UCC Article 2 Sales—Part 1

So far, what we have talked about in this class is the common law of contracts, however,
if we have a sale of goods then the rules might change somewhat under what is called the
Uniform Commercial Code Article 2 Sales Rules. The Uniform Commercial Code is an attempt
to unify commercial law across state boundary lines. Whenever you hear the word “uniform” in
front of some other title, it is a hint that it is a state law involved: Uniform Probate Code,
Uniform Consumer Credit Code, etc.
Our starting point for analysis is the common law of contracts. But if we have a sale of
goods involved, we have to look at the UCC Article 2 Sales rules, and see if some of the rules
have changed. If so, we must follow those rules and not the common law of contract rules. I
analogize things to a series of acetates put on a projector, the first acetate being the common law
of contracts. If we kept that acetate down and then put on top of that an acetate representing the
Uniform Commercial Code, whatever wasn’t changed by the UCC would still shine through and
be projected up on the screen and would still be applicable. But if there were some changes
embedded in the Uniform Commercial Code acetate, it would take precedence over the common
law of contracts.
Generally speaking, the Uniform Commercial Code loosens up on what would otherwise
be harsh results under the common law of contracts. The drafters of the code seem to want to
find reasons to enforce a contract rather than look for reasons to kill a deal. You will probably
see that idea reflected in many of the rules that you will study in this section.
The Uniform Commercial Code is the most significant of all the uniform law, since it has
been adopted, at least in part, in every state in the union. The one state that seems to hold out
always is Louisiana with its civil law notions, but even it has adopted part of the UCC. If every
state has adopted a particular portion of the UCC, you can see how it would tend to unify the law
across state boundary lines. Certainly courts, could interpret language differently to an extent,
but if we start from the same verbiage as our starting point, then you would expect that the
interpretations that would follow would be somewhat uniform. There wouldn’t be as much
chance for diversion if you had totally different starting points of language.
Article 2 of the UCC covers contracts dealing with the sale of goods. What do these
terms mean? Well, a sale is the passing of title for a price. And goods are tangible, movable
property, not services or real property. What if the contract covers more than just goods? For
example, what if there are services and goods hooked together? Then most courts will look at the
predominant factor of the contract and determine whether the common law of contract applies or
if the UCC Article 2 Sales Rules. If, for example, you had a contract to repair a car and the cost
of the materials amounted to $1,000, whereas the cost of labor amounted to $200. There the
predominant focus of the contract was a sale of goods, the parts. On the other hand, if you had
the labor amounting to $1,000 and the parts used to service the car only amounting to $500, then
the predominate focus of the contract would be services and the UCC Article 2 Sales Rules
would not apply and the common law of contracts rules would apply.
Goods Associated with Real Estate
Sometimes it is difficult to know whether something is considered to be a good or part of
the real property, for example: minerals and structures. The rule is: if minerals or structures are
to be severed by the seller before the delivery of items, then that will be considered a sale of
goods and the UCC Article 2 Sales Rules will apply. If, however, those items are to be severed
by the buyer then they are not considered to be goods and the UCC Article 2 Sales Rules do not
apply. Growing crops on land are considered to be goods. Other things that are attached to land
that could be severed without material harm to the land are also considered to be goods.
Merchants
One does not have to be a merchant in order for the UCC Article 2 Sales Rules to apply.
But there are some special rules that apply only to merchants, so you need to know how to
distinguish them. So who is a merchant? A merchant is one who normally deals in goods of the
kind involved in this particular sales contract, for example: Ron’s Sporting Goods in town would
be a merchant of motorcycles and sporting goods, but he would not be considered a merchant of
flowers or groceries. Another way that someone could be considered a merchant is by occupation
and holding oneself out as having knowledge and skill peculiar to the goods involved, for
example: banks and universities. When our university buys tables, chairs and computers, we are
deemed to be a merchant and if there are special merchant rules that apply, they apply to us.

UCC: Offer and Acceptance

Under the UCC, a court will find an enforceable contract so long as it is convinced that
the parties intended to contract, and there is a reasonably certain basis upon which to fill gaps
and grant relief. But we must know, as a bare minimum, what the subject matter of the contract
is and the quantity involved. Some examples of gap fillers provided by the code would be:
● Open price terms-if they don’t agree on price a reasonable price will be imposed.
● Open payment terms-if there are no specifics on payment terms, then it will be a cash and
carry transaction.
● Open delivery terms-if there is no discussion on delivery terms, then the default rule will
be the transfer will take place of the sellers business or where the goods are located.
● Open time term-if there is no time set for performance, then the court will impose a
reasonable time.
So again, these are examples of where the court is looking for reasons to find an enforceable
contract rather than looking for excuses to kill deals.

UCC: Firm Offers

When we first talked about the offer and acceptance hurdle, as being the first hurdle that
had to be jumped, under the common law of contracts we said the general rule was of the offeror
was free to revoke his offer any time prior to effective acceptance. Then we talked about some
exceptions to that general rule, one of which was firm offers. I told you we would talk more
about this when we got to a later section on the Uniform Commercial Code, and now that we are
here, we need to discuss more fully what a firm offer is.
 Firm offer is an offer for sale or purchase of goods made by a merchant in a writing
signed by the merchant and which gives assurances the offer will remain open for a state period
of time or a reasonable period of time, if none is specified. These are irrevocable offers for the
applicable period but not to exceed three months. And there is no need for consideration to make
firm offers binding.
Considering the foregoing requirements, oral offers of contract by merchants will not be
firm offers, nor will unsigned offers by merchants. What about signed written offers by non-
merchants? No, they won’t be firm offers either because you have to have a merchant involved
as the offeror.

UCC: When Buyer Offers to Buy for Prompt Shipment

A special rule applies, under the UCC, when a buyer offers to buy for prompt shipment.
How can the seller treat the offer, as a bilateral offer of contract or a unilateral offer of contract?
The seller can treat the offer as either. He can treat it as a unilateral offer of contract and accept
by promptly shipping or he can treat it as a bilateral offer of contract and accept by promising to
promptly ship.
What if the seller sends non-conforming goods, with the key verbiage of “For accommodation
only?” Well, if the seller treated the offer as a bilateral offer of contract, in other words, if he
accepted by promising to promptly ship, then there is a breach of contract.
On the other hand, if the seller treated the contract as a unilateral offer of contract, and
did not promise to accept but just sent the wrong stuff but had that language of “for
accommodation only” embedded in the shipping documents, then there is no contract and no
breach. There is just a counter offer coming from the seller to the buyer. However, relying upon
this rule is somewhat risky on the part of the seller, for if the buyer does not accept the non-
conforming goods, the seller will have to pay the transportation costs both to the buyer and back
again. He would probably only do this, when he knows the buyer well, the buyer is perceived to
be reasonable and the seller thinks the buyer would appreciate prompt responses even though
they are not perfectly conforming to the contract, rather than delays that might be involved in
perfectly conforming to the contract.
For example, if the buyer ordered 100 items of a particular good and then the seller found
it only had 95 of those in stock, it might be inclined to send the 95 for accommodation only, in
hopes that the buyer would prefer to have 95 rather than zero because of some time constraints
facing it. However, the safer approach would be to call the buyer up on the phone and say: “Hey,
I am sorry! You ordered 100 items and I only have 95 in stock. What do you want me to do?
Send the 95 and then send the extra five later on, after they arrive, or do you want me to wait
until I get the full 100 before I send anything? Tell me what to do.” If the seller has not already
bilaterally accepted the contract, then he would not be in breach of contract no matter which way
the conversation goes at this point. On the other hand, if he has already accepted bilaterally, then
he will be in breach of contract if he cannot promptly ship 100 units that was requested and
accepted.
UCC: Battle of the Forms Rule
There is a very interesting rule in the Uniform Commercial Code called the Battle of the
Forms Rule. It clears up a lot of ambiguities and problems. Let’s first look at the reason for the
rule. Usually, commercial buyers and sellers have their own form documents drafted by their
attorneys, which differ from one another. Each attorney tries to draft the documents in favor of
his client, but the interests of the client can differ depending on which side of the table it is on,
the seller’s side or the buyer’s side. So it’s very common to have the client’s own forms differ.
Its buying documents differ from its selling documents. Often times orders are made and filled
with differing documents changing hands and with neither party paying much attention to the
differences until after (1) the goods have been shipped and accepted and (2) some problem arises
which needs resolution. Then the parties finally take a more careful look at the differences
between the two sets of documents.
Rather than looking for an excuse to find no contract because of the common law ”mirror
image rule,” the UCC tries to find an enforceable contract. As long as the court is convinced that
the offeree intended to accept the offer, it will find an enforceable contract and use the Battle of
the Forms Rule (or perhaps the Knockout Rule) to determine the terms are legally.
The Battle of the Forms Rule provides as follow:
● If either party is a non-merchant, then the Offeror’s terms apply.
● The Offeror could be either the buy or the seller, depending on the circumstances
● If both parties are merchants, the general rule is the Offeree’s terms apply unless:
○ The Offeree’s terms materially alter the original offer
○ The offer expressly prohibits additional or changed terms, or
○ Offeror objects to the changes within a reasonable period of time.
○ Note: these exceptions are so big the offeror is still effectively in the driver’s seat.
If he doesn’t control the terms, he has only himself to blame, because usually the
first two items will satisfy the test. Either the changes will be material or the
offeror, in his offer, expressly prohibits any changes. If he doesn’t rely on those
two to protect himself, as a very last resort he can object to the changes within a
reasonable period of time and nullify the offeree’s attempt to change terms.
The Battle of the Forms Rule that applies when both parties are merchants is a very odd
rule, because the general rule will hardly ever apply. Usually one of the exceptions will apply. So
normally in law you have general rules apply to general circumstances and you don’t have
exceptions cover most of the playing field like they do here.
Alternative to the Battle of Forms Rule (“Knock-out Rule”)
Once offeree’s became accustomed to how the Battle of the Forms Rule worked against
them, they asked their attorneys what they could do in response. If you will recall, for the Battle
of the Forms Rule to work, the court has to be convinced that the offeree wants to accept the
contract. Based on that required assumption, attorneys started to advise their clients, who were
offerees, to insert language in their documents that says something to the effect that: they were
not agreeing to accept the offer, unless the terms would match those contained within their own
documents. In other words, they were conditioning their purchase obligation upon their terms
being effective, rather than those of the offeror.
When courts starting throwing out contracts because of the language like that, the drafters
of the UCC got back together and came up with a new rule called the “Knock-out Rule.” Under
the Knock-out Rule: if the various offers/counteroffers each effectively indicate that there will be
no contract unless the other party agrees to the proposed terms yet the parties act as if there is a
contract, then the courts can find an enforceable contract and ignore all contradictory terms. So
rather than saying that one party’s terms prevail over the other, as happens with the Battle of the
Forms Rule, under the Knock-out Rule, the court goes down both sets of documents side by side
and wherever there is a conflict, it gets its eraser out and erases the terms in both sets of
documents. And then asks itself: “Is there a default rule within the Uniform Commercial Code
that would apply had the parties been totally silent about this issue?” If there is, then that will be
the rule that applies to this contract. It may or may not match the terms of either of the parties,
but that is beside the point. The point is the default rule of the UCC will provide the applicable
terms, rather than one or the other of the parties’ documents.
I have a good homework to illustrate these two rules, but it is premature to discuss this
now because it also includes the risk of loss rules, which have not yet been discussed.
When we discussed the common law of contracts, we learned that modifications have to
be supported by consideration in order to be enforceable. What’s the rule under the UCC? Under
the UCC, modifications need no consideration; they just need to be made in good faith.
Modifications of contracts above the $500 threshold, or that push the contract above that level,
must be in writing to be enforceable under the statute of frauds. We’ll discuss the statute of
frauds in a moment.
In our discussion of the Parole Evidence Rule, under the common law of contracts, we
learned that when the parties put their contract down into writing and intend it to be a full and
final expression of their contract, the courts will not allow any evidence to be submitted that will
add to, vary or contradict the terms of the contract. The court just wants to read the contract,
interpret it and apply it, and not be bothered by attempts to change or add terms to what it just
read. In the context of Uniform Commercial Code the Parole Evidence Rule is relaxed
somewhat. For example, we can prove consistent terms that clear up an ambiguity. And also, the
courts will allow prior course of dealing, prior course of performance and/or usage of trade to
prove or clarify the meaning of terms.
Prior course of dealing has to do with prior contracts that have already been fully
performed. For example, let us say that I have contract to buy ten loads of gravel from a sand and
gravel pit. I have the ten loads arrive, and each time, the top of the mound of gravel is even with
the top of the sideboards of the truck and I accept all of these ten loads with no complaint. And
then I make another contract in the future where I also provide for so many loads of gravel and
this time when I see the gravel arrive, just like it did before, I complain that the loads re not big
enough; that the bottom of the mound should be at the top of the sideboards of the truck. Well
the seller could prove that we had a contract before, and every time he delivered the gravel it
came with the top of the mound just equal to the top of the sideboards and that I didn’t complain
about that. And therefore that should be good evidence that that is the meaning of the word
“load” in the context of our contracts.
Prior course of performance has to do with this particular contract. Let’s say that there are
ten loads in this contract, this is the first time that we have contracted, the first three loads come
with the top of the mound equal to the top of the sideboards on the truck and I don’t complain
about it, and then on the fourth load I complain. Well the seller can say: “The first three loads
came that way and you didn’t complain, therefore the meaning of the word “load” in the context
of this contract means ‘a mound of gravel, the top of which only matches the sideboards of the
truck.’” The term “usage of trade” means that certain words have particular meanings within
certain trades or industries. They have meanings that differ from the common meaning that the
average person would ascribe to that particular word. If we have such words embedded in the
contract, we can produce evidence of what the meaning of that word is in the particular trade,
profession, industry, etc. and the court will interpret that word to match that particular meaning.

UCC Statute of Frauds

As we learned in our discussion of the common law of contracts, the statute of frauds is
the term that describes the laws requiring certain contracts to be in writing before they can be
enforceable. Under the Uniform Commercial Code, the general rule is that contracts for the sale
of goods for $500 or more, or for the leases of goods for $1,000 or more, require a writing signed
by the party sought to be charged before it can be enforceable. The 2003 amendments to the
UCC will change this $500 threshold to a $5,000 threshold, but as of now very few states, if any,
have adopted this.
Now what are the exceptions to the statute of frauds under the UCC? First, we have an
exception regarding confirming memoranda between merchants. Let’s say you have two
merchants that have a conversation over the phone where an offer is made by the one and
acceptance is made by the other, and then the one merchant sends the other one a letter, which
would be considered a confirming memorandum that reflects their oral agreement. When the
other merchant receives that, he has ten days to object to it. If he doesn’t object to it, the UCC
says that the writing provided by the one merchant will satisfy the statute of frauds regarding
both parties, including the one who didn’t sign anything. So if you were the merchant who
received that signed written memorandum of agreement from the other merchant, and you don’t
want it to bind you under the statute of frauds, you had better object to it within ten days of its
receipt.
Another exception to the need for a writing will occur if you admit in some sort of court
documents that you actually had a contract with the other party. If the court is convinced that you
had a contract it doesn’t want to allow you some sort of ticky-tack foul to allow you get out of
the contract because you didn’t formally sign it. To at least some extent, partial performance will
take a contract out of the statute of frauds under the Uniform Commercial Code. Partial
performance will occur to the extent payment is made and accepted or the goods are delivered
and accepted.
 Now we have to make a distinction between divisible goods and indivisible goods to
know how much of the contract will be enforceable. If the contract covers divisible goods, then
the contract is only proportionally enforceable. On the other hand, if the contract concerns
indivisible goods then the whole contract will be enforceable. Let’s say, for instance, that you
and I make an oral contract. I agree to buy ten tons of hard red winter wheat from you at the
price of $1,000 per ton, and I give you a $1,000 down payment. This is all oral, there is no
writing signed by anybody. So the question becomes: To what extent is this oral contract
enforceable? Now what is the nature of the goods: divisible or indivisible? They are divisible
goods. I have paid for 1/10th of the purchase price and it’s possible to take the entire mound of
grain and separate it out between 1/10th or one ton and 9/10ths or nine tons. So this contract is
proportionally enforceable. 1/10th is enforceable, but 9/10ths is not because of the statute of
frauds.
Now instead we change the subject matter to an automobile that by its very nature is an
indivisible good. You can’t buy so many dollars worth of parts of that car. It is either all or
nothing. If I contract to buy your car for $10,000 and put $1,000 down towards the payment and
you accept that payment, we have partial performance. That partial performance will take the
entire contract out of the statute of frauds and make the entire contract enforceable despite the
lack of a signed writing by either party.
The final exception to the statute of frauds rule, under the UCC, has to do with specially
manufactured goods. If an oral contract is made where the seller has to specially manufacture
something and then, in reliance upon the contract, sets about doing it only to have the rug pulled
out by the buyer under the technical violation of the lack of a signed writing, the seller may be
able to get some relief under this exception. If there is no ready resale market for the specially
manufactured goods and the seller has made a substantial beginning toward their manufacture,
then the drafters of the code said it is unfair to have the buyer pull the rug out under those
circumstances. The oral contract under those circumstances will be just as enforceable as if there
had been a signed writing by the buyer.

UCC Title of Risk of Loss

The Uniform Commercial Code provides a lot of default rules in the event the parties
themselves have not agreed to something specifically. A very important set of default rules has to
do with title and risk of loss passage. These rules can be changed by the parties, but if not, the
following rules will apply: Neither an insurable interest, title, nor risk of loss can pass until
“identification” has taken place. What is identification? Identification takes place when (1) the
goods physically exist (2) the seller owns them and (3) they have somehow been specifically
identified as the ones that will be used to satisfy the contract under consideration. So, in other
words, the goods have been set apart or segregated from the other mass of goods in the
warehouse or specially tagged to indicate that these will be the ones used to satisfy this particular
contract, or something like that.
Now insurable interests are important from the standpoint of the buyers being able to buy
an insurance policy and being able to collect if there is a loss of the goods. Under basic insurance
law, a person cannot collect under an insurance policy unless he had what is called an insurable
interest. So these rules determine when that insurable interest begins from the buyer’s standpoint.
So why is title passage an important topic? There are at least three good reasons:
First, property taxation (who has to pay the tax on this particular item?) Oftentimes, states have
what are called “tax days,” and on that particular tax day whatever you own is subject to tax.
Well title passage determines who own the property on a particular day. Secondly, we have to
know which creditors can attach the goods to satisfy a debt: the Seller’s creditors or the Buyer’s
creditors? As long as the Seller still has title, the Seller’s creditors theoretically could grab the
goods to satisfy debts owed by the Seller to its creditors; and it’s premature for the Buyer’s
creditors to grab the goods. But once the title of the goods have passed to the Buyer, it now
becomes too late for the Seller’s creditors to grab the goods to pay off preexisting debts and now
only the Buyer’s creditors have that possibility.
And finally, who’s balance sheet should the goods appear on? You have all taken a basic
accounting course and know that we set up a balance sheet at the end of the year showing all the
assets owned by the company and who owns them, either the creditors or the owners of the
business. You may recall the basic balance sheet equation which says: assets = liabilities +
owner’s equity. Well on the assets side, what assets should appear there? Title determines that
issue.
The ultimate default rule regarding title passage is that title passes at the time and place
the seller completes its physical delivery obligations. This would be the default rule that applies
if one of the more particularized rules discussed below does not apply and the parties themselves
have not specifically decided on title passage terms within the contract itself.
Sometimes sellers give potential buyers a trial period within which to try out a particular item to
see if it meets the needs of the buyer. For example, the seller might say: “Take this for two
weeks and try it out and see what you think. If you like it then buy it, if not then give it back.”
Well, if we have a trial period, we have to be careful legally how to characterize the
arrangement. One the one hand it might be considered to be what is called a sale on approval,
but on the other hand it might be considered a sale or return.
Before discussing the legal differences between these two things, I think it might be good
to consider the logic of how I have structured these rules. This particular graphic has to do with
title passage. The graphic below it in your materials has to do with risk of loss passage. If you
look down in the one below, you will see that A, B and C are exactly the same rule. So, in other
words, both title and risk of loss pass at the same point in time regarding things that fall within
section A; and the same could be said about sections B and C. It’s in part D that we have
significant differences between the default rules covering title passage and risk of loss passage.
Since there is no difference regarding sales on approval and sales or returns between the two
graphics, I am going to talk about title and risk of loss together right now.
So what is the difference between a sale on approval and a sale or return? First we will
look at the contract to see if the trial arrangement is described as being one or the other. If it’s
not specifically called one or the other, then we will look at the intended purpose of the buyer to
determine the matter. If the buyer is trying out the thing to buy for the purpose of using or
consuming it itself, then it is probably a sale on approval. On the other hand, if the buyer is
testing the goods out for the purpose of turning around and reselling them to somebody else then
that would be a sale or return.
If the trial period is characterized as a sale on approval, both title and risk of loss stay
with the seller during the trial period. They will not pass to the buyer until something amounts to
an approval on its part, either it says so specifically or it acts with regard to the goods in a
manner is inconsistent with the seller’s continued ownership or something like that. By contrast,
if the trial arrangement is characterized as a sale or return, then title and risk of loss pass to the
buyer during the trial period. He can transfer both of those items back to the seller by returning
the goods within the trial period, but during the trial period the buyer has both of those things.
Look at homework question #17: Chim Moi, a college student, takes a TV home on a trial basis
for 30 days. Through no fault of his, the TV gets stolen while in his possession. As between
Chimoi and the seller, who has the risk of loss here? Explain. (Also, you should discuss the issue
of bailments in this question.)
Answer: What was the purpose of Chi Moi’s taking the TV set? Wasn’t it for personal
consumption or use? Yes, therefore it was a sale on approval. During the sale on approval trial
period, both title and risk of loss remain with the seller, not with the buyer. Now let’s analyze
things from a bailment perspective. Since Chi Moi did not have the title to the goods during the
trial period, he was only given temporary possession of the goods therefore a bailment was
involved.
The Prima Facie Case for the bailor, in this case the seller, to prove a case of liability
against the bailee, Chi Moi, would be (1) I gave you the TV set in a certain condition. I couldn’t
get it back in the same condition and my resulting damages were X amount of dollars. That
would be the Prima Facie Case proven by the bailor. That would effectively be a serve in tennis
over to the bailee, and the bailee can avoid liability and return the serve by proving (1) that he
met the applicable standard of care and (2) the loss did not occur during some unauthorized
usage of the bailed property.
Let’s take (2) first; he had the right to try out the TV for the trial period. There was
nothing unauthorized about the usage. What about (1), did Chi Moi meet the requirements of a
bailee? The problem said: “through no fault of his the TV got stolen…” That would imply that
he locked his doors and windows and that a thief broke in and stole the TV set. He probably met
his applicable standard of care, which in this case probably just required reasonable care by the
bailee, since this was a mutual benefit bailment.
Homework question #18 says that instead of the buyer being Chi Moi, it’s a retailer
trying out the product as a possible addition to his product line to sell to its customers. Now in
this case this would not be a sale on approval, but rather a sale or return. In sales or returns,
during the trial period both risk of loss and title, at least temporarily, transfer over to the
prospective buyer. Now the buyer can transfer both of those back if he returns the item within the
trial period, but during the trial period they both shift from the seller to the prospective buyer.
Since title passed from the seller to the prospective retail buyer during the trial period, there is no
bailment involved here, because again bailments only have to do with transfers of temporary
possession and not title. Even though a bailment theory cannot be used here, since the risk of loss
was on the prospective buyer when the TV set got stolen, it is liable to pay for the TV set to the
seller.
Homework question #19 shifts the focus away from risk of loss and over to the issue of
title transfer. Returning to the example of Chi Moi, could his creditors grab the TV set while in
his possession? The answer is no. Since during a sale on approval trial period, title remains with
the seller. The seller’s creditors could grab it, but Chi Moi’s creditors could not. What about,
instead of Chi Moi having the TV set, it was the wholesale buyer who is thinking about checking
out the TV set as a possible addition to his line of TV sets to resell to its customers? As we
decided earlier, this was a sale or return. During sale or return trial periods, both title and risk of
loss transfer to the potential buyer. So here, the creditors of that wholesale buyer could grab the
TV set while in its possession. And during that trial period, the seller’s creditors could not grab
it. They could only grab it, if and when, the TV set was returned during the trial period and title
transferred back to the seller.
What if there is no trial period involved, but the seller has a transportation obligation
through a common carrier, like Consolidated Freightways or Yellow Trucking Company,
something like this? Then C applies. And we have to distinguish between shipping or shipment
contracts, on the one hand, and destination contracts on the other. If it’s a shipping or shipment
contract, then title transfers to the buyer as soon as the goods are in the hands of the common
carrier. Now because rule C is the same rule under risk of loss passage, that’s also the same point
in time that risk of loss passes over to the buyer. On the other hand, if it’s a destination contract
then both title and risk of loss pass to the buyer when the goods arrive at the destination and are
tendered for pickup by the buyer.
So how do we know if it’s a shipping or shipment contract or a destination contract? First
we look at the contract itself and see if these terms were specifically used in the contract. If so
then whichever term was used is what the case will be. But more commonly it will not be called
one or the other, but rather an FOB point will be designated in the contract, and both title and
risk of loss will pass at the FOB point. FOB stands for Free On Board. If the FOB point is the
seller’s place of business, then that is a shipping or shipment contract and title and risk of loss
will pass to the buyer as soon as the goods are put into the hands of the common carrier. But if
the FOB point is the point of destination, then that is a destination contract and all the while
during transit both title and risk of loss remain with the seller until the goods arrive at destination
and are tendered to the buyer.
I guess it’s possible to have an FOB point in between, but it’s very unusual. For example,
if you had a New York seller and Utah buyer and the contract provided for FOB Denver, CO,
then from the seller docks to the city limits of Colorado, the seller would have both title and risk
of loss, but as soon as the truck passed over the city line for Denver, both title and risk of loss
would pass over to the buyer. But like I said, that is a very unusual circumstance.
What if the contract does not use one term or the other and there is no FOB point
designated in the contract? The ultimate default rule here would be this would be a shipping or
shipment contract. Usually sellers want shipping contracts and buyers want destination contracts.
This is because sellers would like to get rid of risk of loss as soon as possible and buyers would
like to take on risk of loss as late as possible.
What if there is no trial period involved, so A and B don’t apply, and there is no common
carrier involved, so C doesn’t apply? Then we are down to D. Before I discuss D, I should point
out again that the rule regarding risk of loss passage in the next graphic below is different from
the rule regarding title passage here in this graphic. Buyer pickup situations and seller delivering
the goods in its own truck would be covered under section D.
Under D we will ask ourselves if there is a document of title involved. I had you read the
bailments and personal property chapter before this coverage of the UCC, because there it talked
about special bailments that had documents of title involved. In the common carrier situation the
document of title is called a Bill of Lading, if a real ship is involved it’s a dock warrant. If there
is a warehouse involved, like a grain silo, it issues a warehouse receipt, which is the document of
title. Under this graphic, whenever a document of title is transferred, that is the point in time
when title transfers from seller to buyer. Now in the context of title passage it does not matter
whether or not the document of title is a negotiable document of title or a non-negotiable
document of title. However, those distinctions do become important under the risk of loss
graphic immediately below.
If situations A, B, and C don’t apply and there is no document of title involved and the
goods are not moved, in other words it is a buyer pickup situation, then title transfers as soon as
the goods are identified. On the other hand, if the seller is going to transport the goods to the
buyer in its own truck, then the basic rule of above says title passes once the seller has completed
its delivery obligation. So in that case once the seller’s own truck pulls up at your front door, at
that point title will pass.
The default rule regarding C.F. and C.I.F. contracts is that they are shipping contracts. C
stands for cost, I for insurance and F for freight. So in other words, in a C.F. contract the seller is
supposed to pay cost and freight. In a C.I.F. contract, the seller is supposed to pay cost, insurance
and freight.
Now risk of loss, as the name implies, determines who bears the loss as between buyer
and seller, but this does not necessarily mean that the party on whose shoulders it fall will
ultimately bear the loss. It may have a claim against the common carrier (special bailment), an
insurance company, or against some other responsible third party. Again, the contract terms
prevail, but if nothing is said, the following default rules apply. First we ask ourselves if one of
the parties breached the contract. If there is a breach of contract, then the risk of loss is on the
shoulders of the breaching party. Only if there is no breach, do we go to the next graphic to
determine the default risk of loss rules.
If neither party has breached, we go through the risk of loss rules as follows: First we ask
if there was a trial period given, and again we have to make a distinction between sales on
approval and sale or returns. (Note that both of the rules are the same as we saw above. I
mentioned that before.) The same could be said of the facts that fall within C, where the seller
has a transportation obligation through a common carrier. It is the same exact rules we saw
above with title passage, where we have to distinguish between shipping or shipment contracts,
on the one hand, and destination contracts on the other, and FOB terms, etc.
It is under section D that we have significant differences between risk of loss rules and
title passage rules. Under D, we first ask if there was a document of title involved. If so, then we
further ask if it was a negotiable document of title or a non-negotiable document of title. If it is a
negotiable document of title, then risk of loss passes upon negotiation. If it’s a non-negotiable
document of title, then risk of loss passes after a reasonable period of time has elapsed, sufficient
within which the buyer can make claim upon the special bailee for recognition of its ownership
interest in the property.
I am not going to test you on whether or not you can recognize a negotiable from a non-
negotiable document of title. I will simply tell you if it is one or the other and expect you to be
able to go from there. But for your understanding, a negotiable document of title indicates on the
face that it is freely transferrable to some third party. For example, it might say: “Deliver to the
order of ___________” or “Deliver to bearer.” A negotiable document of title is negotiated by
endorsing the back of it and delivering that document of title to the buyer.
You should not make the mistake of concluding that a non-negotiable document of title is
not transferrable to a third party, the rights under it can be assigned as we discussed in an earlier
section of class. However, as we noted there, an assignee takes no better, nor worse position than
the assignor in that situation. By way of contrast, with a negotiable document of title, a transferee
can gain an even better legal position than the transferor.
Now what if there is no trial period, so A and B don’t apply, what if there is no common
carrier involved, so C doesn’t apply, we’re down to D and there is no document of title? Well our
final default rule asks us to determine whether the seller is a merchant or a non-merchant. If the
seller is a merchant, then risk of loss will pass upon the actual physical delivery of the goods to
the buyer. If the seller is a non-merchant then the risk of loss will pass upon mere tender of
delivery, in other words making it available to the buyer for immediate pickup. (Note that if and
when the 2003 amendments to the UCC pass in a given state, this will change to the physical
delivery point, as is currently the case with merchant sellers. In other words, at that point both
rules will be the same upon the transfer of physical delivery. But most states have not yet passed
the 2003 amendments.)
Examples
Let’s consider some examples to see how documents of title come into play regarding
title passage and risk of loss.
Example 1
An Iowa wheat farmer harvested his crop and stored it in a nearby public grain elevator
which issued him a negotiable “warehouse receipt” showing the type, amount, and quality of the
wheat and his name as the owner. Later on, when the farmer thought it was the best time to sell
that wheat, he went to New York City to negotiate its sale to Pilsbury Corporation. At 10 a.m. on
a given day they make a contract at a price of $80,000 for all the farmer’s wheat, the farmer
indorses the warehouse receipt, and hands it over to the representative of Pilsbury. At 11 a.m. of
that same day, one of the farmer’s creditors gets a $100,000 judgment against him issued by a
court back in Iowa and that creditor immediately goes down to the grain elevator company and
demands they give it possession of the wheat the farmer gave them for storage.
The grain elevator company brings an interpleader action to determine to whom it should
deliver the wheat. (Note: Remember an interpleader action is one where somebody brings a case
saying: “I have something belonging to somebody else, but there is more than one possible party
who might be claiming it. So I want those two parties to fight it out in court, and once the judge
tells me who the winner is, then I will transfer it over.”) In that legal fight between Pilsbury and
the judgment creditor over the wheat, who will win and why?
Answer: You would first ask yourself what is involved here: title passage or risk of loss
passage? Since a creditor of the farmer is involved, it is a title issue we would go to the middle
left-hand graphic to determine the default rule. Under that graphic, it doesn’t matter whether or
not the document of title is negotiable. The rule applies to negotiable and non-negotiable
documents of title in the same way. That rule is: as soon as the document of title is transferred,
that is when title transfers. So that transferred at 10 a.m. on that morning and Pilsbury then had
the title to the goods before the farmer’s creditor got his judgment issued by the court. Thus
Pilsbury would win.
Example 2
What if instead of a judgment being entered against the farmer at 11 a.m., a fire engulfed
the grain elevator destroying all the wheat at 11 a.m.? Between the farmer and Pilsbury, would
Pilsbury be relieved of its obligation to pay the $80,000 to the farmer because of the loss? Who
had the risk of loss?
Answer: Since under the original facts here, there was a negotiable document of title,
under the default rule of risk of loss passage: risk of loss will pass as soon as the negotiable
document of title is negotiated. Well, the farmer indorsed and delivered that document of title
over to Pilsbury at 10 a.m. in the morning. That is when negotiation took place. So that is the
place in time the risk of loss transferred from the farmer over to Pilsbury. So when the fire
occurred one hour later, the risk of loss was on Pilsbury’s shoulders. It would have to try to
collect from the warehouse company, an insurance company, an arsonist or some other third
party, otherwise it will have to observe the loss ultimately between buyer and seller.
Example 3
Let’s assume that the warehouse receipt had been non-negotiable rather than negotiable.
How would that change the outcome?
Answer: In the first problem, we had a title passage issue involved because there was a
judgment creditor of the farmer up against Pilsbury as the competing claimant. There is no
change in our outcome there, because under title passage it doesn’t matter whether the document
of title is negotiable or non-negotiable, title passes simply when the document of title is
transferred. But there will be a big change in the risk of loss issue when the fire was the problem.
In this set of facts, under the default rule for risk of loss passage when there is a transfer
of a non-negotiable document of title, risk of loss does not pass until a sufficient time has
elapsed, sufficient within which the buyer can make a claim against the bailee and have the
bailee recognize its interest in that property, the bailee in this case being the silo company. I gave
you one-hour difference here, and I am thinking that probably one hours time is not considered
to be enough time. If that is the case, risk of loss had not passed from the farmer seller to
Pilsbury. So it would be the farmer’s loss unless he could collect against an insurance company,
the silo company or some third party arsonist, etc.

Homework Question Numbers 21 & 22

Let’s see how the second half of part D, regarding risk of loss passage, works when there
is no document of title. Question 21 says:
Bart want sot get a bicycle for his son’s birthday which is the following Saturday. He
goes down to the Bike Route and negotiates a deal. He pays for the bike but asks them if they
will keep it until Saturday so that his son doesn’t discover it prematurely. Between then and
Saturday, the Bike Route burns down and the bike is destroyed. Between Bart and the Bike
Route, who has the risk of loss and why?
Again A, B and C don’t apply. D is left, there is no document of title, we are down to the
last part of it and we have to determine whether or not the seller is a merchant. Since the Bike
Route normally sells bikes, it would be considered a merchant of bicycles. So we look at the rule
and it says that in the case of a merchant seller, risk of loss passes upon the physical delivery of
the goods. Even though Bart could have taken possession at this point, he didn’t. Therefore risk
of loss remained with Bike Route, so when the loss occurred, when the fire occurred, that risk of
loss was on the Bike Route’s shoulders. Thus Bart would be entitled to receive a comparable
bike or else get his money back.
What about title to the bicycle? We just learned that Bike Route had the risk of loss, but
who had title? Well if you go up to that graphic on title passage, A, B and C don’t apply, D
applies, there is no document of title with the bicycle and there is no transportation through the
seller’s truck involved, it’s simply a buyer pickup arrangement, that graphic tells us that title
passes once the goods are identified. So once the Bike Route tags that bicycle as the one to be
delivered to Bart on Saturday, that is the point in time that title passes to Bart.
So Bart would effectively also have a bailment claim against Bike Route regarding the
loss of the bicycle. That is much harder to prove. It is much easier to rely on the risk of loss,
which we know is on Bike Route’s shoulders. So he would probably just go through that
approach. Now in court he might argue both and hope to win on one, but obviously the risk of
loss approach is the much easier approach. Since it is a strict liability idea.
Now let’s change the facts a bit. Assume that instead of buying the bike from Bike Route,
Bart bought the bike from you. You put up an advertisement in the student center and he called
up and went to your house and negotiated a purchase of your bicycle and then again asked you to
hold the bike until Saturday to make sure it stayed a surprise. And then between the point of sale
and Saturday, your house burned down and the bicycle was destroyed with it. Now who had the
risk of loss?
The thing we changed was the nature of the seller. Instead of Bart buying from a
merchant seller, now he’s buying from you, a non-merchant seller. And the rule here for passage
of risk of loss says that, risk of loss passes upon mere tender of delivery. Since Bart could have
taken the property at the point of sale we would deem that to be tendered delivery. But instead he
asked the seller to keep the bicycle until Saturday. He bailed the bicycle to the seller until
Saturday. So even though the buyer, Bart, is deemed to have the risk of loss regarding that
bicycle, there was a bailment. So the seller may be liable under the bailment theory.
What is the Prima Facie Case for the bailor? (1) He gave the bicycle to the seller/bailee in
a certain condition, couldn’t get it back in that same condition, and the resulting economic loss
was X amount of dollars. That is the tennis serve. The ball is now flying toward the seller/bailee.
He can return the serve and avoid liability by proving two things. First, he must prove that he
met the applicable standard of care. Since this would be a mutual benefit or contract bailment,
the standard of care is reasonable care. If the seller was reasonable, if the fire was not caused by
his fault then he has probably met this first requirement. The second requirement is that he must
show that there was no unauthorized usage during which the loss occurred. Well he was just
storing the bicycle in the garage and that is exactly what they buyer asked him to do, so
everything there was authorized. Therefore he should be able to return that serve and avoid
liability under a bailment theory. So in this case the buyer should observe the loss.
Again this rule regarding non-merchant sellers is scheduled to change if and when the
2003 amendments to the UCC are adopted state by state. Under the new rule risk of loss will
pass upon the actual physical delivery of the goods, just like with merchant sellers, but that is not
the case yet in most states.

Homework Question Numbers 14 & 15

Homework question #14: The contract between the seller and the buyer provided that the
seller was to deliver a certain amount of goldenrod corn to a common carrier and provided for an
FOB shipping point contract, in other words the seller wanted to make a shipping or shipment
contract. By mistake, the seller sent gold giant corn instead. While in transit the shipment was
destroyed when the driver of the truck fell asleep at the wheel and crashed. Between the seller
and buyer, who had the risk of loss at the time of the accident?
Answer: If we go to our risk of loss graphic, before we even go into that graphic the very
first question we ask ourselves is: “Was there a breaching party here?” In this case there was.
The seller was supposed to ship goldenrod corn, but instead sent gold giant corn. That is a breach
on his part. Even though he wanted to have a shipping contract by having an FOB point be the
shipping point that would not effectively happen because of his breach. So the loss falls on the
shoulders of the seller.
Homework question #15: Here the buyer initiated the purchase and its purchase order
form provided “FOB destination.” The seller shipped the goods through a common carrier, but
the seller’s invoices said “FOB shipping point.” When the goods were destroyed in transit, who
had the risk of loss? If the court believed from all the facts and circumstances that the buyer and
seller did want to enter a binding contract, then it would apply either the battle of the forms rule
or the knockout rule to resolve this problem.
If the battle of the forms rule applies, then the buyer, who is the offeror, will most likely
be the victor here. His terms will be the effective terms. Now if both of these parties are
merchants, then our starting point regarding analysis is offeree’s terms apply, unless (and there
are three exception that fall within the “unless” section, and these three exceptions cover
virtually all of the playing field) (1) the offeree’s terms materially alter the original offer. Well
that would be the case here. The terms that conflict have to do with risk of loss passage, that is a
material alteration for sure. That exception would apply and say that the offeree’s terms will not
be effective to change those of the offeror. And again, the offeror was the buyer here and it
wanted FOB destination. It did not want to have the risk of loss during the transit of the goods.
What if one of the parties had been a non-merchant? Then the battle of forms rule says
right from the start that the offeror’s terms would be the effective terms. Again, in this case, that
would be the buyer and the FOB destination term would be the applicable term, thereby putting
risk of loss onto the seller all the way during transit.
Now what if instead of applying the battle of forms rule, the court applied the knockout
rule? There is a whole different approach here. The court, under this rule, would take both
documents; look down them, whatever was consistent would remain, but whatever conflicted
would be erased and pretended as if they had never appeared in either of the documents. And
then the court would apply the default rule that would have been applied had there been total
silence on the issue. Well if nothing was said about something being a shipping contract or a
destination contract when a common carrier was involved, the ultimate default rule under the
UCC is it is a shipping or shipment contract. That would favor the seller because that would
mean that both title and risk of loss would shift to the buyer as soon as the goods got into the
hands of the common carrier. So as you can see here, depending upon which rule applied, the
outcome would be quite dramatically different.

Liability of a Common Carrier (A Special Bailment)

As we observed a while ago, whoever has the risk of loss may have claim against some
third parties, for example a common carrier who was shipping the goods. Let’s discuss the
liability of a common carrier, which is a special type of bailment. It’s basically strict liability,
unless the loss was caused by one of these five things:
1. An act of God (e.g. a tornado taking the truck up to Oz).
2. An act of public enemy, like war, civil unrest, etc. If the truck was in the wrong place at
the wrong time and got destroyed by acts of civil unrest, then it is not the trucking
company’s fault.
3. An order of public authority. What if the trucking company is shipping meat and an
inspector at a state line says the meat has mad cow disease and destroys all of the meat
right there on the spot? That is not the trucker’s fault. He should not be held liable for
that.
4. It could be an act of one who shipped the goods, the one who contracted with the
shipping company, the common carrier, to transport the goods. Maybe he didn’t tell the
shipping company that goods needed to be refrigerated and when they weren’t they
spoiled on the way. Well that wasn’t the trucking company’s fault. That was the one who
hired them.
 5. The inherent nature of the goods. What if the goods are oranges? You have all had
oranges before where it seemed like all of a sudden, overnight, one of them has a bunch
of green fuzz all over it. Well that is inherent spoilage of the goods. That’s not the fault of
the trucker.
If one of these five reasons account for the loss, then the trucking company is not liable. But if
one of these five does not account for the loss, it is pretty much strict liability against the
shipping company, the common carrier.