Chapter 19 – Formation and Terms of Sales Contracts
CHAPTER 19
FORMATION AND TERMS OF SALES CONTRACTS
I. OBJECTIVES:
In chapters 8-18, the student studied the common law rules that govern the creation and
performance of contracts generally. This chapter, and the three that follow, build on that
discussion and focus on the law codified in Article 2 of the Code that governs the sale of
goods. The focus in this chapter is on the rules that govern the formation of sales
contracts and the key terms provided by the Code. After reading the chapter and attending
class, a student should be able to:
1. Analyze whether a transaction involves the sale of goods to which the Uniform
Commercial Code applies or whether common law principles apply to the transaction.
2. Recall the major provisions of the Code that are applicable to the formation of
contracts for the sale of goods, including the “gap fillers” that the Code deems part of
the contract when the parties omit critical terms of state them in an unclear manner.
3. Explain when title to goods passes from the seller to the buyer.
4. Explain what is meant by a voidable title and explain when a buyer can obtain better
title to goods than the seller had.
5. Apply the Code’s rules concerning risk of loss to determine who had the risk of loss
in a given transaction where the goods that were the subject of a contract were lost or
destroyed before the buyer took possession.
6. Distinguish between sale or return and sales on approval and explain the ramifications
those distinctions have for the rights of buyers and sellers.
II. ANSWER TO INTRODUCTORY PROBLEM
A. The first question following the hypothetical that appears at the beginning of the
chapter asks whether an enforceable contract can be formed electronically. Under the
federal Electronic Signatures in Global and National Commerce Act (the “E-sign
act”), which preempts conflicting state law (such as the Article 2 requirement for a
“signed writing” as one means of satisfying the statute of frauds), parties may use
electronic authentications in lieu of “signed writings.” Moreover, in the relatively
few states that have adopted the Uniform Electronic Transactions Act (UETA) online
communications can satisfy the Section 2-201 statute of frauds requirement. See
Cyberlaw in Action: Electronic Writings and the Statute of Frauds (page 533).
B. The second question asks whether the buyer or the seller of the bicycle had the risk of
loss when it was damaged during shipment. Where the seller has not agreed to
deliver the goods to the buyer, the general rule is that the seller retains the risk of loss
until it has placed the goods in the hands of the carrier. If a Trek employee was
loading the box on the carrier’s truck, then Trek would still have the risk of loss. If
the bicycle was already in the hands of the carrier, then, Paul would have the risk of
loss and must pursue the carrier to recover for the damage done to the bicycle.
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Chapter 19 – Formation and Terms of Sales Contracts
Another issue that might arise is whether the Trek properly prepared the bicycle for
shipping, i.e. used reasonable packaging material or whether the packaging left the
bicycle particularly vulnerable to damage during shipment,; in the latter case, the risk
of loss might have remained with Trek.
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Chapter 19 – Formation and Terms of Sales Contracts
C. The third question asks whether the owner of a bicycle that had been entrusted to a
bicycle shop for repairs and was then sold by mistake to another customer could
recover the bicycle from the customer. Under 2-403(3) where goods are entrusted to
a merchant who deals in goods of that kind, the merchant has the power to transfer all
rights of the entruster to a buyer in the ordinary course of business. Thus, in this case
Paul would not be able to recover the bicycle from Melissa and her boyfriend; rather
Paul would have to pursue an action for conversion against the bicycle shop.
D. The fourth question asks whether despite the fact that Melissa and her boyfriend have
the right to keep the bicycle, the ethically preferable thing to do would be to return
the bicycle to the bicycle shop for it to give back to Paul, provided that it returns the
money she paid it. In responding the students should be encouraged to put
themselves in Paul’s shoes and ask how they would like to be treated in this situation.
Because we are dealing with a “new” bicycle, Paul may be equally or better off if he
is—or can be put– in a position to get a brand new (undamaged) Trek bicycle. The
considerations might be different if the item was something that was unique or had
particular sentimental value to the entruster. The Ethics in Action box on page 516
involving an heirloom diamond ring raises this consideration.
III. SUGGESTIONS FOR LECTURE PREPARATION:
A. Introduction
1. Purpose of Article 2 of the Code. Set the stage for the discussion of the law of
sales by pointing out that Article 2 is a legislative amendment of the common law
of contracts. Note that the primary purpose of Article 2 is to eliminate the
technical requirements of contract law that created results not consistent with the
reasonable expectations of the parties to a commercial transaction.
2. Coverage of Article 2. Explain when Article 2 applies to a commercial
transaction, noting that when Article 2 does not apply, the law of contracts does
apply. Ask the students whether Article 2 or contract law applies to each of the
following transactions:
a. Sale of a house. (Contract law)
b. Sale of 1,000 books by a publisher to a bookstore. (Article 2)
c. Sale of a book from a consumer to a consumer. (Article 2)
d. Retaining an accountant to provide tax counseling. (Contract law)
e. Problem Case #1. (Contract law).
Janke v. Brooks (page 530). Where the owner of a classic automobile engaged a
specialist in restoring such cars and the ensuing work was deemed unsatisfactory,
the court held that the UCC was not applicable. The court found that even though
the contract contemplated both the sale of some goods (the parts) and the
provision of services, the contract was predominantly one for services and thus
the implied warranties under the UCC were inapplicable.
Points for discussion: Note the test set out by the court for making the
determination as well as the factors that it considered in this case.
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Chapter 19 – Formation and Terms of Sales Contracts
3. Note that some of the Code provisions apply only to merchants or to transactions
between merchants and that many of the provisions incorporate the concepts of
good faith and commercially reasonable behavior.
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Chapter 19 – Formation and Terms of Sales Contracts
4. Formation of Contracts. Review the rules concerning offer and acceptance of
sales contracts (and the Code rules) which were discussed in Chapters 10 and 11
concerning formation.
5. Review initially the rules concerning offer and acceptance of sales. Note that a
contract for the sale of goods is created despite the omission of other terms if the
subject matter and the quantity are specified. In this regard you should point out
that even the quantity may be somewhat uncertain, if the contract is a
requirements or output contract. Other omitted terms, it should be noted will be
supplied by reference to Code conventions. Explain the purpose of such a flexible
law: to ensure that the parties are not disappointed when they have a reasonable
expectation that a binding commitment exists.
Noble Roman’s, Inc. v. Pizza Boxes, Inc. (page 534) Where a confirmatory writing
contained the quantity term “2,500,000”, but expressly contemplated that not all
2.5 million boxes would be ordered and manufactured, the writing did not constitute
a purchase order for 2.5 million boxes, but a requirements contract; the writing and
course of performance evidenced the intention that the buyer would submit purchase
orders against the requirements contract. The buyer was not, therefore, liable for boxes
for which purchase orders were not submitted.
C. Title
1. Explain in lay language what is meant by title. One way to explain title is to say
the person with title has the power to obtain all rights with respect to the property.
2. When Title Passes. Explain when title passes, the historical importance of that
determination, and the decreased importance of when title passes under present
law.
State of Connecticut v. Cardwell (page 537). Where the contracts for the sale of
tickets to various events being held in the state of Connecticut were made by a
seller from its office in Massachusetts and the contracts did not call for the seller
to deliver the goods to a particular destination or to bear the risk of loss until the
goods were delivered, the contracts were deemed to be “shipment” contracts.
Accordingly, the “sale” occurred in Massachusetts and did not violate a
Connecticut law against ticket scalping.
Points for discussion: What changes in the facts would create a “destination”
contract?
Example for Discussion: Cyberlaw in Action: Buying Beer on the Internet (page
537).
Additional Example: Problem Case #2.
D. Title and Third Parties.
First, state the general rule that a person can convey no greater title than that held by
him or the person for whom he is acting. Next list the exceptions to the general rule.
Ask the students who has title in the following situations:
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Chapter 19 – Formation and Terms of Sales Contracts
1. Ted steals a television from Valerie. Ted sells the TV to Robert’s Used TV Sales,
which buys in good faith. Robert’s sells the TV to Caren, who is a buyer in the
ordinary course of business. (Valerie).
2. Mark takes his stereo to Stan’s Stereo Store for repair work. Stan’s negligently
puts the stereo on its display floor, where Calvin, a buyer in the ordinary course of
business, purchases the stereo. (Calvin)
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Chapter 19 – Formation and Terms of Sales Contracts
3. Same as #2, except that Stan’s sells the stereo to Helen’s Hi-Fi Store. (Mark).
Discuss the difference between a void and a voidable title.
Tempur-Pedic International, Inc. v. Waste to Charity, Inc. (page 539). Where a
manufacturer of mattresses made a donation of mattresses to a charity for the
purpose of distributing them to victims of Hurricane Katrina and the charity
agreed that they would not be resold, but the charity but some of the mattresses
were nonetheless resold, the charity acquired voidable title to the mattresses;
however, with respect to the mattresses that ultimately were purchased, the buyer
was not able to establish that it was a good faith purchaser of the mattresses and
thus was not able to get good title to the mattresses free of the manufacturer’s
claim to them.
Points for Discussion: Note the factors the court pointed to in concluding that the
purchaser was not a good faith purchaser for value. Ask the students whether they
agree that this an equitable result? Who was in the best position to avoid the harm
in this case? Is there anything else the manufacturer might have done to better
assure the donated products were handled consistently with the donation?
Additional Examples: Problem Cases #3 and #4.
Ethics in Action: Perils of Entrusting Goods (page 542): This question raises the issue
of whether the storeowner should go beyond that which he or she is legally required
to do (i.e. to pay the original owner/entruster the value of the ring that was converted
by selling it) in light of the special value it had to the entruster; for example, would
you offer the buyer extra compensation or a special deal on an alternative if he would
return it? For the buyer it raises the question of whether he should surrender his legal
right to keep the ring in light of the circumstances of the sale and the special meaning
it has for the entruster.
E. Risk of Loss
1. Explain the importance of risk of loss and point out that risk of loss does not
always pass from the seller to the buyer when title passes. You should carefully
define the various terms of shipment, and state when risk of loss passes pursuant
to each term of shipment. The student should understand under what
circumstances (1) a ‘shipment’ contract and (2) a ‘destination’ contract are
created, when the risk of loss shifts in each type of contract, and what the
rationale is for shifting the risk at that point. The student should also understand
when the risk of loss shifts in a situation where the goods are being held by a
bailee and where the delivery takes place without moving the goods.
Capshaw v. Hickman (page 543). Under the UCC, the question of ownership and
passage of title is no longer determinative of risk of loss. Rather, risk of loss
passes to the buyer on tender of delivery where, as here, the seller is not a
merchant. Thus the conclusion in this case turns on whether there has been a
“tender of delivery.”
2. Insurable interest should be explained. It should be noted that both the buyer and
the seller can have an insurable interest at the same time.
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Chapter 19 – Formation and Terms of Sales Contracts
3. You may want to ask when title passes, when risk of loss passes, and when the
buyer has an insurable interest in each of the following situations. This exercise
will aid student understanding of these three concepts.
a. Problem Case #5.
b. Problem Case #6.
c. Problem Case #7.
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Chapter 19 – Formation and Terms of Sales Contracts
4. The Global Business Environment: Risk of Loss in
International Sales (page 545): Note the four categories of widely used
international shipping terms that are set forth in the “INCOTERMS” document
published by the International Chamber of Commerce. Emphasize that these
terms are commonly used by parties engaged in international sales of goods and
incorporated into contracts that otherwise are governed by the Convention on
Contracts for International Sale of Goods (CISG).
F. Sales on Trial
1. Develop the differences between a sale on approval, and a sale on return as to (1)
how they originate, (2) where risk of loss lies between the seller and the buyer and
(3) what the relative rights of the buyer, seller and creditors of the buyer are.
Discuss what the seller needs to do to protect his rights under each type of sales
arrangement.
Note that the material on consignments has been moved to chapter 29 which
covers secured interests in personal property and that regarding consignments, the
seller needs to file a financing statement and to post notice of the consignment to
protect its title in the goods.
IV. RECOMMENDED REFERENCES:
A. James Brook, Sales and Leases: Examples and Explanations (5th edition), Aspen
Law & Business, 2009. A concise exposition of the law of sales and leases with good
examples for class and exams.
B. Clayton Gillette and Steven Walt, Sales Law: Domestic and International (Concepts
and Insights), Foundation Press, 2008. An excellent summary of both UCC and
international law of sale of goods.
C. James J. White & Robert S. Summers, Handbook of the Law Under the Uniform
Commercial Code, West Publishing Co. The standard hornbook for the Code, this
book presents the history of the law concerning commercial transactions, explains
why the law is what it is, and studies ambiguities in the Code.
D. Uniform Commercial Code Reporting Service, Chicago, Callaghan & Co. A complete
Code service including the Code and variations made by adopting states. This service
publishes many of the Code cases, which are easily accessed through the service’s
indexing system.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.