P7: Title and Risk of Loss
Title and Risk of Loss - Chapter 21
Upcoming Schedule
Today’s focus is on Title and Risk of Loss from Chapter 21. Upcoming key dates include:
Thursday 10/2: Review Units 1 and 2, Practice Questions; bring laptops.
Tuesday 10/7: Exam #1 covering Units 1 and 2, comprising approximately 50 multiple choice questions, open notes.
Thursday 10/9: Discussion on Unit 3—Secured Transactions from Chapter 30.
Tuesday 10/14: Exploring Creditors' Rights and Remedies, Chapter 29.
Thursday 10/16: Bankruptcy overview, Chapter 31.
Sources of Contract Law
Contract law is derived from various sources, including:
Legislation: Predominantly the Uniform Commercial Code (UCC).
Judges’ Decisions: Common law principles applicable to contracts for services and real estate.
Contracts for goods are governed under UCC, whereas services and real estate contracts typically fall under common law.
Major Differences Between UCC and Common Law
Some major differences in contract law between UCC and common law include:
Offer: UCC has a Firm Offer Rule which allows an offer to remain open without consideration.
Offer: UCC relaxes the definiteness requirement, allowing for greater flexibility in contract formation.
Acceptance: The UCC eliminates the Mirror Image Rule, allowing for acceptance that does not perfectly match the offer.
Consideration: UCC eliminates the Preexisting Obligation Rule.
Statute of Frauds: UCC includes a Specially-Manufactured Goods Exception.
Performance: Under UCC, the Perfect Tender Rule applies.
Remedies: The UCC specifies remedies both for the non-breaching seller and buyer.
Case Study: Alaska Pacific Trading v. Eagon Forest Products
Issue: Did Seller, ALPAC, breach the contract by failing to deliver logs on time?
Rule: UCC's Perfect Tender Rule states, "If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole."
Application: The contract explicitly stated the shipment date, which ALPAC failed to honor. There was no mutual assent or modification to the delivery requirement. Although Eagon initially waived the delivery date, the UCC requires reasonable delivery times, and 20 days was deemed unreasonable. There was no clear repudiation since no unequivocal intention to not perform was demonstrated.
Conclusion: ALPAC breached the contract; summary judgment was affirmed.
Case Study: DeJesus v. CAT Auto Tech Corp
Issue: Whether CAT effectively rejected defective goods by placing a stop order on its check without notifying the seller.
Rules:
The Perfect Tender Rule differentiates between conforming and nonconforming goods.
Rejection must be communicated to the seller in a timely manner; mere stop payment does not suffice and is ineffective without prompt notification.
The seller must be given a chance to cure by providing conforming goods as stipulated in the contract.
Application: Regardless of the goods' conformity, CAT’s communication by stop payment was not considered seasonable since it was issued the day after accepting delivery. Acceptance of the goods waived any objections to late delivery.
Case Study: Hubbard v. Utz Quality Foods
Issue: Did Utz wrongfully reject Hubbard’s potatoes?
Rules: An installment contract allows a buyer to reject nonconforming installments if they substantially impair the value of the installment or breach the whole contract.
Application: The color of potatoes was of key importance; darker color impaired the value of the shipment. The reasoning for substantial impairment was insufficient.
Conclusion: The rejection was permissible, and the contract was canceled due to nonconformity.
Important Concepts in Performance
Perfect Tender Rule: Examination of the distinction between conforming and nonconforming goods.
Right to Cure: The seller's opportunity to rectify issues with the goods delivered.
Inspection and Rejection: Buyers must inspect goods timely and notify sellers of rejections.
Installment Contracts: Define substantial impairment regulations applicable to these contracts.
Revocation of acceptance for already accepted goods requires proof of nonconformity and substantial impairment without reasonable grounds for suspicion.
Destroying Goods and Commercial Impracticability: Certain scenarios may excuse parties from their obligations under the contract depending on circumstances.
Common Law relates to material breaches and substantial performance.
Under UCC, the Perfect Tender Rule generally prevails but is relaxed under installment contracts due to substantial impairment and for revocation of acceptance.
Common Law Remedies for Breach
Key remedies available under common law for breach of contract include:
Compensatory Damages: Compensation for losses directly resulting from the breach.
Consequential Damages: Additional losses that occur as a consequence of the breach.
Liquidated Damages: Pre-determined damages specified within the contract.
Restitution: Restoration of the injured party to the position they were in before the contract.
Specific Performance: Court order compelling a party to perform their contractual obligations.
Injunctive Relief: Legal remedy by which a party may be restrained from specific actions.
Example of Breach of Contract Case: Mike and Selena’s A+ Kitchen and Bath
Mike contracted Selena to remodel his kitchen for $12,000 and paid $4,000 upfront. After starting the job, Selena demolished the kitchen but failed to return for final work.
Mike had to hire another contractor, Mark, at a cost of $10,000 to complete the job.
Question: How much is Mike entitled to collect from Selena?
Options: a. $0 b. $2,000 c. $4,000 d. $10,000 e. $12,000
Seller’s Remedies after Breach (Example Case with Carrie the Car Dealer)
Carrie sells a car for $30,000 to Ben. Ben cancels the purchase due to job loss, leading Carrie to sell the car to Betty for $29,000.
Question: How much can Carrie recover from Ben?
Options: A. $0 B. $1000 C. $2000 D. $3000 E. $17,000
Lost-volume Seller Rule: Covers scenarios where if a seller has virtually unlimited goods, a lost sale represents lost profits.
Importance of Title in Transactions
The implications of holding good title include:
The ownership gives the right to transfer property to subsequent buyers.
Provides the ability to insure properties.
Allows for the use of property as collateral for loans.
Types of Title
Definitions include:
Good Title: When ownership can be legitimately transferred.
Void Title: Title obtained through theft—no voluntary transfer occurs; both the thief and any subsequent purchases from the thief lack valid title.
Voidable Title: Title gained through fraud—voluntary transfer occurs, but the original owner can void the title. If a good faith purchaser buys from the fraudulent buyer, they obtain good title.
Case Study: Candela v. Port Motors, Inc.
Issue: The case involved a stolen car sold to Port Motors that was later seized from Candela, the buyer.
Candela sued Port Motors for breach of warranty of title as Port Motors had a duty to ensure good title.
Defense by Port Motors: They argued they acted in good faith and thus should not bear the responsibility.
Key Considerations: Determining the type of title each party possessed would establish liability.
Risk of Loss Prior to UCC
Before the UCC, risk of loss was generally borne by the party with good title, meaning that title passage also indicated risk transfer. This often led to inequities when possession was delayed in other contractual agreements.
UCC Article 2 and Risk of Loss
The UCC aims to address risk of loss inequities with default rules based on the delivery type.
Default Rules:
Title passage occurs upon seller’s delivery completion.
Depending on the delivery contract type, the risk of loss mechanics differ.
Types of Delivery Contracts Under UCC
Non-carrier delivery (seller delivers goods):
For merchants, ROL passes upon delivery completion; for non-merchants, it passes at the point of tender.
Common Carrier (third-party delivery):
Generally, carriers bear strict liability for loss or damage.:
There are two types of contracts:
Shipment Contract: Risk transfers when goods reach the carrier.
Destination Contract: Risk remains with the seller during transit.
Goods in Bailment (warehouse storage):
Title is transferred when the bailee acknowledges the transfer of title depending on the title documents involved.
Conditional Sale Types:
Sale on Approval: ROL remains with the seller until buyer accepts the sale.
Sale or Return: ROL shifts based on traditional rules established previously.
Changes in ROL Due to Breach
When there is a breach from the seller due to sending nonconforming goods, ROL remains with the seller until the goods are either cured or accepted.
If the buyer is in breach (such as non-payment), ROL transfers immediately to the buyer, which may include limitations for destination contracts held by seller’s insurance statuses.