1. Chapter 13
Sales Contracts: Formation, Title,
and Risk of Loss
16-1

2. The Sale and Lease of Goods
• Goods
– All things that are movable. (other than money, stocks,
and bonds)
• Future goods
– Goods that are not yet in existence or under the
control of people
• Crops not yet planted, minerals not yet mined, a calf not yet
conceived
• Futures contracts
16-3

3. The Sale and Lease of Goods
• Sale
– A contract that transfers ownership of goods by the
seller to the buyer for a price
• Contract for sale
– Includes both a present sale of goods and a contract to
sell goods at a future time
* Gifts and bailments do not qualify as sales
16-4

4. Leases of Goods
• Governed by Article 2A of UCC
• Many of the same rules apply to leasing and sales
of goods
16-5

5. Contracts for Both Goods and Services
• When a contract includes both goods and services,
the dominant element of the contract determines
whether it is a contract for goods or a contract for
services.
– Majority goods – UCC governs
– Majority services – general contract law governs
“True Object Test” – Which element of the contract is the
true object, and which is incidental
16-6

6. Different Laws Apply to Different Transactions
16-7
13-7

7. Special Rules for Sales Contracts
• Good Faith
• Course of Dealings and Usage of Trade
• Formation of a Sales Contract
– Offer and Acceptance
– Firm Offer
– Open-Price Terms
– Output and Requirements Terms
– Additional Terms in Acceptance
– Modification
16-8

8. Good Faith
• Honesty in fact and the observance of reasonable
commercial standards of fair dealing.
• An obligation imposed upon parties under the
UCC
16-9

9. Course of Dealings and Usage of Trade
• Course of Dealings – The way in which the parties
have done business in the past.
• Usage of trade – Any method of dealing commonly
used in a particular trade.
• Both can be used to interpret a contract.
In NC
16-10

10. Formation of a Sales Contract
• Contract can be formed in any manner that shows
the parties reached an agreement.
– Oral (Some exceptions)
– Written
– Implied
• Sometimes even if:
– the exact moment of its making cannot be determined
– some terms are not completely agreed upon
16-11

11. Offer and Acceptance
• Offer – Inviting acceptance in any manner and by
any medium reasonable in the circumstances
• Acceptance – Contract created when sent, as long
as method is reasonable.
– can be a notice of acceptance, prompt shipment,
prompt promise to ship
In NC
16-12

12. Conforming/Noncomforming
• Conforming goods
– Those in accordance with the obligations under the
contract
• Nonconforming goods
– Not the same as those called for under the contract or
that are in some way defective
16-13

13. Nonconforming Goods
• Shipment of nonconforming goods can serve as
acceptance of an offer
– unless the seller reasonably notices the buyer that the
shipment is offered only as an accommodation to the
buyer
16-14

14. Merchants
• The UCC holds merchants to a higher standard
than non-merchants.
• Merchant
– a person who deals in goods of the kind sold in the
ordinary course of business or who otherwise claims to
have knowledge or skills peculiar to those goods
In NC
16-15

15. Firm Offer
• A promise, in writing, to hold an offer for
sale/lease of goods open
– Writing must be signed by the merchant
– Time period for holding the offer open may not exceed
three months
– Consideration not necessary
• In NC
16-16

16. Open-Price Terms
• Occur when the parties intend to be bound by a
contract but fail to mention the price or decide to
set the price later.
• Price must be reasonable at the time goods are delivered.
• In NC
16-17

17. Output and Requirements Terms
• Output contract
– “Everything made”
• Requirements contract
– “Everything needed”
• UCC allows these for sales of goods as long as
parties deal in good faith and according to
reasonable expectations
In NC
16-18

18. Additional Terms in Acceptance
• A contract occurs even though the acceptance
states terms that are additional to or different
from those offered or agreed upon
• unless acceptance is made conditional on assent to the
additional terms
16-19

19. Additional Terms in Acceptance
• If both parties are merchants:
– Additional terms become part of the contract unless
• They materially alter it
• The other party objects within a reasonable time
• The offer limits acceptance of its terms
• If the parties are not both merchants:
– The additional terms are treated as proposals for
additions to the contract
In NC
16-20

20. Modification
• Under UCC, modifications to a contract do not
need new consideration to be binding
• May be oral, unless original written agreement
provides that it may not be modified except by a
signed writing
• Such a clause in a form supplied by a merchant to
a nonmerchant must be separately signed (by the
nonmerchant) to be effective
16-21

21. Form of Sales Contracts
• As long as the price is under $500*, an oral
contract for the sale of goods is enforceable
• If the price is $500 or more, a sales contract must
be in writing to be enforceable.
– Four exceptions
• A lease of goods must be in writing if total
payments under the lease are more than $1,000
*an amendment is being proposed to change it to $5,000
16-22

22. Exceptions to the General Rule
1. Oral contracts between merchants
–
If written confirmation sent and not objected to in
writing within 10 days
2. Specially manufactured goods
–
–
Not suitable for sale to others in the ordinary course
of the seller’s business
The seller has made either a substantial beginning in
manufacturing or commitments to buy them
16-23

23. Exceptions to the General Rule
3. Admissions in court
–
–
If the party sought to be bound admits to an oral
contract in court
Not enforceable beyond the quantity of goods
admitted
4. Executed contracts
–
–
–
If already performed satisfactorily, can’t back out
Can’t refuse to pay for goods received and accepted
If only partially performed, court will enforce only
the part performed
16-24

24. Requirements of Writing
• To satisfy the UCC, must indicate:
– a contract for sale has been made between the parties
– mention the quantity of goods being sold
– be signed by the party against whom enforcement is
sought (the defendant)
• Formal paper, memo, fax, email, sales slip, etc.
16-25

25. Signature Requirements
• Under the UCC, a signature includes any symbol
made with the intent to authenticate a writing.
16-26

26. International Law
• United Nations Convention on Contracts for the
International Sale of Goods (CISG)
– Applies only to sales between businesses whose places
of business are in different countries that have
adopted the law.
• CISG nations
• UCC v CISG
16-27

27. Auction Sales
• Auction with reserve
– the auctioneer may withdraw the goods at any time
before announcing completion of the sale if the
highest bid is not high enough
• Auction without reserve,
– After the auctioneer calls for bids on an article or lot,
that article or lot cannot be withdrawn unless no bid is
made within a reasonable time
• An auction is “with reserve” unless stated to be
“without reserve”
16-28

28. Void and Voidable Title
• Title
– the right of ownership to goods
• Bill of sale
– a written statement evidencing the transfer of personal
property from one person to another
• A bill of sale does not necessarily prove that the seller had
perfect title to the goods.
– Theft, fraud, minors, etc.
– Was seller’s title void or voidable?
16-29

29. Void Title
• Void title – having no title at all
– Buyers of goods acquire whatever title the seller had to
the goods.
– Therefore, if the seller had no title, neither does the
buyer.
– Innocent buyers of stolen goods may bring suit against
the seller for breach of warranty of title.
16-30

30. Voidable Title
• Voidable title
– Title that may be voided if the injured party elects to
do so
– Result of fraud, misrepresentation, mutual mistake,
undue influence, duress, when goods are bought from
a minor or a person who is mentally impaired
– Holder of a good with a voidable title can transfer good
title to someone else by selling the property to them
• As long as it’s a good faith purchaser
16-31

31. Entrusting Goods to a Merchant
• People often entrust goods that belong to them to
merchants
• If the merchant sells the goods
– in the ordinary course of business
– to a third party who has no knowledge of the real
owner’s rights (good faith purchaser)
– the third party receives good title to them
• Except stolen property
– NC statute § 25-2-403
16-32

32. The Passage of Title and Risk of Loss
• What if goods damaged/lost/destroyed in transit
(or while awaiting shipment/pickup)?
• Someone must take the loss, so how do we decide
whom?
16-33

33. The Passage of Title and Risk of Loss
• In general, whoever has title at the time of loss
bears the risk.
• Once goods identified, title passes to the buyer
when the seller fulfills their obligations under the
contract to deliver the goods.
– Identified goods
• specific goods that have been selected as the subject matter
of the contract.
16-34

34. Shipment Contracts
• Shipment contract
– Seller turns goods over to a carrier for delivery to the
buyer
– Title and risk pass to buyer when goods given to carrier
• f.o.b.
– “free on board”
16-35

35. Shipment Contracts
• When goods sent f.o.b. (the place of shipment),
they will be delivered free to the place of
shipment.
• Delivery to and acceptance by carrier fulfills
seller’s obligations
• The buyer must pay all shipping charges from
there to the place of destination.
• Ex: f.o.b. Gastonia
16-36

36. Destination Contracts
• Destination Contracts
– requires the seller to deliver goods to a destination
• Title and risk of loss remain with seller until
tendered at destination
• Tender
– offer to turn the goods over to the buyer
– requires arrival to destination, notice given to buyer,
reasonable time allowed for pickup
16-37

37. Destination Contracts
• When terms do not specify shipping point or
destination, assumed to be a shipment contract
• f.o.b. (the place of destination)
– goods belong to the seller until they have been
delivered to the destination shown on the contract
16-38

38. Destination Contracts
• c.o.d. (collect on delivery) UPS C.O.D.
– instructs the carrier to retain possession until the
carrier has collected the cost of the goods
• c.i.f. (cost, insurance, and freight)
– instructs the carrier to collect all charges and fees in
one lump sum
• f.a.s. vessel (free alongside vessel)
– requires sellers to deliver the goods, at their own risk,
alongside the vessel or at a dock designated by the
buyer
16-39

39. No Delivery Required
• Contract calls for buyer to pick up the goods from
seller
• Title passes to buyer when contract is made
• Seller is merchant
– Risk of loss passes when buyer receives goods
• Seller is not a merchant
– Risk of loss passes when seller tenders goods to buyer
16-40

40. Passage of Title and Risk of Loss
16-41
13-41

41. Fungible Goods
• Fungible Goods
– “goods of which any unit is, by nature or usage of
trade, the equivalent of any like unit.”
– Fuel, grain, sugar, etc.
• “An undivided share of an identified bulk of
fungible goods is sufficiently identified to be sold
although the quantity of the bulk is not
determined.”
16-42

42. Documents of Title
• Document of title
– A paper giving the person who possesses it the right to
receive the goods named in the document
– Bills of lading, warehouse receipts
• When documents of title are used, title and risk of
loss pass when the document is delivered to the
buyer (where delivery is made without moving the
goods)
16-43

43. Agreement of the Parties
• Parties may specify the time that title and risk of
loss pass from the seller to the buyer
• Title and risk of loss pass at the time and place
agreed upon
– One exception
16-44

44. Agreement of the Parties
• Exception:
– If the agreement allows the seller to retain title after it
has been delivered to the buyer
– Title passes to buyer at time of shipment, and the
seller is left with a security interest in the goods rather
than title
Security interest: allows the seller to have property sold
in case the buyer doesn’t pay money owed to the seller
16-45

45. Revesting of Title in Seller
• Buyers sometimes refuse to accept the goods that
are delivered or are otherwise made available to
them
• In all such cases, title to the goods returns to the
seller, even if rejection is not justified
16-46

46. Revesting of Title in Seller
• If buyer accepts goods but then revokes
acceptance for a justifiable reason, title returns to
seller.
• Justifiable reason: discovery of a defect upon
inspection
16-47

47. Revesting of Title in Seller
• If seller sends goods that do not meet the contract
requirements, risk of loss remains with the seller
• If buyer accepts goods but later revokes
acceptance justifiably, risk depends on whether
buyer is insured
– If buyer insured, insurance covers loss
– If not insured, risk remains with seller from the
beginning
16-48

48. Revesting of Title in Seller
• If buyer breaches the contract regarding goods
identified to the contract
– Insurance would pay, if covered
– If no insurance, risk of loss rests with buyer
16-49

49. International Sales
• United Nations Convention on Contracts for the
International Sales of Goods (CISG)
• Doesn’t address passage of title
• Treats passage of risk of loss similarly to UCC
16-50

50. Sales with Right of Return
• Sale on approval
– Sale that allows goods that are primarily for the buyer’s
use to be returned even though they conform to the
contract
– Goods remain property of seller until buyer expresses
approval
• Expressed by oral or written consent, or
• By keeping the goods for more than a reasonable time
16-51

51. Sale or Return
• Sale or return
– Allows goods that are delivered primarily for resale to
be returned even though they conform to the contract
– Buyer takes title to the goods, with the right to revest
title in the seller after a specified or reasonable time
– Buyer must show reasonable care for goods in their
possession, and return of goods comes at buyer’s risk
and expense
16-52

52. Insurable Interest
• Insurable interest
– the financial interest that an insured party has in the
insured property
• Buyers have insurable interest once contract is
made and goods are identified
• Sellers have insurable interest as long as they
retain title
16-53

53. Question?
_________ are all things (other than money, stocks,
and bonds) that are movable.
A. Needs
B. Wants
C. Goods
D. Mercantiles
16-54

54. Question?
What is the right of ownership to goods?
A. Bill of sale
B. Title
C. Designation
D. Lien
16-55

55. Question?
___________ means an offer to turn the goods over
to the buyer.
A. Tender
B. Salesmanship
C. Vending
D. Barter
16-56

56. Question?
What are “goods of which any unit is, by nature or
usage of trade, the equivalent of any like unit”?
A. Tangible goods
B. Intangible goods
C. Dynamic goods
D. Fungible goods
16-57

57. Question?
What is a contract that transfers ownership of goods
by the seller to the buyer for a price?
A. Purchase
B. Merchandise contract
C. Sale
D. Auction
16-58

58. Question?
_________ goods are those that are in accordance
with the obligations under the contract.
A. Conventional
B. Matched
C. Non-conforming
D. Conforming
16-59

59. Question?
What type of sale allows goods to be returned even
though they conform to the contract when the
goods are primarily for the buyer’s use?
A. Sale on return
B. Sale on arrival
C. Sale on disproval
D. Sale on approval
16-60

60. Question?
What is a person who deals in goods of the kind sold
in the ordinary course of business?
A. Proprietor
B. Administrator
C. Owner
D. Merchant
16-61

61. Question?
With a _______offer the writing must be signed by
the merchant, and the time period for holding
the offer open may not exceed three months.
A. Firm
B. Strong
C. Solid
D. Concrete
16-62

62. Question?
What is the financial interest that an insured party
has in the insured property?
A. Insurable interest
B. Lien interest
C. Factored interest
D. Quantum interest
16-63

63. Question?
With an _________ the auctioneer may withdraw
the goods at any time before announcing
completion of the sale if the highest bid is not
high enough.
A. Auction with reserve
B. Auction without reserve
C. Contract with reserve
D. Contract without reserve
16-64