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Suggested Additional Assignments
Research and Drafting Exercise: Warranties
Ask students to find a sales slip with a warranty on it, read the warranty, and then rewrite the warranty in
plain English. Explain exactly what the company will pay for and will not pay for if something goes
wrong. Are they satisfied with the warranty? Are its terms reasonable? Comprehensible to classmates?
Research: Product Liability Class-Action Lawsuits
Have students find a products liability class action lawsuit that has received considerable national press
attention. Possibilities include suits against manufacturers of asbestos or lead paint, suits against the
tobacco industry, and suits against pharmaceutical companies over Fen-Phen or Vioxx. Students should
present a short memo outlining the facts upon which the plaintiffs allege liability, the legal theories on
which the plaintiffs rely, the industry response, and the results of any claims that have gone to trial.
Drafting Exercise: Risk Allocation
Students should draft a contract for the sale of goods that uses common shipping terms, such as “FOB,” to
allocate risk, insurance, and shipping costs.
Research: Title and On-line Auction sites
Students should look at on-line auction sites such as eBay and try to determine how ownership of the
goods listed for sale are treated by the site. Students may want to look at the User Agreements for the
service.
Chapter Overview
Chapter Theme
The Code has reduced the importance of abstract terms, such as “title,” and replaced them with practical
rules designed to enable businesspeople to anticipate risk and protect against it.
Legal Interest
An interest is a legal right in something. More than one party can have an interest in particular goods.
Often the parties will claim ownership, each arguing that his interest is stronger than the other’s. But in
cases where the goods are damaged or destroyed, each party argues that the other one owns the goods.
identification, Title, and Insurable Interest
identification; Passing of Title
Students who performed the Title and On-Line Auction Site research could discuss their findings here.
On eBay, the “Rules and Policies for listing items for sale on eBay” “Your User Agreement” state:
We do not transfer legal ownership of items from the seller to the buyer, and nothing in this agreement
shall modify the governing provisions of California Commercial Code § 2401(2) and Uniform
Commercial Code § 2-401(2), under which legal ownership of an item is transferred upon physical
delivery of the item to the buyer by the seller. Unless the buyer and the seller agree otherwise, the buyer
will become the item’s lawful owner upon physical receipt of the item from the seller, in accordance with
California Commercial Code § 2401(2) and Uniform Commercial Code § 2-401(2).
Passing of Title
Title may pass in any manner in which the parties agree (UCC §2-401).
Insurable Interest
A buyer obtains an insurable interest when the goods are identified to the contract (UCC §2-501).
The seller retains an insurable interest in goods as long as she has either title to the goods or a
security interest in them (UCC §2-501).
Case: Valley Forge Insurance Co. v. Great American Insurance Co.1
Facts: On a Friday afternoon, Karl and Linda Kennedy went to John Nolan Ford to buy a new Ford
Mustang. The parties signed all necessary documents, including a New Vehicle Buyer’s Order, an
Agreement to Provide Insurance, and credit applications. The Kennedys made a down payment, but
could not arrange financing before the dealership closed. John Nolan Ford determined that the Kennedys
were creditworthy and allowed them to take the car home for the weekend. That evening, Karl Kennedy
permitted his brother-in-law, Cella, to take the car for a drive, along with a passenger named Campbell.
Cella wrecked the car, injuring his passenger. Campbell sued, and the question was which insurance
company was liable for all of the harm: John Nolan Ford’s insurer (Milwaukee Mutual), Cella’s insurer
(Valley Forge), or Kennedy’s insurer (Great American). The trial court ruled that title had never passed to
Kennedy and found Milwaukee Mutual liable. The company appealed.
Issue: Had title passed to Kennedy at the time of the accident?
Holding: Judgment affirmed. Excerpts from the court’s opinion: Title had never passed and the dealer’s
insurer was liable. Under the “Agreement” provision, the contract states that “it is expressly agreed that
the purchaser acquires no right, title or interest in or to the property which he agrees to purchase
hereunder until such property is delivered to him and either the full purchase price is paid in cash or a
satisfactory deferred payment agreement is executed by the parties hereto[.]”
We hold that because the parties had otherwise agreed that interest in the car, including insurable interest,
would not pass until the financing was complete, John Nolan Ford still had the risk of loss and the
insurable interest when the accident occurred.
Question: What sections of Article 2 govern this case?
Answer:
Question: There are several questions in this case. Which issue is the most important?
Question: Who is actually litigating this case?
Question: Ignore the law for a moment and make a common sense argument that the dealer’s insurer
ought to win.
Answer: Nobody gets a car for free. The parties had agreed on a price, and everyone knew that the
Question: Now make a common sense argument that the dealer’s insurer ought to lose.
Answer: The Kennedys had not paid for this car. Does the dealership usually give away its vehicles?
1 1995 Ohio. Ap. LEXIS 3939 Ohio Court of Appeals, 1995
Question: According to the court, who does have an insurable interest in the car?
Question: Why does the court reach that conclusion?
Answer: The contract states that the buyer obtains no title or interest in the car until the vehicle has
Question: However, the contract also states that the buyer agrees to insure the car. Doesn’t that
mean that the Kennedys were obligated to do that, and that their insurer should be liable?
Answer: No. Although the contract requires the Kennedys to buy insurance, the agreement is not
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. Which party had title to the car?UCC §2-401: Title to goods may pass in any
manner on which the parties agree.
2. Did the seller have an insurable interest in
interest in the car?
UCC §2-501: The seller retains an insurable in the
goods as long as it holds title to or a security
interest in them.
Imperfect Title
Bona Fide Purchaser
A person with voidable title has power to transfer valid title for value to a good faith purchaser,
generally called a bona fide purchaser or BFP. A person can prove he is a BFP by showing two
things: (1) that he gave value for the goods and (2) that he acted in good faith.
Additional Case: People v. Simmons2
Facts: With a fraudulent check Scott Simmons purchased a 15-carat, heart-shaped diamond ring for
$70,000 from Archer Estate Jewelers. Simmons took the diamond, and the accompanying gemological
certificate, to a jewelry store/pawnshop operated by Glenn Verdult. Verdult bought the ring from
Simmons, paying with a $40,000 cashier’s check. Simmons was arrested for passing a bad check, and the
police seized the diamond.
The trial court awarded the ring to Archer and Verdult appealed.
Issue: Who was entitled to the diamond ring?
Holding: Judgment for Archer reversed and case remanded for trial on whether Verdult was a good faith
purchaser. Excerpts from the court’s opinion:
A thief possesses only void title and can transfer only that which he has. Any subsequent purchaser
has no valid interest in the stolen property.
Not so where the thief acquires the property by a transaction of purchase. Only voluntary transactions
can constitute transactions of purchase. Case law from other states reasons that a thief who
wrongfully takes the goods against the will of the owner is not a purchaser. On the other hand, a
2 2003 WL 21350737 California Court of Appeals, 2003
swindler who fraudulently induces the victim to deliver the goods voluntarily is a purchaser under the
code. Thus, if the original seller voluntarily assents to the transaction and delivers the property, then
the thief obtains voidable title. A person with voidable title may transfer good title in an ordinary
transaction for value to a good faith purchaser.
Here, Archer voluntarily delivered the diamond to Simmons. The original transfer was a transaction
of purchase. Simmons acquired voidable title through this transaction.
A good faith purchaser is a person who, among other things, takes delivery of the goods pursuant to a
preexisting contract for purchase and is honest in fact in the transaction. Whether a person qualifies
as a good faith purchaser is determined by applying the reasonable person standard. For instance, if
the goods are offered at an unusually low price, a reasonable person would suspect that the goods are
stolen and, thus, be put on notice that he may be entering an illegitimate transaction. Usually,
whether a person qualifies as a good faith purchaser involves a credibility determination to be made
by the trier of fact.
Verdult stated that Simmons entered his pawnshop with the 15.05-carat, heart-shaped diamond,
produced a gemological certificate for it, and that Verdult purchased it with a $40,000 cashier’s check.
Under these circumstances the trial court could not determine whether Verdult was a good faith
purchaser. Simmons had voidable title and Verdult may have had good title. Therefore remand is
necessary to give the court an opportunity to decide whether Verdult was a good faith purchaser,
thereby entitling him to ownership of the diamond.
Question: What is a bona fide purchaser?
Question: What is voidable title?
Question: What is an example of voidable title?
Question: Simmons purchased the diamond ring with a bad check. How can he have any title to it?
Question: We keep digging deeper without answering this question. What is a transaction of
purchase?
Question: Can you put all of this together with these facts?
Answer: Certainly. Archer’s employee freely gave title to the diamond ring to Simmons in exchange
Question: Where does Verdult come in?
Question: How does the court determine whether one qualifies as a good faith purchaser?
Answer: The court applies a reasonable person standard: would a reasonable person in the
Question: Did Verdult purchase the ring in good faith?
Question: So who is entitled to the ring?
Answer: We don’t know, yet. The court remanded the case for the trial court to hear evidence to
determine whether Verdult acted in good faith. If Verdult should have suspected something was amiss
Additional Case: Kotis v. Nowlin’s Jewelry 3
Facts: Steve Sitton forged a check belonging to his brother, went to Nowlin’s Jewelry, and
misrepresented that he had his brother’s authorization to make a purchase. He bought a gold ladies’
Rolex watch with a diamond bezel for $9,438.50. The next day, Sitton called Eddie Kotis, the owner of a
used car dealership, and asked if he would be interested in buying the watch. Kotis had bought several
used cars from Sitton over the years and had never had problems with him. Kotis expressed interest, so
Sitton showed him the watch. Sitton explained that several months earlier he had sold his house and used
the proceeds to buy the watch for his girlfriend. Kotis had a good general knowledge of the value of
Rolex watches. He realized this one was in excellent condition. Kotis bought the watch for $3,550.
At some point on that same day, Kotis telephoned the jewelry store and spoke with Cherie Nowlin. He
described the watch, and asked if the store had sold such an item within the past few months. Kotis at
first refused to identify himself. Ms. Nowlin said that Sitton had bought the watch the day before. She
did not have the payment information available and said she would call him back. When Nowlin called
Kotis, she told him that payment had been by a check that had not yet cleared. Kotis told Nowlin that he
did not have the watch and that he did not want it. Kotis refused to tell Nowlin how much Sitton was
asking for the watch.
The bank dishonored the check, the state prosecuted Sitton for forgery and theft, and Nowlin sued to
recover the watch.
Issue: Was Kotis a bona fide purchaser entitled to retain the watch?
Holding: No.
Question: What title did Sitton obtain when he purchased the watch?
Question: Kotis paid $3,550 for the watch; he clearly gave value. What evidence supports Kotis’s
argument that he acted in good faith?
Answer:
Kotis had purchased cars from Sitton and had never had any problems. He had no reason
Question: What evidence supports Nowlin’s argument that Kotis did not act in good faith?
He told Nowlin that he had not yet bought the watch. If that was true, then Nowlin’s
Entrustment
According to UCC §2-403(2), any entrusting to a merchant who deals in goods of that kind gives him
power to transfer all rights of the entruster to a buyer in the ordinary course of business (BIOC).
Risk of Loss
3 844 S.W.2d 920, 1992 Tex. App. LEXIS 3226 (Tex. Ct. App. 1992).
UCC §2-509(4) states that the parties may allocate the risk of loss any way they wish. When neither party
has breached the contract, the risk of loss generally passes from seller to buyer when the seller has
transported the goods as far as he is obligated to. When a party has breached, the risk of loss generally lies
with that party.
Risk Allocation
If you assigned students to draft a risk-allocation contract, this would be a useful place to discuss their
efforts. The risk clauses can be effective even if only one sentence long.
The common law answered this problem by looking at which party had title to the goods at the time of
loss. But the Uniform Commercial Code again rejects the old is abstract concept, striving once more for a
practical solution. The UCC permits the parties to agree on who bears the risk of loss. UCC §2-509(4)
states that the parties may allocate the risk of loss any way they wish.
When the Parties Fail To Allocate the Risk
When neither party has breached the contract, the risk of loss generally passes from seller to buyer when
the seller has transported the goods as far as he is obligated to. When a party has breached, the risk of loss
generally lies with that party.
When One Party Breaches
When the buyer rejects nonconforming goods, the risk of loss remains with the seller until he cures
the defect or the buyer decides to accept the goods
When a buyer accepts goods but then rightfully revokes acceptance, the risk remains with the seller.
to the extent the buyer’s insurance will not cover the loss.
When a buyer breaches the contract before taking possession, it assumes the risk of loss to the extent
the seller’s insurance is deficient.
Case: Harmon v. Dunn4
Facts: Bess Harmon owned a two-year-old Tennessee Walking Horse named Phantom Recall. Harmon,
who lived in Tennessee, boarded her horse with Steve Dunn. Dunn cared for Phantom Recall and showed
him at equestrian events. Harmon instructed Dunn to sell the horse for $25,000, and Dunn arranged for
his friend Scarbrough to buy the colt. On June 30, Dunn delivered Scarbrough’s $25,000 check to
Harmon, who handed over the horse’s certificate of registration and a “transfer of ownership” document.
That night at a horse show, Dunn told Scarbrough he had delivered the check and had the ownership
papers in his car. Dunn did not actually give the documents to his friend. Scarbrough knew that Phantom
Recall was at Dunn’s stable, where Scarbrough had boarded other horses. Sadly, the colt developed
colitis and died suddenly, on July 4. Scarbrough stopped payment on his check, and Harmon sued for her
money. The trial court found for Harmon and Scarbrough appealed.
Issue: Which party bore the risk of Phantom Recall’s death?
Holding: Judgment for Harmon affirmed. Scarbrough suffers the loss. Dunn was a bailee. In a bailment
case, under UCC §2-509(2) (a) and (b), the risk of loss passes to the buyer “on his receipt of a negotiable
document of title covering the goods; or on acknowledgment by the bailee of the buyer’s right to
possession of the goods.” The ownership documents were in the hands of Dunn, the bailee, and the buyer
had access to them no later than July 1.
Question: First things first. Why are these animals called “Tennessee Walking Horses.” Are they
such good walkers?
4 1997 Tenn. App. LEXIS 217 Tennessee Court of Appeals, 1997
Answer: Yes. Tennessee Walking Horses have an unusual gait, which enables them to walk faster
than virtually any other breed of horse, attaining speeds of about 6 to 8 miles per hour and
Question: Enough trivia. What is a bailment?
Question: Who was the bailor and who was the bailee?
Question: Why does the Code treat bailments as slightly different from other sales involving risk?
Question: How does the Code allocate risk in a bailment case?
Answer: Under UCC §2-509(2), if the contract requires a bailee to hold the goods for the buyer, the
Question: But Scarbrough never received all of the ownership documents, and Dunn never explicitly
said, “You are the owner.” Why should Harmon win?
Answer: Common sense prevails. Dunn and Scarbrough were friends, and Dunn said that he had the
Question: Scarbrough spent $25,000 on a horse he owned for three days. That doesn’t seem fair.
Answer: It is a question of allocating risk. The court is saying it would make even less sense for
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. Did the parties create a bailment?In a bailment, one person legally holds goods for
the benefit of another.
2. Which party bore the risk of the horse’s death?UCC §2-509(2): If the contract requires a bailee to
hold the goods for the buyer, the risk passes when
the buyer obtains documents entitling her to
possession, or when the bailee acknowledges her
right to the goods.
Additional Case: Beal v. Gri'n 5
John Beal ran a cleaning business. He purchased a window-blind cleaning machine from Daniel Griffin
for $18,000. Griffin told Beal that the best way to ship the machine was by “electronic” means, in other
words, with the special care given to sensitive electronic equipment. They agreed that Griffin would
package the machine for safe shipment, arrange for “electronic” shipping, and insure the shipment. Beal
would pay for it.
5 123 Idaho 445, 849 P.2d 118, 1993 Idaho App. LEXIS 37 (Idaho Ct. App. 1993
Griffin did not in fact use electronic shipping, nor did he purchase insurance. When the machine
arrived, it was inoperable. Beal immediately telephoned Griffin, who urged Beal to accept the machine,
with the understanding that Griffin would obtain money to have it repaired. On those conditions, Beal
accepted the machine. He waited a year for Griffin to arrange repairs, but the machine was never fixed.
During that year, he had the machine inspected and it appeared not to be the model he had ordered. Beal
rejected the machine and sued Griffin.
Question: What is the result if the parties did not allocate the risk of loss in their contract?
Answer:
The first step is to decide who breached. Griffin, the seller, breached the contract.
Warranties
Normally a manufacturer or a seller gives a warranty and a buyer relies on it. A warranty might
be explicit and written, or it could be oral.
Express Warranties
An express warranty is one that the seller creates with his words or actions. The UCC establishes
that the seller may create an express warranty in three ways: (1) with an affirmation of fact or a
promise; (2) with a description of the goods; or (3) with a sample or model.
A.rmation of Fact; Basis of the Bargain
A statement is more likely to be an affirmation of fact if:
• It is specific and can be proven true or false.
• It is written.
• Defects are not obvious.
• Seller has greater expertise.
If students completed the warranty research and drafting exercise they should explain their findings at this
juncture.
You Be The Judge: In Re Sony PS3 “Other OS” Litigation
Facts: In 2006, Sony Computer Entertainment America LLC introduced the PlayStation 3 (PS3) gaming
system, as ““the most advanced computer system that serves as a platform to enjoy next generation
computer entertainment.” Sony promoted PS3’s innovative capabilities: access to online gaming through
the PlayStation Network (PSN) and an “Other OS” feature, which enabled users to install other operating
systems and use the console as a personal computer. In some promotional materials, Sony stated that it
expected the PS3 to have a “ten year life cycle” and that it would “be a console that’s going to be with
you again for 10 years.” However, the product license agreement and terms of service informed
consumers that updates could result in some features losing functionality.
In 2010, Sony released a PS3 software update that posed a difficult dilemma for PS3 owners. Installing
the update would improve online gaming, but disable the Other OS feature; declining it would maintain
the Other OS, but disable access to the PSN.
A group of disgruntled gamers sued Sony, claiming breach of express warranty. They argued that Sony
expressly promised that the PS3 and all of its features would work for ten years, but later unilaterally took
away a fundamental product feature after only four years. The district court dismissed the claim,
reasoning that the companies’ statements did not amount to express warranties. The plaintiffs appealed.
You Be the Judge:
Argument for Sony: Your honors, let’s examine what Sony promised: The company predicted that the
PS3 console would have a ten-year lifespan. That statement is not the same as a promise that all of the
PS3’s features would be available for that entire time period. Sony’s statements only promise a ten-year
lifespan for the PS3 itself. Moreover, Sony’s license agreement and terms of service clearly informed
consumers that updates “may cause some loss of functionality.” It is clear that Sony’s express warranty
did not extend to all of the product’s features.
Argument for PS3 Owners: Sony explicitly touted the PS3 as being with the consumer for “another ten
years.” It also promoted its fundamental features: the PSN and the Other OS. Any reasonable consumer
would construe a promise of a ten-year product lifespan to extend to all of its features. And this was the
basis of the bargain between Sony and its PS3 consumers. Imagine if the manufacturer of a hybrid car
suddenly disabled the vehicle’s electric feature, making it function solely on gasoline—years after it was
sold. That manufacturer’s switcheroo would change the fundamental nature of the product in the
consumer’s hands. This is what Sony did. And that is a breach of an express warranty.
Holding: For Sony. The court concluded that Sony’s statements together did not amount to an express
warranty about the life of the product features. According to the court, promising the PS3 would have a
ten-year life span only meant the console itself would work for ten years, not that all of its features would
still be available.
Question: What is an express warranty?
Question: Would you classify Sony’s claims about the ten year life cycle as more akin to puffery or an
affirmation of fact?
Answer: An affirmation of fact, an statement about the nature or quality of the goods. But according to
