freight.

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21.2a Express Agreement
• As a general rule, in sales law parties are free
to make their own contract.
• Privileged to contract expressly regarding basic
terms
• Cannot “disclaim” their Code obligations of
good faith, diligence, and due care
• Buyer’s duty in a sales contract is to pay for the
goods.
• Typically, payment due at the time and place
buyer is to receive the goods.
• Concurrent conditions of exchange

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21.2b Documentary Transactions
The seller uses documents of title to
control the goods until he/she is paid.
– Bill of lading
– Warehouse receipt
– Multipurpose commercial instruments
• Typical documentary exchange

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21.2c Course of Dealing, Usage of
Trade, Course of Performance
A course of dealing is a sequence of prior
conduct between the parties.
A usage of trade is a practice or custom in
the particular trade.
Course of performance concerns a
contract that requires repeated
performances.

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21.2c Critical Thinking
CASE: Heller
Beads failed the quality test with buyer but
passed the test with seller, although the tests
employed were slightly different. Buyer
cancelled the contract because of Beads’ failed
test.
• What evidence supported the conclusion that
there was usage of trade in the industry with
respect to the testing conducted in this case?
• Why did the appellate court disagree with the
trial court?

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21.2d Gap Filling Under the Code
Price Reasonable price [2-305]
Quantity “Output” and “Requirements” provisions: reasonable amount
[2-306]
Delivery Tender of delivery at seller’s place of business [2-507; 2-308]
Time Reasonable time for performance [2-309]

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21.3a Title - In General
• Title is the bundle of rights that constitute
ownership.
• Per the Code, the rights, obligations, and
remedies of the seller, the buyer, and the
third parties are determined without
regard to title.
• The most important concept related to
the passage of title is the identification of
the goods to the sales contract.

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21.3b Identification to the Contract
Title to goods cannot pass until the
goods have been identified to the
contract.
• Seller must specify the particular goods
involved in the transaction.
• Special provisions for agricultural items
• Insurable interest created before the
passing of title or delivery of goods.

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21.4a Risk of Loss in
Breach-of-Contract Cases
• Loss will be borne by the party who has
breached contract.
• Buyer rightfully revokes acceptance, the
risk of loss is back on seller.
– Subject to any insurance carried by buyer.
• If buyer repudiates the sale, seller
can impose the risk of loss on buyer.

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21.4b If No Breach Exists (Slide 1 of 2)
Shipment
– F.O.B. shipping point: the risk of loss passes
to buyer when goods delivered to carrier.
– F.O.B. destination: risk of loss does not pass
to buyer until goods arrive at the destination
and are available to buyer for delivery.
– No designation: Buyer bears risk until arrival.
Bailments
– When seller tenders negotiable document of
title to buyer, the risk of loss passes to buyer.

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21.4b If No Breach Exists (Slide 2 of 2)
Other cases
• If seller is a merchant, risk of loss will not
pass to buyer until the goods are received.
• Nonmerchant seller transfers the risk of
loss by tendering the goods.
• Sale on approval: risk of loss does not
pass until buyer accepts the goods.
• Sale-or-return transaction: buyer has the
risk of loss.

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21.4b Critical Thinking
CASE: Wilson
The seller intended the transactions to be
shipment contracts, so the risk of loss passes to
the buyer when the items are delivered to the
carrier. Further, the seller was offering a standard
C.I.F., where the buyer bears risk of loss.
• Why did the court decide this was a shipment
contract?
• What impact does the question of who pays the
insurance have in determining who bears the risk of
loss?

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21.5a Application of the CISG
• The CISG applies if countries of the
parties to the contract have ratified the
CISG.
– Parties may opt out of having the CISG
apply.
• The CISG only applies to non-consumer
contracts for the sale of goods.

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21.5b Significant CISG Provisions
• CISG guided by the mirror-image rule.
• CISG declares that a contract does
not have to be in writing to be
enforceable.
• Consideration is not required to
modify or terminate a contract.

Chapter 21: Sales Contracts: Domestic & Global Aspects of Formation, Title, & Risk of Loss

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Chapter 21: Sales Contracts: Domestic & Global Aspects of Formation, Title, & Risk of Loss