Q1BasisFMV# SharesToms ContributionsCash$50,000$50,00040Installme.docx

Q1BasisFMV# SharesTom's
ContributionsCash$50,000$50,00040Installment
Note$240,000$350,000Gails'
ContributionsInventory$60,000$50,00060Equipment$125,000$2
50,000Patentable Invention$15,000$300,000Please write your
solution in the yellow areas below the question.The installment
note has a face amount of $350,000 and was acquired last year
from the sale of land held for investment purposes (adjusted
basis of $240,000). As to these transactions, provide the
following information:aTom’s recognized gain or loss.bTom’s
basis in the Owl Corporation stock.cGail’s recognized gain or
loss.dOwl Corporation’s basis in the inventory, equipment, and
the patentable invention.eGail’s basis in the Owl Corporation
stock.hHow would your answers change if Gail was a
partnership?
Chapter 19
Agency
Copyright © 2016 McGraw-Hill Education. All rights reserved.
*
Principal-Agent RelationshipsIt is often necessary for a person
or firm to be represented by another in business or personal
dealings with third parties. This relationship is called a

principal-agent relationship.Agent: The person who represents
another. Principal: The person the agent represents or performs
duties for. Contract of agency: An agreement between a
principal and an agent by which the agent is vested with
authority to represent the principal.
19-*
Learning Outcome 19-1: Describe the principal-agent
relationship.
Page: 304
*
Who May Appoint an Agent
19-*
Any competent party (a person or a corporation) who has the
legal right to perform an act may delegate his or her
performance to another by appointing an agent.
Exceptions - Voting, serving on juries, holding public office,
delegation of personal services.
relationship.
Page: 304
*
Who May Appoint an Agent (Cont.)
19-*
A minor who has appointed an agent may avoid the contract of

agency in some states, just as he or she may avoid other kinds
of contracts.
In some instances, courts have held that minors operating
businesses are bound by contracts they enter.
relationship.
Page: 304
*
Who May Be Appointed
as an Agent
19-*
Anyone legally competent to act for himself or herself may
serve as an agent of another.
Minors and others who lack contractual capacity may still be
competent to represent others as agents if they are capable of
carrying out duties of an agency relationship.
Organizations, such as partnerships or corporations, may act as
agent.
relationship.
Page: 304
*
Classes of AgentsAgents are classified according to nature of

their relationship with principals.General AgentA person
authorized to assume complete charge of principal’s business
or entrusted with general authority to act for principal in all
business matters.Special AgentA person delegated to act only in
particular transaction, under definite instructions, and specific
limits on scope of authority.
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Learning Outcome 19-2: Classify the two major kinds of agents.
Page: 305
*
Creation of AgencyAgency by AgreementThe most common
method of creating an agency is by contract, or agreement. A
contract of agency usually states:The rights and duties of
principal and agent.The agency duration.Any other agreements
made between parties.
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Learning Outcome 19-3: Discuss the four ways in which an
agency may be created.
Page: 305
*
Creation of Agency(Cont.)An agency contract may be oral or
written, and express or implied.Note – Statute of Frauds
(discussed Chapter 13) which requires certain types of contracts
to be in writing to be enforceable also applied to contracts of

agency pertaining to same contract types. Attorney in fact:
Legal term for person appointed as agent
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Page: 305
*
Creation of Agency(Cont.)Power of attorney: Legal document
that formally creates agency.Note - If principal becomes
incompetent after agent appointed, power of attorney may be
invalidated.A durable power of attorney should be executed if
principal intends for agent’s authority to remain intact if
principal becomes incompetent.
19-*
Page: 305
*
Creation of Agency (cont.)Agency by RatificationOccurs when
principal: Approves agent’s unauthorized act.Approves
unauthorized person’s act in principal’s name. Ratification
apples to entire act.Principal cannot accept transaction benefits
and not accept transaction obligations. Ratification occurs after
the fact where authorization occurs before the fact.

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Page: 306
*
Creation of Agency (cont.)Agency by NecessityWhen
circumstances make such agency necessary. Although family
relationship does not give family members right to act as agents
for each other some states recognize agency by necessity when a
spouse fails to support the other or minors.
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Page: 306
*
Creation of Agency (cont.)Agency by Operation of LawWhen
court finds need for agency to achieve desired social policy.
Court may appoint agent, called a guardian ad litem, with
authority to purchase necessities parent has failed to provide.
Under court-directed agency, parent bound by reasonable
contracts made by agent.
19-*

Page: 306
*
Authority of an AgentAn agent may perform only acts that are
authorized by principal or court. If agent exceeds authority, he
or she can be personally liable unless unauthorized act
reasonably assumed by third party to be within powers
delegated.
19-*
Learning Outcome 19-4: Explain the various forms of an agent’s
authority.
Page: 307
*
Authority of an Agent (Cont.) While courts have interest in
protecting property and interests of principal, they also have
interest in protecting property and interests of third parties who
have good reason to rely on apparent authority of
agent.Authority of agent can be express, implied, or apparent.
19-*
authority.
Page: 307
*

Express, Implied, and
Apparent AuthorityExpress Authority - Authority of agent to
perform duties specifically stated in contract of agency.Implied
Authority - Authority agent reasonably assumes he or she has
that relates to express authority granted by principal. Apparent
Authority - Authority third party reasonably assumes agent
possesses that agent does not actually possess .
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authority.
Page: 307
*
Agent’s Torts and CrimesA principal is liable for torts and
crimes of agent if committed at direction of principal or while
agent performing authorized duties during ordinary course of
agency.If agent makes fraudulent statement in contract within
scope of authority, principal is responsible.
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authority.
Page: 308
*

Agent’s Torts and Crimes (Cont.)Principal is liable for agent’s
torts or crimes whether agent commits act willfully, recklessly,
or negligently. Both principal and agent may be held liable for
agent’s torts or crimes committed while agent is acting within
the scope of his or her authority.
19-*
authority.
Page: 308
*
Agent’s Torts and Crimes (Cont.)Example - Mamnani, a sales
agent for store owned by Fischer, purchased, and intended to
resell, merchandise Mamnani knew was stolen. Because Fischer
knew merchandise stolen, both Mamnani (agent) and Fischer
(principal) subject to criminal prosecution. Note If only
Mamnani knew merchandise stolen, Fischer not subject to
prosecution as selling stolen goods not within scope of
Mamnani’s authority.
19-*
authority.
Page: 308
*

Duties of Agents, Principals,
and Third PartiesWhen an agency is created, three parties are
affected:AgentPrincipalThird-party agentEach of these parties
have duties to one another.
19-*
Learning Outcome 19-5: Describe the duties of an agent to a
principal, a principal to an agent, a principal and a third party to
each other, and an agent and third party to each other, in light
of whether the principal is disclosed, partially disclosed, or
undisclosed.
Page: 308
*
Duties of Agent to PrincipalAn agent must obey all the
principal’s reasonable and lawful orders and instructions within
the scope of the agency contract.An agent may not perform any
act that would betray the principal’s trust.An agent may not act
for two parties to a contract without the consent of both.
19-*
undisclosed.
Page: 309
*

Duties of Agent to Principal (cont.)An agent may not buy his or
her own property for the principal, sell the principal’s property
to himself or herself, or compete with the principal in any way,
without the principal’s knowledge and consent.An agent must
possess the qualifications needed to carry out the work of the
agency as agreed.
19-*
undisclosed.
Page: 309
*
Duties of Agent to Principal (cont.)An agent is liable for losses
to the principal resulting from the agent’s incompetence.An
agent must keep accurate accounts of his or her transactions
conducted as part of the agency agreement.An agent must remit
to the principal all profits from contracts made by the agent
unless other provisions are made in the agency agreement.
19-*

undisclosed.
Page: 309
*
Duties of Principal to AgentPrincipal must pay agent
compensation.If Person acts as agent for more than one party
with their knowledge, agent entitled to receive compensation
from each principal.Principal must reimburse agent for money
advanced in carrying out principal’s instructions and for debts
paid on principal’s behalf.Principal must reimburse agent for
loss or damage suffered in performance of duties.
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undisclosed.
Page: 309
*
Duties of Principal to Agent (cont.)
In cases where agent owed money by principal and is in
possession of principal’s property/goods, agent may place a
lien and refuse to surrender property/goods to principal until
payment made.Not necessary for agent to receive compensation
for services in order for agency relationship to exist. A
gratuitous agent is one who acts on behalf of principal without

being paid.
19-*
undisclosed.
Page: 309
*
Duties of Principal and Third Party
to Each OtherA principal is responsible to third parties for
agreements made by agent on behalf of principal if agent acted
within scope of express or implied authority. If agreement not
authorized by principal, and outside the scope of agent’s
employment, principal not liable. A third party is liable to
principal for lawful contracts made by his or her agent.
19-*
undisclosed.
Page: 310
*

Duties of Agent and Third Party
to Each OtherThe relationship between agents and third parties,
and whether agents can be held personally liable, is influenced
by number of factors.Disclosed Principal:When agent informs
third party that he/she is acting on behalf of another, and makes
third party aware of principal’s identity, principal is a
“disclosed principal”. Partially Disclosed Principal:When the
agent informs third party that he/she acting on behalf of
another, but identity of principal unknown to third party,
principal known as “partially disclosed principal”.
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undisclosed.
Page: 310
*
Duties of Agent and Third Party
to Each Other (cont.)Undisclosed Principal: When agent does
not inform third party he/she acting on behalf of another, the
unidentified principal is known as an “undisclosed
principal”.Because third party does not know identity of
principal, agent can be held personally liable to third party.
Similarly, if agent acts with authority (either actual or
apparent), and third party later learns of agency and principal’s
identity, third party may hold principal liable.

19-*
undisclosed.
Page: 311
*
Termination of AgencyAgency is a type of contract and, like
other contracts, may be terminated by agreement, by
performance, or by operation of law.An agency contract is
terminated by an act of the parties when:The principal and the
agent have mutually agreed on termination.The principal has
dismissed the agent.The agent has given up the position.The
purpose of the agency relationship is fulfilled.
19-*
Learning Outcome 19-6: Explain how an agency may be
terminated.
Page: 311
*
Termination of Agency (cont.)If agency exists “at will,”
principal has right to revoke agency agreement and discharge
agent for a reason or for no reason at all.A principal who
dismisses an agent must give termination notice to all third

parties who are accustomed to doing business with agent or
have knowledge of appointment. Failure to do so will render
principal liable on further contracts.
19-*
terminated.
Page: 311
*
Termination of Agency (cont.)A principal may not revoke
agency contract if agent has interest in subject matter of agency
in addition to the remuneration (salary, commissions) he/she
receives for services. An irrevocable agency is agency coupled
with an interest. An agency agreement authorizing agent to sell
specific property, deduct commissions, and apply proceeds
toward outstanding debt principal owes agent is example of
irrevocable agency.
19-*
terminated.
Page: 311
*
Differences between Principal-Agent and Employer-Employee
RelationshipsThe main difference between principal-agent and
employer-employee relationships is an employer’s power to

control the activities of a non-agent employee. Whereas an
agency agreement brings about a relationship between a
principal and a third party that results in a contract, an
employee who is not also an agent has no such rights or powers.
19-*
Learning Outcome 19-7: Differentiate between the principal-
agent and employer-employee relationship.
Page: 312
*
Differences between Principal-Agent and Employer-Employee
Relationships (cont.)The employer controls not only what an
employee must do but also how it is done. If an employee is
required to perform duties for the employer that necessitate the
exercise of judgment and discretion and results in establishing
a contract between the employer and a third party, then the
employee has the status of an agent even without a formal
agency contract.
19-*
Learning Outcome 19-7: Differentiate between the principal-
agent and employer-employee relationship.
Page: 312
*
Chapter 18
Warranties

*
Protecting Consumers
and Third PartiesA seller or manufacturer has a very significant
legal responsibility to buyers and users of goods and services,
as well as to third parties. These obligations are covered by the
law of sales, contract law, the Uniform Commercial Code
(UCC), and tort law. Two important aspects of the law
protecting buyers and users concern warranties and product
liability:Warranties: Covered by the law of sales, contract law,
and the UCC, provide consumers with remedies when goods that
they purchase are not or do not perform as expected. Product
liability: Covered by tort law, provides consumers and users
with remedies when they are injured or suffer property damage
as a result of defective goods.
18-*
Learning Outcome 18-1: Identify the various provisions of the
law that protect consumers and third parties who suffer physical
injuries or financial losses.
Page: 288
*

The Law of WarrantiesWarranty: A guarantee or promise made
by the manufacturer or seller that the goods offered really are
what they are claimed to be, or that the goods are what a
reasonable person has a right to expect. Two types of
warranties:Express warranty: Explicit, specifically stated
promises.Implied warranty: A guarantee suggested or inferred
from known facts and circumstances.
18-*
Learning Outcome 18-2: Explain the term “warranty” and
distinguish between express and implied warranties.
Page: 288
*
Express Warranty by PromiseIt is an explicit, definite promise
by the seller that the goods will have certain characteristics. An
express warranty that is made by the seller to the buyer and
becomes part of the basis of the agreement creates an explicit
warranty that the goods will be as promised. If a written
warranty is ague and indefinite, the court may apply the custom
of the marketplace. It is not required that a seller make a
specific written or oral statement of warranty for an express
warranty to exist. Actions of the seller also may be considered
express warranties.
18-*
Learning Outcome 18-3: Identify the four kinds of express
warranties.
Page: 289
*

Express Warranty by Description, Sample, or ModelAny
description of goods which is made part of the basis of the
bargain creates an express warranty that the goods shall
conform to the description.Any sample or model that “is made
part of the basis of the bargain creates an express warranty that
the whole of the goods will conform to the sample” or model. A
buyer may refuse delivered goods if the goods are not the same
as described by the seller or do not conform to the sample or
model used by the seller to effect the sale.
18-*
warranties.
Page: 289
*
Example: Express Warranty Facts:Cool Appliances, Inc.
displayed a double-door refrigerator model, RE 1290.
Prospective buyers were encouraged to examine the appliance,
understand the features, and make note of the technical
specifications.By using a display model as the basis for the sale,
Cool Appliances warranted that any model of RE 1290
refrigerators sold would be substantially the same as the display
model.
In this case, Cool Appliances Inc. makes an express warranty by
the description of the model.
18-*

warranties.
Page: 290
*
The Timing of
the Express WarrantyMost express warranties are made before
or during a sales transaction.Written or oral statements issued
by the seller after the transaction has been completed can also
be interpreted as express warranties. Marketers recognize the
uneasiness that many buyers experience after having made a
buying decision. To reduce this uneasiness, sellers often send
out mailings to assure buyers that they did indeed make a wise
purchase. These statements, subsequent to the sale, can also be
regarded as express warranties.
18-*
warranties.
Page: 290
*
The Effect of Sellers’ “Puffing”“It is not necessary to the
creation of an express warranty that the seller use formal words
such as ‘warrant’ or ‘guarantee’ or that the seller have a
specific intention to make a warranty, but an affirmation of the
value of the goods or a statement purporting to be merely the
seller’s opinion or commendation of the goods does not create a

warranty” [UCC 2-313(3)]. Consequently, puffing, however
sincere and persuasive this sales talk may be, does not
constitute a warranty, even if the buyer relies on the statements.
18-*
warranties.
Page: 290
*
Disclaimers of Express WarrantiesTo limit the effect of express
warranties, some sellers put specific limitations in the warranty.
Disclaimer: A denial or repudiation in an express warranty,
which serves to limit the effectiveness of a warranty. Example:
A manufacturer claims a pump will deliver a certain number of
gallons of water per minute. A disclaimer may say, “Warranty
does not cover applications where water must be pumped into
storage tanks.”Another example of a disclaimer is when oral
warranties are given and then followed by a written document
containing a disclaimer.
18-*
warranties.
Page: 291
*
Implied WarrantiesSpecific references to implied warranties,

which are those warranties not made explicitly but that a buyer
might reasonably expect a seller to honor. Implied warranties
can relate to either: Title, or Quality of goods.
18-*
Learning Outcome 18-4: Identify the three kinds of implied
warranties.
Page: 291
*
TitleThe UCC provides that “the title conveyed shall be good,
and its transfer rightful; and the goods shall be delivered free
from any security interest or other lien or encumbrance of
which the buyer at the time of contracting has no
knowledge.”This means the seller promises that:He or she is the
real owner of the goods offered for sale.The seller has the right
to sell the goods.There are no claims or liens of any kind
against the goods that might later cause the seller to lose title to
someone else who might claim ownership or an interest in the
goods.
18-*
warranties.
Page: 291
*
Example: Implied Warranties

of TitleFacts:Ken bought a used car from Will, a college friend,
for $18,000. After a few days, a local bank notified Ken that
Will owed $4,000 to the bank, and had used the car as security
for the loan—this was recorded in the appropriate bank
documents.
In this case, Ken may sue Will for his loss on the grounds that
the implied warranty of title had been breached.
18-*
warranties.
Page: 291
*
Quality:
Implied Warranty of MerchantabilityThe law assumes that the
goods sold by a merchant or seller are fit to be sold or resold
and, therefore, carry an implied warranty of merchantability.
Merchant: Anyone who deals in goods of the kind being sold in
the ordinary course of business, or who presents himself or
herself as having the skills or knowledge relating to the
goods.When a merchant sells goods, he or she warrants that the
goods will:Pass without objection in the trade under the contract
description.Be fit for the ordinary purposes for which such
goods are sold.Be adequately contained, packaged, and labeled
as the agreement may require.Conform to the promises or
statements of fact made on the container or label.
18-*

warranties.
Page: 293
*
Quality: Implied Warranty of Fitness
for a Particular PurposeA seller, at the time of making a
contract, knows or has reason to know any particular purpose
for which the goods are required and that the buyer is relying on
the seller’s skill or judgment in selecting or furnishing suitable
goods.The warranty exists even if the buyer does not expressly
inform the seller of his or her intended use of the merchandise.
To recover for breach of the implied warranty of fitness of
purpose, a buyer must prove that: The seller knew or had reason
to know the buyer’s purpose.The seller knew or had reason to
know that the buyer was relying on the seller’s skill or
judgment.The buyer did rely on the seller’s skill or judgment.
18-*
warranties.
Page: 292
*
Disclaimers of Implied WarrantiesThe two important implied
warranties of merchantability and of fitness for a particular
purpose may be disclaimed in several ways.

The UCC provides specific rules that must be followed by a
seller who wants to avoid the responsibility of these implied
warranties.
18-*
warranties.
Page: 294
*
Disclaimers of Implied Warranties (cont.)A disclaimer of the
warranty of merchantability must mention the word
merchantability. If the disclaimer is in writing, it must be
conspicuous; it cannot be buried in the fine print of the
contract.
Disclaimers of the warranty of fitness for a particular purpose
must be in writing and must be conspicuous. Such warranties
are excluded by the use of expressions such as “as is” or “with
all faults,” or other language.
Also, the court may refuse to enforce unconscionable
disclaimers. Unconscionable disclaimers are ones that are
inconspicuous, oppressive, or unfair.
18-*
warranties.
Page: 292
*

Magnuson-Moss
Warranty LegislationThe Magnuson-Moss Warranty Act
addresses many different kinds of abuses to consumers relating
to warranties.The Magnuson-Moss Warranty ActApplies only
when written warranties are made voluntarily on consumer
products that cost more than $25. The act requires that such
warranties be both (1) clearly disclosed to the buyer, and (2)
labeled as either “full” or “limited.” The act applies only to
purchases by consumers of tangible personal property normally
used for personal, family, or household purposes, not to
commercial or industrial transactions. It is a federal statute and
affects only warranties on products that are sold in interstate
commerce, that is, trade between two or more states.
18-*
Learning Outcome 18-5: Explain the provisions of the
Magnuson-Moss Warranty Act.
Page: 293
*
Magnuson-Moss
Warranty Legislation (cont.)The type of warranty to which the
act applies is much more narrowly defined than is an express
warranty under the UCC. Warranties covered by the act are:Any
written statement of fact made by a seller to a purchaser relating
to the quality or performance of a product and stating that the
product is free of defects or that it will meet a specified level of
performance over a period of time. A written promise to
“refund, repair, replace, or take other action” if a product fails

to meet written specifications.
18-*
Page: 293
*
Distinction between Full
and Limited WarrantyFull warranty: Promises that a defective
product will be repaired without charge within a reasonable
time after a complaint has been made. If the product cannot be
repaired within a reasonable time, the consumer may receive
either a replacement product or a refund of the purchase price.
It applies to anyone who owns the product during the warranty
period, not just the original buyer. No time limitation can be
placed on a full warranty.Limited warranty: A written warranty
that does not meet the minimum requirements of a full warranty.
If only a time limitation distinguishes a limited warranty from a
full warranty, then the act permits the seller to indicate this fact
by such language as “full 12-month warranty.”
18-*
Page: 293
*

Remedies under the Magnuson-Moss Warranty ActGenerally, a
consumer who has suffered damages pursuant to this law may
sue for breach of warranty in state court. If, however, a large
number of consumers are injured by the same seller, a class
action lawsuit may be brought against the seller in federal court.
A class action lawsuit is a lawsuit collectively filed by many
individuals.In either situation, consumers can recover court
costs and attorney's fees if they win the case.
18-*
Page: 294
*
Lemon LawsThe Magnuson-Moss Warranty Act is sometimes
referred to as the federal lemon law. In addition to federal law,
consumers are also protected by lemon laws enacted by the
individual states. Lemon laws: Statutes that provide remedies to
consumers for products such as automobiles that repeatedly fail
to meet certain standards of quality and performance. Lemon
laws vary greatly from state to state, and may not necessarily
cover used or leased products.
18-*
Page: 294
*

Chapter 17
Sales
*
The Law of SalesThe law of sales affects many individuals and
businesses, and is very comprehensive. It does not include
investment securities, real estate, or services. Contracts for
services are considered ordinary contracts and are not covered
by the UCC.In transactions that involve both goods and
services, a court looks to the predominant portion of the
contract to determine whether it is a sales contract for goods or
a services contract for repairs.
17-*
Learning Outcome 17-1: Discuss the concept of title in relation
to the law of sales.
Page: 268
*
Contracts for Sale vs.

Contracts to SellContract for sale: A legally enforceable
agreement that has as its purpose the immediate transfer of title
to personal property in return for consideration. This may be for
a present sale of goods or for a sale of future goods. Sale: The
passing of title from the seller to the buyer for a price (payment
can be in the form of money or goods).
17-*
Learning Outcome 17-2: Distinguish between a contract for sale
and a contract to sell.
Page: 268
*
Contracts for Sale vs.
Contracts to Sell (cont.)Existing goods: Goods that physically
exist and are owned by the seller at the time of sale. Future
goods: Goods that do not exist at the time of the sales
transaction but are expected to come into the possession of the
seller.Examples: Growing crops and timber, and goods not yet
manufactured.An agreement to sell future goods is considered a
contract to sell, in contrast to a contract for sale. The
distinction between existing and future goods is important
because a person cannot sell goods to which he or she does not
hold title.In almost every case, courts have held that title to
such future goods remains with the seller.
17-*
Learning Outcome 17-2: Distinguish between a contract for sale
and a contract to sell.
Page: 268

*
Oral, Written, Express,
and Implied ContractsSales contracts may be oral or written,
and express or implied. Contracts greater than $500 must be in
writing to be enforceable. Complete agreement need not be in
writing, but should show evidence of the intention of the
parties. Contract must be signed by the affected parties.
17-*
Learning Outcome 17-3: Identify the classifications of sales
contracts, including oral, written, express, and implied.
Page: 268
*
Entire and Divisible
Sales ContractsThe difference between entire contracts and
divisible contracts is distinct and can be seen in many business
transactions.Entire contract: Because all components are
interdependent and included in the same order, payment for the
contract would not be required until the whole order is fulfilled.
Divisible contract: If components are ordered as separate
entities, payment for each deliverable is due only when delivery
is complete.
17-*

Learning Outcome 17-4: Discuss the difference between entire
and divisible contracts.
Page: 269
*
Contracts for Labor and MaterialsContract for labor and
materials: A sales contract for goods of special design,
construction, or manufacture is neither a contract for sale nor a
contract to sell. A contract for labor and materials does not have
to be in writing to be enforceable (even if greater than $500).
The contract will not be binding if the buyer repudiates
(cancels) the oral contract and the seller receives the notice
before he or she has made either a substantial beginning in
manufacturing the goods or commitments for their procurement.
If, however, the seller has begun manufacture or made a
commitment, the cancellation is not effective.
17-*
Learning Outcome 17-5: Describe the special requirements of
contracts for labor and materials.
Page: 270
*
Trial Periods and ReturnsSome sellers are willing to allow
prospective customers a trial period or the right of return for the
merchandise. It is important to determine who owns and has
title to the merchandise while it is in the prospective buyer’s
possession, in the event of loss or damage.Example: An online
store sends a customer a vacuum cleaner to try for 30 days,

before the customer makes a decision to buy it.
17-*
Learning Outcome 17-6: Discuss trial periods and returns.
Page: 270
*
Trial Periods and Returns (cont.)Contract of Sale with Right of
ReturnSometimes goods are sold on a trial basis; a short trial
period will be established during which the buyer can use the
machine. A contract for sale with the right of return gives the
buyer both title to the goods and the opportunity to return them
to the seller at a later time.Sale on ApprovalWhen a contract
provides for the sale of goods subject to the buyer’s approval,
the transaction is a sale on approval. The goods remain the
property of the seller until the buyer has expressed approval of
the goods.
17-*
Page: 270
*
Trial Periods and Returns (cont.)Sale or ReturnMost goods sold
can be returned for a variety of reasons unless the sale is clearly
identified as final or the circumstances of the return are
unreasonable. Sale or return: An agreement where the seller will
accept the return of goods at the request of the buyer.Merchants

will agree to a sale or return in order to maintain goodwill
rather than because the seller is legally obliged to accepted the
return goods.
17-*
Page: 271
*
Other Kinds of Sales
Auction SalesBuyer: The party making the offer, or bid. Seller:
Owner of the goods, who engages an auctioneer to gather bids
from interested parties with the intent of selling to the highest
bidder. A bidder may retract a bid at any time before the
hammer falls, and such retraction does not revive any previous
bid. Kinds of Auctions:Auction without reserve: Goods must be
sold to the highest bidder and may not be withdrawn after
bidding has begun. Auction with reserve: Gives the auctioneer
the right to withdraw the goods at any time before announcing
completion of the sale if reasonable bids are not made. If a
reserve amount has been established, it is announced by the
auctioneer before bidding begins.Auction sales are with reserve
unless otherwise specified.
17-*
Learning Outcome 17-7: Discuss auction sales, conditional
sales, and consignment sales.
Page: 272
*

Conditional SalesOne way of selling merchandise is with the
condition that title will remain with the seller until the purchase
price has been paid. The buyer cannot legally resell goods
purchased this way because title has not passed; a person cannot
sell goods to which he or she has no title. The seller can
repossess the goods if the buyer does not pay in the time agreed.
17-*
Page: 273
*
Consignment SalesA consignment sale occurs when a seller (a
consignor) entrusts goods to a merchant (a consignee).The
merchant acts under contract as the seller’s agent to sell the
goods in exchange for a small fee.
17-*
Page: 273
*

DeliveryMany transactions require shipment of goods
purchased.However, shipping goods is not without risk.While
goods are in transit, there is a distinct possibility that damage
may occur. Example: flood damageGenerally, a prudent party
will make certain that goods are insured against these types of
losses; however, to do so, he or she must have an insurable
interest in the goods.
17-*
Learning Outcome 17-8: Discuss how the delivery of shipments
affects the passage of title, and how f.o.b. shipping point and
f.o.b. destination differ.
Page: 273
*
Delivery (cont.)Insurable InterestAn insurable interest is the
right to insure goods against any potential loss.Sellers have an
insurable interest in the goods as long as they have title to
them, whereas buyers are allowed to insure goods even before
they obtain title to them [UCC 2-501(1)].
17-*
Page: 273
*

Delivery (cont.)The manner in which the goods are shipped
affects the passing of title. Title to goods that are shipped by
private carrier or delivered by the seller passes at the time of
delivery to the buyer. If the buyer arranges for delivery, title
passes when the buyer, or his or her agent, picks up the goods.
In the case of goods that are shipped by common carrier, title
passes to the purchaser according to the conditions that follow.
17-*
Page: 273
*
F.O.B Shipping Point
and F.O.B. DestinationF.O.B. means “free on board.” F.O.B.
shipping point: When goods are sold f.o.b. shipping point, title
to the goods passes from the seller to the buyer when the carrier
receives the shipment (buyer will pay the transportation
charges).F.O.B. destination passes when the goods are delivered
to the buyer. Cost of transporting the goods is paid to the
carrier by the seller but is usually included in the buyer’s
invoice.The buyer has an advantage in this method of shipment.
17-*

Page: 273
*
Remedies for Breach
of Sales ContractsRemedies are available for only a limited
time. The UCC provides a statute of limitations, that is, a time
limit after which the usual legal remedies are no longer
available.In the absence of negligence or fraud, legal action to
remedy a breach of sales contract must be started within four
years from the breach.
17-*
Learning Outcome 17-9: Explain both sellers’ and buyers’
remedies for breach of sales contracts.
Page: 274
*
Sellers’ RemediesBuyer Refuses to Accept Delivery of the
GoodsStore goods for the buyer, and sue to recover the sales
price.Resell the goods immediately if perishable or if market
value might depreciate rapidly. Seller can sue buyer for the
difference between the price the goods brought in the resale and
the price the buyer had agreed to pay Retain the goods, and sue
the buyer for the difference between the contract price and the
market price.Buyer Refuses to Pay the Purchase PriceIf the
seller still has possession of the goods, he or she can resell

them. If merchandise has already been delivered to the buyer,
he or she can sue for the purchase price.
17-*
Page: 274
*
Example: Seller’s RemedyFacts:Kip placed an order with Best
Purchase for specially designed medical laboratory testing
equipment.When the equipment was ready for shipment, Kip
notified Best Purchase of his intention to cancel the order.
When the buyer refuses to accept delivery of the goods, the
seller may retain the goods and sue the buyer for the difference
between the contract price and the market price at the time the
buyer refused to honor the contract.
In this case Best Purchase has the right to hold the equipment
for Kip and sue for the agreed-upon purchase price.
17-*
Page: 275
*
Sellers’ Remedies (cont.)When the Buyer Is Insolvent When
the buyer is insolvent, the seller has the right of stoppage in

transit. Stoppage in transit is the right of an unpaid seller to
stop goods in transit and order the carrier to hold them.This
right exists for both FOB shipping point sales and FOB
destination sales.
PO: 9; Page: 233-234
17-*
Page: 277
*
Buyers’ RemediesWhen the Wrong Quantity Is DeliveredIf a
smaller quantity of merchandise is delivered than was ordered,
the buyer may either reject delivery and sue for damages or
accept the quantity delivered and sue for damages. If a larger
quantity of goods is delivered than was ordered, the buyer may
reject the entire shipment; accept only what was ordered and
reject the rest; or accept the entire shipment and pay for the
additional items at the contract price.When the Goods Are Not
as OrderedBuyer may revoke the contract and return the goods
that are substantially different from those that were ordered. If
the goods have already been paid for, the buyer may demand a
refund of the purchase price.
17-*
Page: 275
*

Buyers’ Remedies (cont.)When the Seller Fails to Deliver the
Goods Buyer can sue for damages by bringing a tort action
charging conversion. If the goods are unique (work of art) and
the buyer wants the particular goods that are specified in the
contract, the buyer can seek a court order of specific
performance. A buyer who wishes to obtain goods that are
rightfully his or hers, rather than money damages, can sue to
obtain them by bringing an action of replevin.The buyer can
cover, and if the buyer chooses to cover, he or she may demand
from the seller, as damages, the difference between the cost of
cover and the contract price If title has not yet passed to the
buyer, his or her remedy when the seller refuses to deliver at the
time and place stated in the contract is a suit for breach of
contract.
17-*
Page: 276
*
Example: Buyers’ RemedyFacts:Terry ordered 100 microwave
ovens from a wholesaler, but the wholesaler made an error and
shipped 200 microwaves instead. However, Terry was delighted;
he received an unexpected bargain, since the price of the
microwave was going to increase shortly as a result of change in
the foreign exchange rate. If the seller delivered a larger
quantity of goods than was ordered, the buyer may (a) reject the
entire shipment, (b) accept only what was ordered, or (c) accept

the entire shipment and pay for the additional items at the
contract price.
In this case, Terry can take delivery of the entire shipment and
pay for all 200 microwaves at the contract price.
17-*
Page: 277
*
Chapter 16
Transfer of Title
*
TitleLegal disputes often involve the determination of who
holds title when a loss occurs.Prior to the adoption of the
Uniform Commercial Code (UCC), the concept of title was
crucial in making determinations of the rights and
responsibilities of the parties to a contract and, even more
important, who bore the risk of loss.
16-*

*
Learning Outcome 16-1: Explain how title and certificate of
title relate to the concept of ownership.
Page: 252
The Right of OwnershipThe concept of private property is one
of the foundations of our economic and social system. Title (as
it relates to property): It is intangible; you cannot see it or feel
it.The person who has title to property (the owner) also has the
right to possess it, unless the person has given up the right to
possess the property. Also, a person who has title to a property
also has the right to encumber it, or offer it as collateral for a
debt.When we sell something, we sell not only the property but
also the intangible right of ownership called title. Example:
Automobile—certificate of title
16-*
*
Learning Outcome 16-1: Explain how title and certificate of
title relate to the concept of ownership.
Page: 252
Kinds of PropertyTwo main classifications of property:Real
PropertySometimes referred to as real estate; land and all
articles permanently attached to it (buildings and
trees).Personal PropertyAll property other than real property,
such as automobiles, clothing, computers, etc. Personal property
can be tangible and can be seen and touched, or intangible
(patents, copyrights, or ownership in a corporation). Only

personal property is subject to the UCC.
16-*
*
Learning Outcome 16-2: Distinguish between the two main
types of property, and indicate which one is subject to the law
of sales.
Page: 252
How Title PassesLegal concepts involved in the passage of
title:Bill of SaleA written statement that the seller is passing
ownership to the buyer. The bill of sale need not be an elaborate
legal document—
a handwritten note is just as effective. Bill of LadingA receipt
for goods to be shipped, acknowledging that such goods have
been received and indicating agreement that the goods will be
transported to the destination specified. The bill of lading is
prepared by the common carrier (a trucking firm, a railroad, or
an ocean liner) that has agreed by contract to transport the
goods by land or water. In the case of goods shipped by air, an
airbill is prepared.
16-*
*
Learning Outcome 16-3: Describe how title passes and discuss
how bills of sale, bills of lading, and warehouse receipts are
involved in the passing of title.
Page: 253

How Title Passes (cont.)Legal concepts involved in the passage
of title (cont.):Warehouse ReceiptA warehouse receipt is much
like a bill of lading except that the goods involved are not being
transported but merely stored. There are two kinds of warehouse
receipts: A nonnegotiable warehouse receipt is like a straight
bill of lading; it is simply a receipt for the goods to be stored. A
negotiable warehouse receipt, like the negotiable order bill of
lading, requires that the original copy be presented to the
warehouser before the goods will be surrendered to someone
claiming them. A negotiable warehouse receipt is proof of
ownership.
16-*
*
Learning Outcome 16-3: Describe how title passes and discuss
how bills of sale, bills of lading, and warehouse receipts are
involved in the passing of title.
Page: 254
When Title PassesTitle to goods passes when the parties intend
for it to pass. In the event that the intent of the parties is not
clear, title passes at the moment when they unconditionally
agree to sell specific goods that are in a deliverable state.
16-*
*
Learning Outcome 16-4: Explain when title to goods passes.
Page: 254

IntentIn the eyes of the law, title passes when the parties intend
it to pass. How does a party prove what he or she intended?
Example: Mike bought a boat and arranged to pick it up the
following day. Before he had a chance to pick it up, the boat
was destroyed by fire. Quite likely, the seller would claim that
she intended title to pass at the time of the transaction, thus
insisting that the buyer bear the loss. Mike would probably say
that he intended title to pass when he picked up the boat,
arguing that the seller should bear the loss. To minimize the
number of such disagreements, certain rules for determining the
intent of the parties have been established.
16-*
*
Page: 254
Specific TimeAlthough it may take some time to complete the
documents that signify the passing of title, title itself passes in
a single instant. While both parties are free to create a contract
that stipulates precisely when the transfer of title passes, the
law does provide guidelines as to when this occurs.
16-*
*
Page: 254

Conditional SalesConditional Sales: One with contract
provisions that specify conditions that must be met by one of
the parties. The two types of conditions found in contracts:
Conditions precedent: When a sales contract provides that
specific conditions must be met before title passes, the
agreement contains conditions precedent.Conditions subsequent:
When a sales contract provides that specific conditions must be
met after title has passed, it is said to contain conditions
subsequent.
16-*
*
Learning Outcome 16-5: Define the term “conditional sales” and
identify the two types of conditions found in contracts for
conditional sales.
Page: 255
Example: Conditional Sales Facts:Leo agreed to buy a
Volkswagen Jetta from a dealer on the condition that the title
would pass from the seller to the buyer once a custom luggage
rack was installed. However, even before the installation of the
luggage rack, the car suffered irreparable damages.
As it was a contract based on a condition precedent, the title
was not yet transferred to Leo. Hence, the dealer will have to
bear the loss.
16-*

*
Learning Outcome 16-5: Define the term “conditional sales” and
identify the two types of conditions found in contracts for
conditional sales.
Page: 255
Lost and Stolen GoodsWhen a person possesses an item,
ownership is presumed, but it is possible to have possession of
goods without having title, just as it is possible to have title
without having possession. A person who finds an article has
good title against anyone except the true owner. Anyone who
buys an article from someone who has found it must be prepared
to surrender the article to the true owner. It is often difficult to
prove ownership of a lost article. Police and insurance agents
encourage people to retain receipts with model and serial
numbers of valuable personal property.
16-*
*
Learning Outcome 16-6: Explain the law governing title to lost
or stolen goods.
Page: 255
Transfer of Title by EstoppelIn some cases goods can be passed
by a nonowner who does not have title. In these cases, title is
said to pass by estoppel. Estoppel: A legal bar to the use of
contradictory words or acts in asserting a claim against another.
For title to pass by estoppel, the purchaser must be able to
prove the following:The purchase was made in good faith. The

buyer believed the seller to be the real owner or one appointed
to act for the real owner.The purchase was made from one in
rightful possession.Value was given by the buyer for that which
he or she now claims ownership under the principle of estoppel.
16-*
*
Learning Outcome 16-7: Define the principle of estoppel and
provide examples of how this principle is applied in various
situations.
Page: 256
Examples of EstoppelTransfer of Money or Commercial Paper
Made Out to BearerWhen the owner of cash or commercial
paper (a check) makes it payable to bearer, who then gives it to
a third person, the original owner cannot demand the return of
the money from a third party to whom it was given in exchange
for something of value.Transfer of Property to a Seller Dealing
in the Same Type of GoodsWhen the owner of goods entrusts
property to a person who sells the same type of goods, and that
person sells the property to an innocent third party, the owner is
estopped from recovering the goods from the third party.
16-*
*
situations.
Page: 256

Examples of Estoppel (cont.)Transfer of Property to a Seller
Permitted to Appear as the Real OwnerIf the owner of property
gives possession of it to a second party and allows that person
to act as the real owner, the rightful owner cannot recover the
property if the second party sells the property to an innocent
third party.Transfer of Proof of Ownership to an Unauthorized
SellerIf the owner of goods entrusts proof of ownership to
someone in possession of the goods, the goods cannot be
recovered by the true owner from an innocent purchaser.
16-*
*
situations.
Page: 257
Example: Transfer of Property
by EstoppelFacts:Vicky is looking to buy a specific ring for her
fiancé.She stops by a leading jewelry store and asks for the
design and size of the ring she wants.The salesperson locates
the last available ring in that design and size, and Vicky
purchases it. The salesperson is unaware that the very same ring
was sold in good faith to another customer, Ria.
While Ria would be estopped from recovering the ring from
Vicky, who is the innocent third party, she may sue the
salesperson for the recovery of the ring.
16-*

*
situations.
Page: 257
Sales by Persons Having
Rightful PossessionRemote party: A salesperson in a retail
store, service station, restaurant. Such individuals have the right
to make legitimate sales as representatives of the owner of the
goods, although they themselves are not titleholders. A
salesperson has the express or implied permission of the
titleholder of the merchandise to sell it. Agents acting on behalf
of principals can pass title without holding title themselves.
16-*
*
Learning Outcome 16-8: Discuss sales by persons with
possession of, but not title to, goods.
Page: 257
Sales by Persons Having
Wrongful PossessionWrongful possession: Occurs when
property (stolen goods) is transferred without permission of the
owner. The titleholder, or rightful owner, of stolen goods is

never estopped. That is, he or she is never prevented from
exercising a claim to the goods, even if the person in possession
of them is an innocent purchaser of the property.
16-*
*
Learning Outcome 16-8: Discuss sales by persons with
possession of, but not title to, goods.
Page: 258
Transfer of Title
to Fungible GoodsFungible goods: Those that are generally sold
by weight or measure (wheat, sugar, flour, gasoline, and oil).
The following rules apply to determine when title to such
fungible goods passes:If goods are ordered and the building,
tank, storage yard, or grain elevator where they come from is
not specified: Title passes when the goods become ascertained
(become clearly identifiable). If a buyer orders a specific
quantity of fungible goods from a specific mass:Title passes at
once, even before the portion ordered is separated from the rest.
16-*
*
Learning Outcome 16-9: Describe the passage of title to
fungible goods.
Page: 258

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