Chapter 23 The Sale of Goods PDF

The Sale of Goods Canadian Business and the Law, EIGHTH EDITION Learning Objectives After studying this chapter, you should have an understanding of the principles that govern the sale of goods and the impact of sale of goods legislation the effect of implied conditions and warranties on...

The Sale of Goods Canadian Business and the Law, EIGHTH EDITION Learning Objectives After studying this chapter, you should have an understanding of the principles that govern the sale of goods and the impact of sale of goods legislation the effect of implied conditions and warranties on sale of goods transactions how businesses use standard shipping terms to manage risk when title will transfer from a seller of goods to the buyer remedies for breach of contract in regard to the sale of goods 2 The Sale of Goods One of the purposes of business law is to promote trade and commerce; in order to achieve that goal, the law takes a role in transactions involving the sale of goods. In regard to the sale of goods, several legal issues arise: o the sale of goods contract itself o the impact of sale of goods legislation o the implied terms in a sale of goods contract o when ownership and the risk of loss are transferred from a seller of goods to the buyer o the remedies available when a sale of goods contract is breached 3 The Common Law The common law concerning the sale of goods is reflected by the Latin phrase caveat emptor. caveat emptor: “Let the buyer beware” or “let the buyer take care.” Historically, the common law required prospective purchasers to take care of themselves, to be aware of what they were purchasing, and to make appropriate investigations before buying. o The customer was expected to include any import aspects of the sale in the contract. This led to harsh results and over time, judges began to create principles to protect purchasers of goods. Eventually these principles were codified in the Sale of Goods Act. o Similar or identical legislation has been adopted in each province. 4 Sale of Goods Legislation Sale of goods legislation implies a set of terms into every transaction for the sale of goods and provides remedies if these statutory terms are breached. The terms are mandatory in consumer transactions but may be excluded or varied in commercial contracts by use of express contract terms. 5 Goods and Services (1) The Sale of Goods Act, (SOGA) applies to sale of goods only. “Goods” means personal property in its tangible, portable form as well as items attached to land that can be severed. SOGA does not apply to service contracts. o It may be difficult to distinguish a contract for the sale of goods from one for the provision of services—for example, a contract to paint a portrait. o The legal test is whether the contract was primarily for the sale of goods or primarily for the supply of services. 6 Goods and Services (2) A “sale” means that money and ownership must be exchanged. o SOGA does not apply to loans, gifts, leases, or licences. o For example, a licence to use computer software would not be considered a sale for the purposes of SOGA. 7 Implied Terms—Conditions and Warranties (1) If SOGA applies to a contract for the sale of goods, the effect is that a number of terms are automatically implied into the contract. These terms will be either conditions or warranties. The remedy for breach will depend on whether the term is a condition or warranty. 8 Implied Terms—Conditions and Warranties (2) Condition—if breached, the buyer will be able to repudiate the contract of sale, return the goods, and obtain a return of the purchase price.  Alternatively, the buyer has the option to proceed with the contract, treat the breach of condition as a breach of warranty, and sue for damages. Warranty—if breached, the innocent party cannot repudiate the contract and may only sue for damages for breach of contract. 9 Conditions Implied by the Sale of Goods Act The seller has the right to sell the goods (i.e., the seller owns the goods or will own them when ownership transfers to the buyer). The goods will be reasonably fit for the intended purpose where the buyer makes the intended purpose known. The goods will be of merchantable quality (the goods are of reasonable quality considering the price and free of defects not apparent on a reasonable examination). If sold by sample, the goods will correspond to the sample. If the goods are sold by description, they will correspond with their description. 10 Warranties Implied by the Sale of Goods Act The buyer will enjoy quiet possession of the goods (i.e., third parties will not claim rights against the goods). Goods are free from liens and encumbrances in favour of third parties that were not declared or known to the buyer. Payment will be made within a reasonable time. Delivery will be made within a reasonable time. 11 Case 23.1 (1) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 Pine Valley (PV) was hired by the City of Toronto to build a dry pond to capture excess water. PV was selected in part because it proposed to use a particular soil—45 percent to 70 percent sand, 1 percent to 35 percent silt, and 14 percent to 20 percent clay, and PV had provided the city with a sample of “R Topsoil” from the defendant, Earthco, a custom soil provider. 12 Case 23.1 (2) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 PV entered into a contract with Earthco to purchase a large quantity of the soil. The contract included these terms: o [PV] has the right to test and approve the material at its own expense at our facility before it is shipped and placed … o If [PV] waives its right to test and approve the material before it is shipped, Earthco Soils Inc will not be responsible for the quality of the material once it leaves our facility. 13 Case 23.1 (3) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 The contract also provided that Earthco would provide “soil testing if required,” at $300 per test. Due to strict time constraints imposed by the city, PV did not exercise its right to test the soil before it left Earthco. The soil was installed and failed. Subsequent testing revealed it was significantly different in composition from the sample. PV sued Earthco. 14 Case 23.1 (4) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 Court: o The parties may exclude or vary any of the Act’s conditions or warranties with “explicit” and “clear and direct” language. o SOGA imposes an implied condition that when a sale is by description, that the goods will correspond to the description. o The contract’s reference to Earthco not being responsible for “the quality of the material” did not provide explicit, clear, and direct language to oust the statutory condition that the product supplied would be of the same description or identity as the original sample of soil. 15 International Perspective 23.1 Contracts for the International Sale of Goods The Convention on the International Sale of Goods (CISG) provides a uniform set of rules for forming contracts. It applies to business-to-business contracts automatically if both parties are from ratifying countries. It does not apply to contracts for services, technology, leases, and others. Business people must be aware of differing rules among other legal systems in order to manage risk and make effective decisions. o For example, the CISG states that contracts need not be in writing and makes no distinction between conditions and warranties. 16 Shipping Terms (1) Businesses use standardized terms are used for delivery and payment in contracts of sale. bill of lading: A shipping document that serves as a contract between the seller and the carrier. o It also provides evidence the goods have been transferred to the carrier. o It often also sets out the terms of the shipping arrangement, such as fees, expenses, delivery times, and any agreed-upon limitations of liability. stoppage in transit: The right of a seller to demand that goods be returned by a shipper to the seller, provided the buyer is insolvent. 17 Shipping Terms (2) CIF: A contractual term making the seller responsible for insurance and shipping. o The seller is responsible for arranging the insurance (in the buyer’s name) and shipping. o The purchase price includes the cost of the goods, insurance, and shipping. FOB: A contractual term whereby the buyer specifies the type of transportation and the seller arranges that transportation and delivery of the goods to the carrier at the buyer’s expense. o i.e., “free on board”—the seller incurs the cost of delivering the goods to the carrier, and generally the buyer pays for shipping and insurance. 18 Shipping Terms (3) COD: A contractual term requiring the purchase to pay the carrier upon deliver of the goods. o i.e., “cash on delivery”—the purchaser pays for the goods upon delivery. o This was more common before credit cards existed. 19 Transfer of Title (1) Title (ownership) is a key feature of every transaction because risk of loss (theft, damage, destruction) will be borne by the owner of the goods. It is commonly assumed that delivery and payment result in transfer of title to the buyer, but this is not necessarily the case. o Possession and ownership can be held by different parties. o For example, the seller may still possess the goods, but they are owned by the buyer. o Payment does not necessarily result in transfer of title. SOGA legislation sets out a series of rules that determine when title passes to the buyer. 20 Transfer of Title (2) specific goods: Goods that are in existence and identifiable at the time the contract of sale is formed. unascertained goods: Goods that are not yet set aside and identifiable as the subject matter of the contract at the time a contract of sale is formed. future goods: Goods that are not yet in existence at the time the contract of sale is formed. 21 Rule 1 Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery or both are postponed. 22 Rule 2 Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property does not pass until the thing is done and the buyer has received notice. 23 Rule 3 Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh, measure, test, or do some other act or thing for the purpose of ascertaining their price, the property does not pass until such act or thing is done and the buyer has received notice. 24 Rule 4 Where goods are delivered to the buyer on approval or on “sale or return” or other similar terms, the property passes to the buyer o when they signify approval or acceptance; or o if they do not signify approval or acceptance to the seller but retains the goods without giving notice of rejection. 25 Rule 5 Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, the property passes to the buyer, and such assent may be express or implied. 26 Remedies (1) Whether or not title has passed from the seller to the buyer affects the compensation to which the seller is entitled in the event of a breach by the buyer. damages for non-acceptance: Damages to which a seller is entitled if a buyer refuses to accept goods prior to the passing of title. o When title has not passed to the buyer, these are damages to which a seller is entitled if a buyer refuses to accept goods prior to title shifting. action for the price: The seller’s claim when the buyer has breached the contract and title to the goods have passed to the buyer. o When title has passed to the buyer, the buyer must pay the full amount under the contract (purchase price). 27 Remedies (2) When a term of a contract of sale is breached, classification of the relevant term of the contract is essential to determining the remedy. Breach of a condition by the seller—this will give the innocent party the right to claim damages and also to reject the goods and treat the contract as ended. Breach of warranty—the innocent party is entitled only to claim damages or a reduction of the purchase price due to the breach. A buyer cannot return the goods as a result of a breach of warranty and must continue to perform its obligations under the contract. 28