Business Law 18 - 19

UCC 2-401(1) and 2-501_______________.

prevent title to goods from passing from the seller to the buyer unless the goods are identified in the sales contract.

__________ can be made at any time and in any manner explicitly agreed to by the parties of a sales or lease contract.

Identification of goods

[UCC 2-501(1), 2A-217] Identification of goods mandate:
What is the rule regarding the identification of already existing goods?

Already existing goods are identified when a sales or lease contract is made and names the specific goods sold or leased.

Already exsiting goods identification example:

Examples A piece of farm machinery, a car, or a boat is identified when its serial number is listed on a sales or lease contract.

[UCC 2-501(1), 2A-217] Identification of goods mandate:
What is the rule regarrding identification of goods that are part of a mass goods?

Goods that are part of a larger mass of goods are identified when the specific merchandise is designated

Identification of large mass of goods example:

If a food processor contracts to purchase 150 cases of oranges from a farmer who has 1,000 cases of oranges, the buyer’s goods are identified when the seller explicitly separates or tags the 150 cases for that buyer.

[UCC 2-501(1), 2A-217] Identification of goods mandate:
What is the rule regarding identification of future goods?

Future goods are goods not yet in existence, such as unborn animals and crops to be harvested.

Identification of future goods example:
Unborn animals 

For sales and lease contracts, unborn young animals (such as unborn cattle) are identified when the young are conceived [UCC 2-501(c), 2A-217(c)].

Identification of future goods example:
Crops to be harvested

For sales contracts, crops to be harvested are identified when the crops are planted or otherwise become growing crops [UCC 2501(c)].

Identification of future goods example:
Future goods other than crops and unborn animals

Future goods other than crops and unborn animals are identified when the goods are shipped, marked, or otherwise designated by the seller or lessor as the goods to which the contract refers.

Article 2 of the UCC establishes precise rules for determining the _______ in sales contracts.

passage of title

Under UCC 2-401(1), ____ to goods passes from the seller to the buyer in any manner and under any conditions explicitly agreed on by the parties.

title

[UCC 2-401(2)].

Point in time pertaining to the title

If the sales contract requires or authorizes the seller to send the goods to the buyer but does not require the buyer to deliver the goods at a destination, title passes to the buyer at the time and place of shipment. This is called a ________.

shipment contract.

Shipment contract requirements:

The seller is required to ship the goods to the buyer via a common carrier, make proper shipping arrangements, and deliver the goods into the carrier’s hands.

Shipment contract example

A company in Texas purchases a shipment of goods from a seller in North Carolina. Pursuant to the contract, the seller is required to deliver the goods to a named shipping company’s facilities at the Port of Wilmington, North Carolina. This is a shipment contract. Title to the goods transfers to the buyer when the goods are delivered to the designated shipping facility at the Port of Wilmington.

If a sales contract requires the seller to deliver the goods at a destination, title passes when the goods are tendered there. This is called a _________.

destination contract.

Destination contract title passage:

Title passes to the buyer when the seller tenders delivery of the goods at the specified destination [UCC 2-401(2)(b)].

Destination contract example:

A company in Boston, Massachusetts purchases a shipment of goods from a seller in southern California. The sales contract requires the seller to deliver the goods to a specified location in Boston. This is a destination contract. Title to the goods remains with the seller until conforming goods are tendered to the buyer at the designated location in Boston.

Sometimes, a sales contract permits a buyer to pick the goods up from a seller. In such situations, the time and place of the passage of title depends on whether the seller is to deliver a ___________ to the buyer.

document of title
(e.g., a warehouse receipt or bill of lading)

Document of title example:

If the goods named in a sales contract are located at a warehouse, title passes when the seller delivers to the buyer a warehouse receipt representing the goods.

If (1) no document of title is needed and (2) the goods are identified at the time of contracting, title passes at the time and place of contracting [UCC 2-401(3)(b)].
Example:

If a buyer signs a sales contract to purchase bricks from a seller, and the contract stipulates that the buyer will pick up the bricks at the seller’s place of business, title passes when the contract is signed by both parties.

Shipping terms:
FOB point of shipment

The buyer bears the shipping expense and risk of loss while the goods are in transit [UCC 2-319(1)(a)].

FOB point of shipment example:

If a shipment contract specifies “F.O.B. Anchorage, Alaska,” and the goods are shipped from New Orleans, Louisiana, the buyer bears the shipping expense and risk of loss while the goods are in transit to Anchorage, Alaska.

FAS port of shipment:

• Requires the seller to deliver and tender the goods alongside the named vessel or on the dock designated and provided by the buyer.

• The seller bears the expense and risk of loss until this is done [UCC 2-319(2)(a)]. The buyer bears shipping costs and the risk of loss during transport.

FAS port of shipment example

If a contract specifies “F.A.S. The Gargoyle, New Orleans,” and the goods are to be shipped to Anchorage, Alaska, the seller bears the expense and risk of loss until it delivers the goods into the hands of the vessel The Gargoyle in New Orleans. Once this is done, the buyer pays the shipping costs, and the risk of loss passes to the buyer during transport to Anchorage, Alaska.

C.I.F. (cost, insurance, and freight) is

a pricing term that means that the price includes the cost of the goods and the costs of insurance and freight.

C.&F. (cost and freight) is a

pricing term that means that the price includes the cost of the goods and the cost of freight.

F.O.B. place of destination (free on board)

requires the seller to bear the expense and risk of loss until the goods are tendered to the buyer at the place of destination [UCC 2-319(1)(b)].

FOB place of destination example

If a destination contract specifies “F.O.B. Anchorage, Alaska,” and the goods are shipped from New Orleans, Louisiana, the seller bears the expense and risk of loss before and while the goods are in transit until the goods are tendered to the buyer at the port of Anchorage, Alaska.

No-arrival, no-sale contract

requires the seller to bear the expense and risk of loss of the goods during transportation.

If the parties do not have a specific agreement concerning the assessment of the risk of loss, _______.

the UCC mandates who will bear the risk.

Absent any indication to the contrary, sales contracts are presumed to be _______ rather than destination contracts.

shipment contracts

A shipment contract requires

the seller to deliver goods to a carrier that conform to the sales contract.

The risk of loss in a shipment contract passes to

the buyer when the seller delivers the conforming goods to the carrier.

Shipment contracts are created in two ways:

The first method requires the use of the term shipment contract. The second requires the use of one of the following delivery terms: F.O.B. point of shipment, F.A.S., C.I.F., or C.&F.

Shipment contract example:

A company in South Dakota purchases a shipment of goods from a seller in Oklahoma. Pursuant to the contract, the seller is required to deliver the goods to a named trucking company’s facilities Tulsa, Oklahoma. This is a shipment contract. Risk of loss to the goods transfers to the buyer when the goods are delivered to the designated trucking facility in Tulsa. If the goods are lost, destroyed, or damaged during shipment, the buyer suffers the loss. Sellers to a destination contract usually purchase insurance to cover the risk of such loss.

A destination contract

requires the seller to deliver conforming goods to a specific destination.

The risk of loss in a destination contract is on

the seller while the goods are in transport. Thus, except in the case of a no-arrival, no-sale contract, the seller is required to replace any goods lost, destroyed, or damaged in transit.
[UCC 2-509(1)(b)].

Risk of loss in a destination contract example:

A company in Chicago, Illinois purchases a shipment of goods from a seller in Detroit, Michigan. The sales contract requires the seller to deliver the goods to a specified location in Chicago. This is a destination contract. If the goods are lost, destroyed, or damaged during transit, the seller is responsible for any costs associated with replacing the goods. Sellers to a destination contract usually purchase insurance to cover the risk of such loss.

UCC rules for when a sales contract permits a buyer to pick up goods from a destination:
[UCC 2-509(3)]

Merchant-seller. If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received. In other words, a merchant-seller bears the risk of loss between the time of contracting and the time the buyer picks up the goods.

Nonmerchant-seller. Nonmerchant-sellers pass the risk of loss to the buyer on “tender of delivery” of the goods. Tender of delivery occurs when the seller (1) places or holds the goods available for the buyer to take delivery and (2) notifies the buyer of this fact.

Nonmerchant-seller.

Nonmerchant-sellers pass the risk of loss to the buyer on “tender of delivery” of the goods. Tender of delivery occurs when the seller (1) places or holds the goods available for the buyer to take delivery and (2) notifies the buyer of this fact.

Merchant-seller.

If the seller is a merchant, the risk of loss does not pass to the buyer until the goods are received. In other words, a merchant-seller bears the risk of loss between the time of contracting and the time the buyer picks up the goods.

Goods sold by a seller to a buyer are sometimes in the possession of a

bailee

(e.g., a warehouse).

Q: When goods are held by a bailee and the seller does not move them, when can risk of loss pass by receiving a document?

A: Risk passes to the buyer when the buyer receives a negotiable document of title covering the goods (e.g., warehouse receipt or bill of lading).

Q: What does UCC § 2-509 cover?

A: UCC 2-509 defines who bears the risk of loss in a sales contract when goods are damaged, destroyed, or lost—depending on whether delivery involves a carrier, a bailee, a merchant-seller, or a nonmerchant-seller.

Q: What happens if the bailee refuses to honor the document or delivery direction?

A: Risk of loss stays with the seller.

Q: When can risk of loss pass through a nonnegotiable document?

A: Risk passes when the buyer receives a nonnegotiable document of title or written delivery direction and has a reasonable time to present it to the bailee and demand the goods.

Special risk of loss rules apply to situations in which there has

been a breach of a sales contract [UCC 2-510].

A seller breaches a sales contract if the seller tenders or delivers nonconforming goods to the buyer. If the goods are so nonconforming that the buyer has the right to reject them, the risk of loss remains with the seller until

(1) the defect or nonconformity is cured or (2) the buyer accepts the nonconforming goods.

Nonconforming goods example

A buyer orders 100,000 smart watches from a seller. The watches are to include a small camera with an advanced lens equal to the best camera lens made. The contract is a shipment contract, which normally places the risk of loss during transportation on the buyer. However, the seller ships to the buyer totally nonconforming watches that include a very low-resolution camera lens. This switches the risk of loss to the seller during transit. The goods are destroyed in transit. The seller bears the risk of loss because the seller breached the contract by shipping nonconforming goods.

A buyer breaches a sales contract if the buyer

(1) refuses to take delivery of conforming goods, (2) repudiates the contract, or (3) otherwise breaches the contract.

Buyer breaching sales contract

Ryan signs a contract to purchase a piece of equipment from Dara. However, before paying for and taking possession of the equipment, Ryan finds a similar piece of equipment and purchases it from a different seller. Here, Ryan has repudiated the original sales contract. Dara may sue Ryan for breaching the contract and recover damages that were caused by the breach. Ryan bears the risk of loss of the equipment for a commercial reasonable time while Dara tries to sell the equipment to another buyer or otherwise reasonably disposes of the equipment.

Sellers often entrust possession of goods to buyers on a trial basis. These transactions are classified as sales on approval, sales or returns, and consignment transactions [UCC 2-326]. Title and risk of loss in these types of ______ are discussed in the following paragraphs.

conditional sales

In a ____, there is no sale unless and until the buyer accepts the goods. A sale on approval occurs when a merchant allows a customer to take the goods for a specified period of time to see if they fit the customer’s needs. The prospective buyer may use the goods to try them out during this time [UCC 2-326(1)(a)].

sale on approval

Sale on approval:
Buyer acccepting sale / goods

Acceptance of the goods occurs if the buyer (1) expressly indicates acceptance, (2) fails to notify the seller of rejection of the goods within the agreed-on trial period (or, if no time is agreed on, within a reasonable time), or (3) uses the goods inconsistently with the purpose of the trial (e.g., a customer resells a digital device to another person).

In a sale on approval, unless otherwise agreed, the risk of loss and title to the goods ____ They do not pass to the buyer until acceptance [UCC 2-327(1)]. The goods are not subject to the claims of the buyer’s creditors until the buyer accepts them UCC 2-326(2)]

remains with the seller.

Sale on approval example

A trucking company is interested in purchasing a new fleet of trucks. The trucking company enters into a sale on approval contract with a vehicle manufacturer to purchase 100 trucks. The contract provides that the vehicle manufacturer will supply three trucks for the trucking company to use for two months to determine whether the trucks meet the needs of the trucking company. Assume that after two months the trucking company determines that the trucks do not meet its requirements. Here, the trucking company returns the trucks and pays nothing. If, however, the trucking company determines that the trucks meet its needs, it will retain and pay for the three trucks plus complete the contract to purchase the other 97 trucks. The vehicle manufacturer retains title and risk of loss while the three trucks are in possession of the trucking company.

Front: What is a sale or return under UCC 2-326?

Back: A sale or return is when the seller delivers goods to a buyer primarily for resale, and the buyer may return any unsold goods within a stated or reasonable time.

In a sale or return

the seller delivers goods to a buyer primarily for resale [UCC 2-326(1)(b)].

Sale or return example

A producer of luxury brand luggage delivers 100 pieces of luggage to a retail store on a sale or return basis. The store pays $400 per piece of luggage. If the store sells 60 pieces of luggage but fails to sell the other 40 within a reasonable time, it may return the unsold luggage to the seller and recover the compensation it paid for the 40 returned pieces of luggage ($16,000). Title and risk of loss to the luggage transferred to the retail store when it took possession of the 100 pieces of luggage. If the luggage is destroyed while in the possession of the store, the store is responsible for their loss. It cannot recover the value of the destroyed or damaged luggage from the seller.

In a __________, the owner of goods (the consignor) delivers the goods to another party (the consignee) to sell on the consignor’s behalf.

consignment

Consignment example

Liam, the owner of an expensive antique piece of furniture, enters into a consignment contract whereby Willoughby’s consignment store agrees to place the furniture in its shop to be offered for sale. The furniture is listed at a sales price of $40,000, and the parties agree to a revenue split whereby Willoughby’s (consignee) will receive 30 percent of the sales price and Liam (consignor) will receive 70 percent of the sales price. If the antique sells, the parties will split the proceeds as agreed. If the antique does not sell during an agreed-upon time, or a reasonable time if the parties have not agreed upon a time, Liam will recover the antique from Willoughby’s. Liam retained title and risk of loss while the antique is in Willoughby’s possession. If Willoughby’s store burns down and the antique is destroyed, Liam bears the loss. Consignors of expensive items usually insure the consigned item against such loss.

In the case of an _______, if the lessor is a merchant, the risk of loss passes to the lessee on the receipt of the goods [UCC 2A-219].

ordinary lease

If the lease is a _______ and the supplier is a merchant, the risk of loss passes to the lessee on the receipt of the goods [UCC 2A-219]. A finance lease is a three-party transaction consisting of a lessor, a lessee, and a supplier (or vendor).

finance lease

UCC leasing rules example

Carlos leases a new automobile from a car dealership. This is an ordinary lease where the automobile dealership is the lessor and the Carlos is the lessee. Title remains with the dealership. Carlos must register the car with the state in order to drive the car. The risk of loss passes to Carlos on receipt of the car. If Carlos gets into an automobile accident, Carlos is liable for damages caused to the leased vehicle. It does not matter if Carlos or another party caused the accident. Lessors usually require the lessee to carry automobile insurance on leased vehicles, which most likely will pay for the damages caused to the car. If the insurance coverage does not pay the full value of the loss, then the lessee will be required to pay the amount of the uncovered damages to the vehicle.

To purchase insurance, a party must have

an insurable interest in the goods.

In a case in which a buyer purchases goods from a thief who has stolen them, the purchaser does not acquire title to the goods. The real owner can reclaim the goods from the purchaser [UCC 2-403(1)]. This is called

void title.

Void title

Octavius steals a jet ski that is owned by Claudia. Octavius resells the jet ski to Romy, who does not know that the jet ski was stolen. If Claudia finds out that Romy has the jet ski, Claudia can reclaim it because Octavius had no title in jet ski, and Romy did not obtain title when Romy purchased the stolen good. There is void title. Romy’s only recourse is against the thief, Octavius, if the thief can be found.

A person (buyer) who obtains goods through fraud, or by paying for the goods with a check that is dishonored, or by impersonating another person, acquires ________ to the goods.

voidable title

A buyer with voidable title can transfer good title to a _______. A good faith purchaser for value is someone who pays sufficient consideration for the goods to a person that the purchaser honestly believes has good title to the goods.

good faith purchaser for value

Fraudently obtained goods example

Camila buys an expensive drone from Oliver for nearly fair market value. It is later discovered that Oliver bought the drone from an electronics store with a bounced check—that is, a check for which there were insufficient funds in the bank to pay for the drone. The electronics store cannot reclaim the drone from Camila because Camila purchased the drone in good faith and for value from Oliver. The store’s only recourse is to try to recover payment for the drone or other remedy from Oliver.

A lessee who leases goods through fraud, or by paying for the goods with a check that is dishonored, or by impersonating another person, acquires a ______in the goods

voidable leasehold interest

A lessee with a voidable leasehold interest can transfer a good leasehold interest to a good faith buyer for value or a ______. A good faith sublessee for value is someone who pays sufficient consideration to a person that the sublessee honestly believes has a valid leasehold interest in the goods. The original lessor of the goods cannot recover the goods from a good faith purchaser for value or a good faith sublessee for value [UCC 2A-305(1)]. The only recourse for the original lessor of the goods is to try to recover payment of the lease price or other remedy from the original lessee.

good faith sublessee for value

The purpose of the Uniform Commercial Code (UCC).

A model set of uniform laws created to reduce differences between state commercial laws and make interstate business more consistent.

How the UCC becomes law.

A state must enact the UCC or parts of it as its own commercial statute.

UCC adoption across the states.

Every state except Louisiana has adopted most or all of the UCC.

Why the UCC was needed.

Businesspeople were frustrated by having to follow different commercial laws in every state they operated in.

What the UCC governs.

Uniform rules for commercial transactions across the United States.

Structure of the UCC.

The UCC is divided into articles, each covering a different area of commercial law.

UCC Article 1 – General Provisions.

Contains foundational rules and definitions for applying the UCC.

UCC Article 2 – Sales.

Governs the sale of goods.

Article 2 of the UCC.

Article 2 governs sales of goods and has been adopted in some form by every state except Louisiana.

Federal use of Article 2.

Federal courts also apply Article 2 rules to sales contracts governed by federal law.

Purpose of uniform sales laws.

Uniformity reduces confusion and inconsistency for businesses operating across different states.

Article 2 scope.

Article 2 applies to transactions in goods under UCC 2-102.

Definition of a sale under the UCC.

A sale is the passing of title from seller to buyer for a price, under UCC 2-106(1).

Example of a sale of goods.

Purchasing an automobile (over $500) is a sale of a good, no matter whether payment is made in cash, card, cryptocurrency, or any other consideration.

Definition of goods under UCC 2-105(1).

Goods are tangible, movable items at the time they are identified to the contract.

Goods include special categories.

Specially manufactured goods and the unborn young of animals are included in the definition of goods.

Items excluded from Article 2.

Items that are not tangible goods—such as money, stocks, bonds, patents, and other intangible items—are not governed by Article 2.

Real estate exclusion.

Real estate is not a tangible good and is not governed by Article 2 of the UCC.

Article 2A of the UCC.

Article 2A governs personal property leases and provides uniform rules for formation, performance, and default in lease contracts.

Relationship between Article 2 and Article 2A.

Article 2A is similar to Article 2, and many Article 2 rules were adapted to fit leasing terminology and leasing practices.

Scope of Article 2A.

Article 2A applies specifically to leases of goods, not real estate or services.

Examples of goods commonly leased.

Automobiles, trucks, farm machinery, industrial equipment, and aircraft are frequently leased under arrangements governed by Article 2A.

Definition of a lease under UCC 2A-103(1)(j).

A lease is a transfer of the right to possess and use goods for a set term in exchange for consideration.

Range of leased goods.

Leased goods can range from personal-use vehicles to highly complex industrial equipment used by multinational corporations

Definition of lessor under UCC 2A-103(1)(p).

The lessor is the party who transfers the right of possession and use of the goods.

Definition of lessee under UCC 2A-103(1)(n).

The lessee is the party who acquires the right to possession and use of the goods.