1. C H A P T E R
Formation and Terms of
19
Sales Contracts
Merchants have no country. The
mere spot they stand on does not
constitute so strong an attachment
as that from which they draw their
gains.
Thomas Jefferson, U.S. president
and merchant, in a letter to Horatio
G. Spafford (March 17, 1814)
19-1

2. Learning Objectives
• Analyze whether common law or
the UCC applies to a sale of goods
• Explain the meaning of voidable title
and when title to goods passes from
seller to buyer
• Apply UCC’s rules about risk of loss
• Distinguish between sale or return
and sales on approval
19-2

3. The UCC and Sale of Goods
• The Uniform Commercial Code (UCC or
Code) govern most commercial
transactions within the United States
• Under UCC Article 2, a sale of goods
involves the transfer of ownership to
tangible personal property in exchange
for money, other goods, or the
performance of services
– Does not specifically apply to trade in services
19-3

4. If a Dispute Arises…
• If dispute arises about a sales transaction, a
disputing party must determine (a) the basis
for the dispute, (b) applicable law, (c) and
how to respond to the dispute (negotiate or
litigate)
• Example:
Dealer Management Systems, Inc. v. Design Automo
. in which court determined whether unsigned
contract for software over $500 was a contract
for goods governed by the UCC (yes) and if it
complied with Statute of Frauds (no)
19-4

5. 19-5

6. Article 2 A
• Leasing large goods, such as
manufacturing or agricultural equipment,
is common
• UCC Article 2A applies to a lease of goods
– The District of Columbia and all states except
Louisiana have adopted UCC Article 2A
19-6

7. Details of Sales Contracts
• Interpreting a sales contract is easier with
common rules of interpretation:
– Trade practices refers to using words
common in a particular industry
• Example: “case” has a different meanings
for different industries
– If price was omitted, UCC 2-305 fills the
gap by providing the term: reasonable
price at the time for delivery
19-7

8. Details of Sales Contracts
• An outputs contract is an agreement in
which buyer purchases all produce of seller
– Example: hog farmer agrees to sell all hogs
produced only to HamNBacon Co.
• A requirements contract is an agreement in
which seller must provide all requirements for
buyer’s production to the buyer
– Example: Textiles Inc. must provide all fabric
required for production to T-Shirts LLC
19-8

9. Noble Roman’s, Inc. v. Pizza Boxes, Inc
.
• Facts:
– Franchisor Noble Romans and Pizza Boxes
entered into letter agreement for manufacture
of boxes that distributor Multifoods would order
– Agreement included clause: “In the event that
the total of 2.5 million boxes are not manufactured,
Noble Roman’s is responsible for any portion of the
[printing] prep charge remaining.”
– Pizza Boxes produced far more than ordered
by distributor, then sued Noble Romans for
unpaid inventory; trial court found for Pizza
Boxes
19-9

10. Noble Roman’s, Inc. v.
Pizza Boxes, Inc.
• Appellate Opinion:
– Contract language is that of requirements
contract
– No meeting of the minds on how many boxes
Pizza Boxes would ultimately produce
– Course of performance (UCC 2-208) shows
Pizza Boxes invoiced Multifoods as purchaser
– Unambiguous clause states Noble Roman’s
liability for printing prep charges only
– Reversed and remanded with instructions
19-10

11. Details of Sales Contracts
• Under the exclusive dealing contract
provision of UCC 2-306(2), sellers have
an obligation to use their best efforts to
supply the goods to the buyer and the
buyers are obligated to use their best
efforts to promote their sale
• If no time for performance is specified,
a reasonable time is implied
19-11

12. Details of Sales Contracts
• For contracts requiring successive
performances over an indefinite period of
time, UCC 2-309 provides that either party
can terminate the contract upon giving
reasonable notice
• Standardized shipping terms
customarily used in sales
contracts to aid in deciding
which party bears risk of loss
19-12

13. Title to Goods
• Title (evidence of legal ownership) to
goods cannot pass from seller to buyer
until goods are identified to the contract
[UCC 2–401(1)]
• Parties may agree when title passes
– If no agreement, title to goods passes to buyer
when seller completes obligations of delivery
• Passage of title determines who bears risk
of loss if goods damaged during shipment
19-13

14. Title to Goods
• Fundamental rule:
buyer cannot receive
better title to goods
than seller had
– If seller was thief,
buyer does not
obtain good title
19-14

15. Title to Goods: Exception to Rule
• Under UCC 2-403(1), a seller who has a
voidable title may pass good title to a
good faith purchaser for value
– Voidable title: gained by fraudulent
means
– Good faith [UCC 1–201(19)] means
“honesty in fact in the conduct or
transaction concerned”
19-15

16. Tempur-Pedic International, Inc. v. Was
• Facts:
– Tempur-pedic (TP) made donations to Waste
to Charity (WTC) for Hurricane Katrina victims
• Donation contract conditioned on non-resale
– TP discovered that the mattresses were being
sold in various ways, including from trucks and
e-Bay
– TP sued WTC and CSS (reseller) for breach of
contract and fraud
• Issue: Was CSS a good faith purchaser?
19-16

17. Tempur-Pedic International, Inc. v.
Waste to Charity, Inc.
• Opinion:
– TP voluntarily made donation to WTC, thus
WTC acquired voidable title to the property
– CSS, though, was not a good faith purchaser:
• Mattress price substantially below market value
• Tags had been removed from mattresses
• CSS knew TP didn’t authorize sale of used mattresses
• Corporate charter of ADI, seller to CSS, had been
revoked during relevant time period
– Motion for preliminary injunction granted
19-17

18. Title to Goods: Exception to Rule
• A buyer in ordinary course is a person
who gains good title because s/he
– in good faith and without knowledge
that the sale to him is in violation of the
ownership rights of a third party, and
– buys goods in the ordinary course of
business of a person selling goods of that
kind (other than a pawnbroker) [UCC 1–
201(9)]
19-18

19. Title to Goods: Exception to Rule
• If goods are entrusted to a merchant who
deals in goods of that kind, the merchant
may transfer all rights of the entruster to a
buyer in the ordinary course of business
[UCC 2– 403(2)]
– But a merchant-seller cannot pass good
title to stolen goods even if buyer is a
buyer in the ordinary course of business
19-19

20. Risk of Loss in Shipping
• Common law placed risk of loss on the
party who had technical title at time of loss
• UCC provides specific rules:
– Contracting parties, subject to the rule of
good faith, may specify who bears risk of loss
in the agreement [UCC 2–509(4)]
– If contract requires seller to ship goods by
carrier but does not require delivery to specific
destination, risk passes to buyer when seller
delivers goods to carrier [UCC 2–509(1)(a)]
19-20

21. International Sale of Goods
• United Nations Convention
on Contracts for the
International Sale of Goods
(1980) provides rules
governing risk of loss in sale
of goods contracts
• International Chamber of
Commerce publishes a list of
common international
shipping terms known as
INCOTERMS
19-21

22. Common Shipping Terms
• Shipment contract: seller must place
goods in possession of a carrier and
contract for transportation as is
reasonable for the nature of goods and
other circumstances
– Unless parties specify shipment method, contract
is generally construed as a shipment contract
• Destination contract: seller must deliver
goods to specific destination bearing risk
and expense of delivery
19-22

23. Shipment Contracts
• FOB (free on board) point of origin:
seller must deliver goods free of
expense and at seller’s risk (including
loading on board) to the place
designated [2-319(1)]
• FAS (free alongside ship): seller must
deliver goods alongside the vessel at
the port at seller’s own risk and expense
[2–319(2)]
19-23

24. Shipment Contracts
• CIF (cost, insurance, and freight): price of
goods includes seller’s cost and risk to
load, ship, and insure goods [2–320]
• C & F: same as CIF, except seller not
obligated to insure [2–320]
19-24

25. Destination Contracts
• FOB destination: FOB term plus destination for
the goods puts expense and risk of delivering to
that destination on the seller [2–319(1)(b)]
• Ex-ship: places expense and risk on seller until
goods are unloaded from whatever ship is used
[2–322]
• No arrival, no sale: expense and risk during
shipment is on seller, but if goods fail to arrive
through no fault of the seller, the seller has no
further liability to buyer [2–324]
19-25

26. Capshaw v. Hickman
• Tender of delivery requires that
seller put and hold conforming
goods at buyer’s deposition and
give the buyer any notification
reasonably necessary to enable
him to take delivery
• In this case, question remains as
to why Hickman gave car keys
to Capshaw, but car was left in
Hickman’s driveway until
Capshaw’s check cleared
19-26

27. Sales on Trial
• Common commercial practice is for seller
of goods to entrust possession of goods to
buyer to either give buyer an opportunity
to decide whether or not to buy or to try to
resell them to a third person
– Sale on approval, sale or return, or
consignment
– Risk of loss depends on terms of entrusting
19-27

28. Test Your Knowledge
• True=A, False = B
– An outputs contract is an agreement in which
buyer purchases all the production of seller
– CIF (cost, insurance, and freight) means buyer
covers risk to load, ship, and insure goods
– FOB (free on board) Port of Miami means that
seller must deliver goods to the Port of Miami
at seller’s risk and expense, including loading
goods on board
19-28

29. Test Your Knowledge
• True=A, False = B
– Shipment contract means that buyer must
arrange for carrier to pick up and
transport goods
– FAS (free alongside ship) means that seller
must deliver goods alongside the vessel at
the port at seller’s own risk and expense
– A consignment is not a sale, but an
entrusting in which the consignor bears
the risk of loss
19-29

30. Test Your Knowledge
• True=A, False = B
– UCC Article 2 governs most sale of goods
transactions in the United States
– Tom agrees to mow Katy’s lawn during
the summer. Katy failed to pay Tom as
agreed. The provisions of UCC Article 2
apply to Tom and Katy’s contract.
– INCOTERMS were developed by the
United Nations to determine title to goods
19-30

31. Test Your Knowledge
• Multiple Choice
– Ike’s Bikes sells motorcycles. Sam’s Used Cars
& Cycles (Sam’s) sold Ike a used motorcycle.
Ike believes the bike belonged to Sam’s since
Sam’s produced papers that looked official.
Sam’s had stolen the bike from Ted. Ike may:
a) sell the bike since he was a buyer in the
ordinary course of business with good title
b) not sell the bike since it was stolen
c) sell the bike to any customer, but Ted may
sue Ike for damages and will win since Ted
is the rightful owner of the bike
19-31

32. Test Your Knowledge
• Multiple Choice
– Pacific Paper Co. (Pacific) and BoxCo had
a contract in which Pacific must provide
all cardboard for BoxCo’s box production.
This type of contract is known as a(n):
a) outputs contract
b) destination contract
c) supply contract
d) requirements contract
e) none of the above
19-32

33. Test Your Knowledge
• Multiple Choice
– Choi ordered 100 crystal vases from Kristal in
New York. The contract stated the goods
were to be delivered “FOB Choi’s, 111 Main,
Cityville, TX.” The truck overturned en route
and the vases were destroyed. Choi must:
a) pay Kristal the contract price and order again
since Choi contracted for the risk of loss
b) notify Kristal to resend the order since Kristal
contracted for the expense and risk of
delivering to the destination
19-33

34. Thought Questions
• Jefferson said, “Merchants have no
country.” Do you agree with Jefferson?
How might Jefferson view current
international business practices?
19-34