Chapter 14

Sales Law:



Risk of Loss and Warranties

I. Risk of Loss

   What happens when goods being sold under a sales contract are damaged through no fault of the buyer or seller?

Who ends up responsible for paying for the damages?

Who has the “risk of loss”?

 The first place to look to determine who has the risk of loss is the contract itself  When the parties have not allocated the risk of loss by contract, the Commercial Code supplies the rules to be followed in making the risk of loss determination

A. No Breach of Agreement

1.

Sale on Approval

2.

Sale or Return

3.

On Consignment

A. No Breach of Agreement (cont.)

4.

No movement of Goods Required

a.

b.

c.

Goods in Possession of Bailee  Bailment Merchant Seller Non-Merchant Seller

5.

Movement of Goods Required

a.

b.

Shipment Contract Destination Contract

B. Breach of Agreement



When one of the parties breaches the contract, the Commercial Code passes the risk of loss to the breaching party 1.

2.

3.

Seller’s Breach –

[Com Code when the seller tenders or delivers nonconforming goods such that the buyer has a right to reject the nonconforming delivery, the risk of loss remains on the seller until cure or the buyer’s acceptance § 2510(1)]

Seller’s Breach – Buyer Revokes Acceptance –

buyer’s insurance coverage [Com Code § 2510(2)] when the buyer accepts nonconforming goods and then rightfully revokes his or her acceptance, the risk of loss rests on the seller to the extent of any deficiency in the

Buyer’s Breach –

buyer repudiates the contract, the seller may treat the risk of loss as resting on the buyer where conforming goods have been identified and the

II. Insurable Interest

Insurable Interest

 The UCC has made provision for an insurable interest to exist for the buyer if the goods are in existence and identified [Com Code § 2501(1)]  The seller retains an insurable interest in the goods by retaining either title to the goods or a security interest in the goods [Com Code § 2501(2)]  Having an “insurable interest” permits a party to obtain insurance coverage to protect against damage to goods

III. Warranties

Warranty

 A

“warranty”

assure the buyer that the goods will meet certain standards   The

Song-Beverly Consumer Warranty Act

[Civil Code § 1790 et seq.] along with the UCC, give purchasers of consumer goods additional rights

CONSUMER GOODS

are defined as “any new product that is used, bought, or leased for use primarily for personal, family, or household purposes, except for clothing and consumables”

1.

2.

3.

4.

A. Title Warranties

Good Title –

when goods are sold, the seller must transfer “good title” and the transfer must be rightful [Com Code § 2312(1)(a)]

Free From Security Interest

goods “free from any lien or encumbrance” which the buyer has no knowledge of

–

the seller must also deliver the

Disclaiming Warranty of Title and No Security Interest

specific language in the contract [Com Code § 2312(2)]

–

a seller must disclaim either of the two above warranties by using

Infringement –

the seller makes a warranty that the goods will be delivered free from claims by third parties that the goods infringe upon any patents or trademarks [Com Code § 2312(3)]

B. Quality Warranties

 When a seller gives assurance that a good will meet certain quality standards, a “warranty of quality” has been given to the buyer  

Express Warranties Implied Warranties

C. Conflicting Warranties

If more than one warranty exists, then the intention of the parties is determined by applying the following rules:

D. Disclaiming or Modifying Warranties

      If a seller wants to limit or totally disclaim a warranty, the UCC permits it as long as the limitation or disclaimer adheres to the legislated requirements The Song-Beverly Consumer Warranty Act further complicates this area by not permitting any disclaimer of an implied warranty of a consumer good except on an “as is” or “with all faults” basis [Civil Code § 1792.3]

Express Warranties Implied Warranty of Merchantability Implied Warranty of Fitness for a Particular Purpose Both Implied Warranties

 

E. Magnuson –Moss Warranty Federal Trade Commission Improvement Act

In 1975, Congress extended federal protection to consumers by enacting the Magnuson-Moss Warranty Federal Trade Commission Improvement Act [15 USC § 2301 et seq.] Congress wanted to “improve the adequacy of information available to consumers, prevent deception, and improve competition in the marketing of consumer products” [15 USC § 2302(a)]  A full warranty entitles the consumer to a minimum remedy of having the warrantor conform the product to the warranty within a reasonable time and without charge

F. Statute of Limitations

 Under Commercial Code Section 2725(1) and (2), a lawsuit for a breach of any sales contract must be commenced within four years after tender of delivery, unless a warranty explicitly extends to a future performance of the goods.

Chapter Summary



Risk of Loss

  No Breach of Agreement Breach of Agreement 

Insurable Interest



Warranties

      Title Warranties Quality Warranties Conflicting Warranties Disclaiming or Modifying Warranties Magnuson-Moss Warranty Federal Trade Commission Improvement Act Statute of Limitations