Copyright © 2009 by Pearson Prentice Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 6 th Edition by Henry R. Cheeseman Chapter 17 Performance of Sales, Leases, and E-Contracts

17 - 2Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Introduction passage of title Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts. [UCC 2-401] risk of loss Article 2 adopts concise rules for risk of loss that are not tied to title. insure “insurable interest” Parties to the sales contract have the right to insure the goods against loss if they have an “insurable interest” in the goods.

17 - 3Copyright © 2009 by Pearson 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. In the absence of such an agreement, the UCC mandates when identification occurs. [UCC 2-501(1), 2A-217]

17 - 4Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Passage of Title (1 of 2) Once the goods exist and have been identified, title to the goods may be transferred from the seller to the buyer. Article 2 Article 2 of the UCC establishes precise rules for determining the passage of title in sales contracts. Lessees do not acquire title to the goods they lease.

17 - 5Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Passage of Title (2 of 2) title 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 [UCC 2-401(2)(a)] Destination contracts [UCC 2-401(2)(b)] Document of title [UCC 2-401(3)(a)]

17 - 6Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Carrier Cases: Movement of Goods Generally, goods shipped via carrier are considered to be sent pursuant to a shipment contract or a destination contract. Shipment contract Shipment contract – the buyer bears the risk of loss during transportation. [UCC 2-509(1)(a)] Destination contract Destination contract – requires the seller to deliver conforming goods to a specific destination. [UCC (1)(b)] The seller bears the risk of loss during transportation

17 - 7Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Shipping Terms Sales contracts often contain the following terms: F.O.B. (free on board) point of shipment F.A.S. (free alongside) or F.A.S. (vessel) port of shipment C.I.F. (cost, insurance, and freight) and C. & F. (cost and freight) F.O.B. place of destination Ex-ship (from the carrying vessel) No arrival, no sale contract Sales contracts often contain the following terms: F.O.B. (free on board) point of shipment F.A.S. (free alongside) or F.A.S. (vessel) port of shipment C.I.F. (cost, insurance, and freight) and C. & F. (cost and freight) F.O.B. place of destination Ex-ship (from the carrying vessel) No arrival, no sale contract

17 - 8Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Noncarrier Cases: No Movement of Goods (1 of 3) 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?

17 - 9Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Noncarrier Cases: No Movement of Goods (2 of 3) Merchant-Seller Rule: 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-Seller Rule: Nonmerchant-sellers pass the risk of loss to the buyer upon “tender of delivery” of the goods. [UCC 2-509(3)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Noncarrier Cases: No Movement of Goods (3 of 3) Goods in the Possession of a Bailee Goods in the Possession of a Bailee (i.e., 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. [UCC 2-509(2)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Risk of Loss: Conditional Sales (1 of 3) Sale on Approval Sale on Approval 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. They do not pass to the buyer until acceptance. [UCC 2-327(1)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Risk of Loss: Conditional Sales (2 of 3) Sale or Return Contract 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 risk of loss and title transfer to the buyer when he or she takes possession of the goods. [UCC 2-327(2)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Risk of Loss: Conditional Sales (3 of 3) Consignment Consignment 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. A consignment is treated as a sale or return under the UCC. [UCC 2-326(3)]

Copyright © 2009 by Pearson 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 [UCC 2-510] Seller in Breach A seller breaches a sales contract if he or she tenders or delivers nonconforming goods to the buyer [UCC 2-510] Buyer in Breach Buyers breach a sales contract if they: Refuse to take delivery of conforming goods, Repudiate the contract, or Otherwise breach the contract [UCC 2-510] Buyer in Breach Buyers breach a sales contract if they: Refuse to take delivery of conforming goods, Repudiate the contract, or Otherwise breach the contract [UCC 2-510]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Risk of Loss: Lease Contracts If the parties to a lease contract do not agree as to who will bear the risk of loss of the goods if they are lost or destroyed, the UCC supplies risk of loss rules: Ordinary Lease Ordinary Lease – risk of loss is retained by the lessor. Finance Lease Finance Lease – risk of loss passes to the lessee. Tender of delivery of goods fails to conform to the lease contract 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. [UCC 2A-219, 2A-220(1)(a)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Insuring Goods Against Loss or Damage Determine the value of goods subject to the sales or lease contract. Purchase insurance from a reputable insurance company covering the goods subject to the contract. Maintain the insurance by paying the premiums when they are due. Immediately file the proper claim and supporting documentation with an insurance company if the goods are damaged, destroyed, lost, or stolen.

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Sales by Nonowners (1 of 2) Void Title and Lease: Stolen Goods Void Title and Lease: Stolen Goods A thief acquires no title to the goods he or she steals. [UCC 2-403(1)] Voidable Title Voidable Title Title that a purchase has if the goods were obtained by: Fraud A check that is later dishonored Impersonating another person [UCC 2-201(1), 1-201(44)(d), UCC 2-403(1)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Sales by Nonowners (2 of 2) Good Faith Purchaser for Value 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. Good Faith Purchaser for Value 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. Good Faith Subsequent Lessee 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. Good Faith Subsequent Lessee 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.

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Entrustment Rule: 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 buyer in the ordinary course of business takes the goods free of any third-party security interest in the goods. [UCC 2-403(2)]

Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Entrustment Rule (continued) The entrustment rule also applies to leases. If a lessor entrusts the possession of his or her goods to a lessee who is a merchant who deals in goods of that kind, the merchant-lessee has the power to transfer all the lessor’s and lessee’s rights in the goods to a buyer or sublessee in the ordinary course of business. [UCC 2A-305(2)]

Copyright © 2009 by Pearson 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 © 2009 by Pearson 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.