Chapter 23: The Sale of Goods PDF

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 16:02:10 GMT Chapter 23: The Sale of Goods 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 im...

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 16:02:10 GMT Chapter 23: The Sale of Goods 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 [A] when title will transfer from a seller of goods to the buyer remedies for breach of contract in regard to the sale of goods Business Law in Practice Salish Sea Natural Products Limited (SSNP) is owned by Tabitha Joe, a member of the Coast Salish people on Vancouver Island. Joe’s business develops and manufactures natural hair and beauty products that are made from locally harvested, natural ingredients. The business has been a success, and SSNP’s beauty products are now sold to a number of spas and hair salons across British Columbia. Joe’s most recent endeavour has been the development of “Sea Goddess,” a line of temporary natural hair colourants that wash out after a few weeks of normal washing. The new line of products presently consists of five unique colours that are packaged in eye-catching, biodegradable packaging featuring the work of local artists. After testing was completed, she sent samples of the colourants to the spas and salons that presently carry SSNP’s other hair and beauty products. She hopes the samples will generate interest in the new product and that her current customers will add it to the line of products they sell to their spa and salon clientele. If the product is a success, she would like to eventually develop additional colours and possibly expand her market reach into other provinces as well as sell Sea Goddess directly to consumers online through SSNP’s website. Initial feedback from several spas and salons has been very positive, but before SSNP begins manufacturing larger quantities of the product, Joe wants to ensure that it has properly structured the purchase and sale contracts that it has with its customers. She also wants to properly manage the risks that are involved with the sale and delivery of its new product. 1. What legal issues arise in regard to the sale of Sea Goddess to spas and salons? 2. What should SSNP be aware of when negotiating the contract of sale with spas and salons? 3. What terms should SSNP use in regard to the shipping of Sea Goddess? 4. What happens if a shipment of Sea Goddess is lost or damaged before it reaches the buyer? Introduction The sale of goods, like other aspects of business, is influenced by various laws and regulations. The fundamental laws affecting sales are the common law principles of contract and tort law explained in Parts Two and Three of this text. There are also a number of important statutes, both federal and provincial, that apply to the sale and marketing of goods. The main objectives of these laws: They protect the parties to sale of goods transactions, particularly buyers. They protect consumers from physical harm. They promote a fair and competitive marketplace. They protect consumers from unfair selling and marketing practices. The laws relating to the first of these objectives will be discussed in this chapter. The laws dealing with the other three objectives will be discussed in Chapter 24. There is some overlap, because the sale of goods, the protection of consumers, and the promotion of a fair and competitive marketplace are related concepts. In regard to the sale of goods, several legal issues will be discussed in this chapter: the sale of goods contract, the impact of sale of goods legislation, the implied terms in a sale of goods contract, when ownership and the risk of loss are transferred from a seller of goods to the buyer, and the remedies available when a sale of goods contract is breached. If a business sells its products internationally, or purchases goods from foreign sellers, the business may be subject to the laws of other countries and may also be affected by rules governing the international sale of goods. The Sale of Goods The sale of goods is very important to the overall Canadian economy. From the supply of oil and gas, to the resale of manufacturing and building materials, to the purchase of items such as automobiles and groceries by consumers, millions of dollars in goods are bought and sold every day in Canada. One of the purposes of business law is to promote trade and commerce, and to achieve that goal, the law assumes a role in transactions involving the sale of goods. The Contract of Sale The contract of sale is the legal foundation for every sale of goods transaction. Several key aspects of the contract of sale are worthy of particular attention—the terms of the contract relating to the sale, the transfer of ownership of the goods to the buyer, the terms relating to payment and delivery, and the remedies for a breach of the contract. The Common Law When buyers agree to purchase goods, they typically have expectations regarding the attributes and characteristics of the goods. Purchasers of Sea Goddess, for example, will probably assume that the product is properly manufactured and safe for its intended use. Whether such expectations are protected from a legal perspective is a different matter. The historic foundation of the common law concerning the sale of goods is reflected by the Latin phrase caveat emptor , which means “let the buyer beware” or “let the buyer take care.” 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. If the purchaser expected a product to have certain attributes or exhibit certain characteristics, the common law required those expectations to be contained in the contract. Otherwise, the purchaser would be left without a remedy if the product proved to be deficient. Because an unwavering application of the doctrine of caveat emptor often produced unfair results, judges began to create principles that would provide a measure of protection for purchasers of goods. Eventually, these principles were codified in sale of goods statutes. Sale of Goods Legislation Beginning in the 1800s, English judges generated the basic principles that inform the modern law concerning the sale of goods. In response to the harshness of caveat emptor, they developed common law rules that, among other matters, implied specific terms into contracts for the sale of goods, whether or not the parties had expressly agreed to those terms. In addition, rules evolved regarding the transfer of ownership from seller to buyer, which was particularly important because the owner of the goods was generally considered to bear the risk of any damage or loss in regard to the goods. On this basis, a reasonably predictable set of exceptions to the doctrine of caveat emptor was developed. For example, common law rules arose to the effect that goods sold would be reasonably suitable for the purpose for which they were intended to be used and would be of merchantable—or reasonable—quality. In 1893, the English Parliament enacted the Sale of Goods Act, an influential piece of legislation based on the common law principles that had developed. The Act summarized—rather than reformed—the common law of the time. The Act implied a set of terms into every transaction for the sale of goods unless it was contrary to the parties’ intentions. The legislation also provided remedies if these statutory terms were breached. These implied terms operated in addition to any express terms or representations that were agreed upon by the parties at the time the contract of sale was made. England’s 1893 Sale of Goods Act forms the cornerstone of modern sale of goods legislation everywhere in Canada except Québec. Since all the provincial statutes are based on the original English legislation, they are all nearly identical. The law governing the sale of goods is a specialized branch of contract law. This means that the sale of goods is governed by legislation and, where the legislation is not relevant, by the common law rules of contract. In order for the Sale of Goods Act to apply, there must be privity of contract between the customer and the “offending” party. In some situations, such as business transactions where the parties have agreed to exclude the Sale of Goods Act, the Act will not apply. While the parties to a sale of goods transaction may agree to exclude, or vary, the terms implied by the Sale of Goods Act, care must be taken to ensure that applicable implied warranties and conditions are specifically excluded. However, some provinces have passed legislation that prohibits the parties in consumer transactions from excluding, or varying, these implied terms. This is discussed further in Chapter 24. Example 1 A major salon chain ordered 800 units of Sea Goddess, and the written contract of sale states that the parties have agreed to exclude the application of the Sale of Goods Act to the transaction. Following delivery of the product, the chain complains that the seller has breached an implied term of the contract of sale because the dye is not reasonably fit for its intended purpose. The buyer will not be able to rely on the implied terms of the Sale of Goods Act because the parties have agreed to exclude the application of the Act and the transaction is not a consumer transaction. The buyer will have to rely on the terms of the written contract for a remedy. Example 2 A consumer purchased a package of Sea Goddess directly from SSNP through SSNP’s website. The customer paid the purchase price when they placed the order, but the dye was not delivered for two months. The terms and conditions on SSNP’s website, to which the customer agreed, state that the terms of the Sale of Goods Act are excluded from all online sales. The late delivery constitutes a breach of the implied warranty that the goods will be delivered within a reasonable time. The exclusion of the Sale of Goods Act is ineffective, because the customer is a consumer and therefore the terms implied by the Act cannot be excluded or varied. Quiz  Question 23.1 Mark as: None Review What phrase captures the idea that prospective purchasers are expected to take care of themselves and make appropriate investigations before buying goods? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a res ipsa loquitor b caveat emptor c ab initio d bone volenti Show Submitted Answer Show Correct Answer Check My Answer Goods and Services The Sale of Goods Act applies only to the “sale of goods.” A “sale” means that money and ownership must be exchanged. The Act does not apply to loans, gifts, leases, or licences. Importantly, this means that generally the Act does not apply to the provision of commercial software, which is typically licensed to users rather than sold. “Goods” means personal property in its tangible, portable form as well as items attached to land that can be severed. For example, the hair dye supplied by SSNP would be considered goods. Goods do not include the sale of land or buildings, or the provision of services. Goods also do not include intangible personal property, such as accounts receivable, intellectual property, or shares of a corporation. It may be difficult to distinguish a contract for the sale of goods from one for the provision of services. The distinction is important because it will determine whether or not the Sale of Goods Act applies. For example, in Gee v White Spot, the court held that a cooked meal served to a customer at a sit-down restaurant was a sale of goods, even though the transaction involved a significant provision of services, including setting the table, cooking the food, and clearing the dishes. In the case of Borek v Hooper, a contract between a homeowner and an artist for a large custom painting was found not to be a sale of goods, although the artist did supply some goods, such as the canvas, the paint, and the frame. The legal test is whether the contract was primarily for the sale of goods or primarily for the supply of services. Accordingly, when a contract involves both a sale of goods and a supply of services, whether or not the Sale of Goods Act applies will depend on the primary purpose of the contract. Quiz Question 23.2 Mark as: None Review Vida commissioned Grundy, a famous local artist, to create a mural on the wall of her store. The paint is now peeling, and she wants to take action under the Sale of Goods Act. Which statement best describes the most likely outcome? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a She cannot take action under the Sale of Goods Act because Grundy provided an intangible good. b She cannot take action under the Sale of Goods Act because of the principle caveat emptor. c She cannot take action under the Sale of Goods Act because Grundy provided a service, not a good. She cannot take action under the Sale of Goods Act because there were no implied terms or conditions in her d contract with Grundy. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.3 Mark as: None Review Which statement is correct with respect to the terms implied by the provincial Sale of Goods Acts? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The implied terms in the Acts apply to the provision of commercial software licensed to users. b The implied terms in the Acts override any express terms or representations agreed upon by the parties. c The Acts contain implied terms that vary widely from one provincial jurisdiction to another. d The Acts prohibit the parties from excluding, or varying, the implied terms in consumer transactions.  Show Submitted Answer Show Correct Answer Check My Answer Implied Terms—Conditions and Warranties When the Sale of Goods Act applies to a contract for the sale of goods, the effect is that a number of terms are automatically implied into the contract. The legislation classifies these implied terms as either conditions or warranties. The primary difference between implied conditions and implied warranties rests in the remedy that the innocent party will have upon a breach. Conditions Implied by the Sale of Goods Act In the event of breach of an implied condition, the buyer will be able to repudiate the contract of sale, return the goods (if they have been delivered), and obtain a return of the purchase price (if it has been paid). 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. Conditions implied by the Sale of Goods Act include the following: The seller has the right to sell the goods. In other words, the seller owns the goods or will own them in the future when ownership transfers to the buyer. If the goods are stolen or were already sold to someone else, for example, this condition would be breached. The goods will be reasonably fit for their intended purpose where the buyer, expressly or by implication, makes it known what the intended purpose of the goods will be, in such a way as to show that they are relying on the skill and judgment of the seller (a buyer need not make the intended purpose known when goods are used for their ordinary purpose). For example, if the buyer in a paint supply store asked what paint should be used to paint a concrete floor and the recommended paint did not adhere to concrete, this condition would be breached. The goods will be of merchantable quality and free of defect that would not be apparent upon a reasonable examination of the goods (“merchantable quality” means the goods are of reasonable quality considering the price paid). For example, this condition would be breached if the seller were selling a toaster that had no visible damage but failed to work when the buyer took it home and attempted to use it. Where goods are sold by sample, the goods will correspond to the sample. For example, this condition would be breached if a purchaser selected a particular sofa from a store display but a different sofa was delivered by the seller. Where goods are sold by description, the goods will correspond with the description. This condition would be breached, for example, if a buyer ordered goods from a catalogue but the goods delivered by the seller did not match the catalogue description. SSNP has provided samples of its new hair colourants to potential purchasers. SSNP will need to ensure that the product that is shipped to its clients corresponds with the samples it has provided, or it will be in breach of an implied condition of their supply contract. Quiz Question 23.4 Mark as: None Review What is meant by the term merchantable quality? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a a reasonable quality, considering the description of the goods b the value declared or known to the buyer at the time c the value of goods corresponds with their description d the price paid determines the reasonableness of quality Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.5 Mark as: None Review Which of the following is an implied term when goods are sold “by description”? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The buyer will enjoy quiet possession of the goods. b The goods will match the seller’s description. c The buyer relies on the judgment of the seller. d The goods will be delivered within 30 days.  Show Submitted Answer Show Correct Answer Check My Answer CASE 23.1 Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265, leave to appeal to SCC granted, 2023 CanLII 6109 (SCC) THE BUSINESS CONTEXT: In commercial contracts for the sale of goods, it is not uncommon for the seller to include wording that is intended to exempt the seller from conditions and warranties implied by Sale of Goods Act (SGA) legislation. FACTUAL BACKGROUND: Pine Valley was hired by the City of Toronto as a contractor for a project intended to deal with basement flooding in residences in North York. The contract required Pine Valley to build a dry pond to capture excess water. To accomplish this, Pine Valley was to install drainage pipes and apply proper topsoil for drainage. The City had selected Pine Valley, in part because it approved of the soil mix that Pine Valley proposed to use: 45 percent to 70 percent sand, 1 percent to 35 percent silt, and 14 percent to 20 percent clay. The sample of “R Topsoil” submitted to the City had been provided to Pine Valley by Earthco, a custom topsoil provider, which had also provided a test showing their sample met the composition required by the City. Pine Valley entered into a contract with Earthco for the supply of 3 678 cubic yards of the soil for a price of $66 168. The contract also provided that Earthco would provide “soil testing if required,” at $300 per test. Clauses 6 and 7 of the contract provided as follows: [Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed … If [Pine Valley] 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. Due to strict time constraints imposed by the City, Pine Valley did not exercise its right to test the soil before it left Earthco. The soil was installed by Pine Valley and shortly thereafter, water was discovered pooling at the site. Subsequent testing by the City revealed that the soil composition differed significantly from the original sample of R Topsoil. Pine Valley was required to remove and replace the soil, which it did and then sought compensation from Earthco. Earthco denied responsibility on the basis that Pine Valley had waived testing and therefore assumed all responsibility for the soil once it left Earthco. At trial, the court agreed with Earthco and held that by the contract’s exclusionary clauses, Earthco had successfully excluded liability for failing to supply topsoil that corresponded with the description in the contract. Pine Valley appealed the court’s decision. THE LEGAL QUESTION: Did the trial judge err in finding that the exclusionary clauses ousted the liability of Earthco under the implied condition in s 14 of the SGA (that goods sold by description will match their description)? RESOLUTION: The decision of the trial judge was overturned. According to the Ontario Court of Appeal, while section 53 of the Sale of Goods Act, RSO 1990, c S 1, provides that the parties may exclude or vary any of the Act’s conditions or warranties, this must be done with “explicit” and “clear and direct” language. Section 14 of the SGA relates to the identity of the goods and imposes an implied condition that when a sale is by description, that the goods will correspond to the description. The court held that the contract’s reference to Earthco not being responsible for “the quality of the material” once it left Earthco’s facility 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. Critical Analysis Loading question... Warranties Implied by the Sale of Goods Act In the event of a breach of an implied warranty, the innocent party cannot repudiate the contract and may only sue for damages for breach of contract. Warranties implied by the Sale of Goods Act include the following: The buyer will enjoy quiet possession of the goods, which generally means that third parties will not claim rights against them. The goods are free from liens and encumbrances in favour of third parties that were not declared or known to the buyer when the contract was made. Payment of the purchase price for the goods will be made within a reasonable time. Delivery of the goods will be made within a reasonable time. In order to ensure compliance with the Sale of Goods Act, SSNP must ensure it accurately describes its product. For example, if SSNP describes its product on its website as “hypoallergenic” and a manager of a salon, seeing this description purchased 200 packages of Sea Goddess to resell to its customers, some of whom later complain that the product produces an allergic rash, then SSNP has breached the implied condition that the goods will match their description. If the contract of sale between the salon and SSNP said nothing about implied terms or the Sale of Goods Act, then the Act applies because the parties have not agreed to exclude its application. As a result, the salon may return the product to SSNP and obtain a refund of the purchase price paid. Quiz Question 23.7 Mark as: None Review EcoDesign Inc (Eco) purchased 200 weeping caragana trees for spring planting from Abbot Garden Centre Ltd. Two weeks later, planting was complete and payment forwarded to Abbot. Two months later, Eco was served with a claim issued by Misty Tree Farms Ltd, alleging non-payment for the goods by Abbot Garden Centre and naming Eco as a third party to the claim. How was the Sale of Goods Act violated in this instance? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a breach of contract b breach of innominate term c breach of implied term d breach of implied warranty Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.8 Mark as: None Review A judge has found that Clear View Windows Inc is liable to pay damages to a client for breach of one of its implied obligations under the Sale of Goods Act. Which of the following best describes the nature of the implied term breached by Clear View? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.  a binding assurance b pre-contractual term c warranty d covenant Show Submitted Answer Show Correct Answer Check My Answer INTERNATIONAL PERSPECTIVE 23.1 Contracts for the International Sale of Goods In international trade, it is important that shipping terms be standardized to ensure that there is a common understanding between jurisdictions. The International Chamber of Commerce has published a set of definitions for trade terms, known as “Incoterms.” These definitions do not have the force of law but are often adopted by contracting parties and they may differ from the Sale of Goods Act terms outlined in this chapter. Business people need to be familiar with the appropriate terms applying to their specific transaction. Video 23.1 describes Incoterms in detail. Video Please visit the textbook on a web or mobile device to view video content. In 1980, the United Nations Commission on International Trade Law (UNCITRAL) produced a treaty, the Convention on the International Sale of Goods (CISG). The treaty, signed in Vienna in 1980, came into force in 1988 and has been ratified by more than 95 countries, including Canada and the United States. The goal of the convention is to create a uniform body of international commercial law. The CISG applies to business-to- business contracts for the sale of goods. The convention automatically applies to the contract if the parties are from ratifying countries, unless they contract out of its provisions. It does not apply to contracts for services and technology, leases and licences, or goods bought for personal, family, or household use. Video 23.2 provides an overview of the CISG. Video Please visit the textbook on a web or mobile device to view video content. The convention provides a uniform set of rules for forming contracts and establishes the obligations of the buyer and seller. It addresses in a comprehensive manner such issues as the requirement of writing; offer and acceptance; implied terms; performance of the contract, including the buyer’s and seller’s obligations; and breach of contract. Because the rules constitute a compromise among differing rules in the various legal systems, Canadian buyers and sellers need to be aware of significant differences between the CISG and Canadian rules. For example, under Canadian law, contracts for the sale of goods worth more than a minimum amount must be in writing in order to be enforceable. The CISG states that such contracts need not be in writing or in any particular form. The CISG also makes no distinction between conditions and warranties and allows parties to make irrevocable offers. Importantly, the CISG also orders specific performance (fulfillment of the contract by the defendant) as the primary remedy with rare exceptions, whereas under the common law, damages are the primary remedy and specific performance is rarely available. Critical Analysis  Loading question... Sources: International Chamber of Commerce, “Incoterms 2020”, online: https://iccwbo.org/resources-for- business/incoterms-rules/incoterms-2020/; UNCITRAL, “Legal Guide to Uniform Instruments in the Area of International Commercial Contracts, with a Focus on Sales”, online: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/tripartiteguide.pdf; United Nations Commission on International Trade Law, “United Nations Convention on Contracts for the International Sale of Goods (CISG) (1980)”, online: https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg; Sheerin Kalia, International Business Law for Canadians: A Practical Guide (Toronto: LexisNexis Canada, 2010) at 109, 126, and 131; Anthony Daimsis, “Competent Ontario Lawyers Should Know About the CISG”, Lawyers Weekly (11 December 2017), online: http://www.canadianlawyermag.com/author/anthony daimsis/competent-ontario- commercial-lawyers-should-know-about-the-cisg-15058/at; UNCITRAL: United Nations Commission on International Trade Law, UNCITRAL, “Interview of Head of the Legislative Branch Mr. José Angelo Estrella Faria” (20 February 2020), online: YouTube https://www.youtube.com/watch?v=5XKcjbZMiwU; ICC, “Incoterms® 2020 Explained for Import Export Global Trade” (20 February 2020), online: YouTube https://www.youtube.com/watch? v=7g7IC4IzjDM. Quiz Question 23.10 Mark as: None Review Which statement is accurate with respect to the Convention on the International Sale of Goods (CISG)? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The CISG is mandatory in consumer sale of goods transactions. b The rules in the CISG are virtually identical to those in the Sale of Goods Act. c It applies to all international commercial contracts for the sale of goods. d It has been ratified by Canada and the United States.  Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.11 Mark as: None Review Wakefield Corporation is shipping goods internationally and would like to insert internationally recognized shipping and delivery terms in its international sales of goods contracts. Which of the following would be best suited for this application? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a UNCITRAL b CISG c Incoterms d Sale of Goods Act Show Submitted Answer Show Correct Answer Check My Answer Shipping Terms Business has developed standardized terms for often used delivery and payment arrangements in contracts of sale (Figure 23.1). To illustrate these terms, assume that SSNP has agreed to sell $4000 worth of Sea Goddess to SalonLux, a Kelowna based salon, and the goods will be shipped from SSNP’s facility on Vancouver Island to SalonLux through a carrier called Custom Trucking. Bill of Lading The bill of lading , generically known as a “shipping document,” is the contract between the seller (SSNP) and the carrier (Custom Trucking). It specifies to whom the goods must be delivered and provides evidence that the goods have been transferred from the seller to the carrier. The bill of lading often also sets out the terms of the shipping arrangement, including fees, expenses, delivery times, and any agreed-upon limitations of liability. The time it takes for goods to reach their destination can be significant, particularly in international business transactions. What happens when, a few days after shipping the goods, SSNP learns that SalonLux is insolvent or bankrupt? In that case, SSNP has the right to exercise stoppage in transit. SSNP can direct the carrier to return the goods to SSNP, even though title may have transferred to SalonLux. Provided Custom Trucking receives this direction before it has delivered the goods to SalonLux, it must return them (at SSNP’s expense) to SSNP. Cost, Insurance, and Freight The initials CIF stand for “cost, insurance, freight.” In a CIF contract, the seller is responsible for arranging the insurance (in the buyer’s name) and shipping. The purchase price includes the cost of the goods, insurance, and shipping. The seller must deliver the goods to the carrier and send copies of all documentation and a full statement of costs to the buyer. Free on Board The initials FOB stand for “free on board.” In an FOB contract, the buyer specifies the type of transportation to be used, and the seller arranges the shipping and delivers the goods to the carrier. The seller has completed its responsibilities when the goods are delivered to the carrier. The seller incurs the cost of delivering the goods to the carrier, and generally the buyer pays for shipping and insurance. For example, if the contract is “FOB Kelowna,” SalonLux will advise SSNP how the goods are to be transported, and SSNP will arrange for that transportation and ensure that the goods are delivered to the relevant carrier. Cash on Delivery A COD or “cash on delivery” contract was once common with consumer orders, particularly before credit cards existed. The purchaser is obliged to pay for the goods upon delivery. This term was used to ensure that the carrier did not part with possession of the goods without the purchaser having paid for the goods. Quiz Question 23.12 Mark as: None Review Which term is used to ensure that the carrier does not part with possession of the goods without the purchaser having paid for the goods? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a SFA b COD c FOB d CIF  Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.13 Mark as: None Review Which shipping term connotes that the seller’s responsibilities are over when the goods are delivered to the shipper selected by the buyer? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a FOB b SFA c CIF d COD Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.14 Mark as: None Review Which statement best describes a bill of lading? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a It sets out when title passes from the seller to the buyer. b It is a contract between the seller and carrier. c It provides evidence of when the goods have transferred from the seller to the buyer. d It sets out the purchase price and cost of shipping and insurance.  Show Submitted Answer Show Correct Answer Check My Answer Transfer of Title The transfer of title, or ownership, from seller to buyer is an essential feature of every transaction involving the sale of goods. The determination of when ownership is transferred is important because of the historic legal maxim that “risk follows title.” This means that, generally, the risk of loss—theft, damage, or destruction— will be borne by the party who owns the goods. Accordingly, the risk of loss will transfer from seller to buyer when ownership of the goods passes from seller to buyer. Consider these examples: A truckload of goods is destroyed by fire in mid-delivery between seller and buyer. Who bears the risk of loss? The parties agree that certain goods will be paid for within 30 days of sale. Do the 30 days begin upon delivery of the goods or at some earlier point? A custom-built machine has been built but has not yet been delivered to the customer or paid for. If the seller goes bankrupt, who owns the machine? Importantly, possession and ownership of goods can be held by different parties. Possessing goods without owning them (i.e., without having title) confers certain obligations and rights. Ownership confers additional rights. Many people incorrectly assume that delivery and payment automatically result in the transfer of title from seller to buyer—while this may sometimes be the case, it is not always the case. The best way for parties to ensure clarity as to when title, and therefore risk, will pass from seller to buyer is to write the contract of sale in a way that specifies delivery and payment terms and clearly indicates when and how title will pass from seller to buyer. The parties can then predict when responsibility for the goods will shift to the buyer, and they can arrange matters such as insurance coverage accordingly. When the parties fail to agree on when title will transfer from seller to buyer, there are statutory provisions that resolve the issue. The provincial Sale of Goods Act sets out a series of rules that determine when title will pass from seller to buyer, in the absence of agreement by the parties. It is important to remember that these rules only take effect when the parties have failed, either in express terms of a written contract or through their conduct, to agree on when title will transfer. In this way, the rules function as a set of default principles that apply when it would otherwise be difficult or impossible to determine the intention of the parties as to the transfer of title. The rules are stated here, along with an example of each. In broad terms, the acts address two contrasting sets of circumstances. The first four rules deal with specific goods , which are goods that are already in existence and can be clearly identified when the contract is formed. The fifth rule deals with unascertained goods and future goods. Unascertained goods are goods that are yet to be set aside and identified as being the subject matter of the contract. For example, when a customer walks into a store, points to a television on display, and asks to purchase that television, the customer is really asking to buy a television just like the one on display. In that case, the television that the customer is purchasing is unascertained goods, because the specific television set that the customer will take home has not yet been set aside and identified. Future goods are goods that are not yet in existence at the time the contract is entered into. For example, a contract for 1000 packages of Sea Goddess that have not yet been manufactured is a contract for future goods. It is important to determine whether the goods at issue are specific goods, unascertained goods, or future goods, so that the proper rule is applied. 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 is postponed. Example ABC Discounter went to SSNP’s facility, saw 200 packages of product that it wanted to purchase, and agreed to buy the product. ABC paid in full and the product was moved to a loading dock for pick-up the following day. Unfortunately, there was a fire at SSNP's manufacturing facility that night, and all the product was destroyed. Title in the goods and risk of loss passed to ABC when the contract was made, since the goods were specific goods in a deliverable state. 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. Example Spa Zone and SSNP had a contract in which Spa Zone agreed to buy 1000 packages of Sea Goddess, and SSNP agreed to use custom-made private brand packaging on its product. SSNP finished packaging the product on the weekend, and planned to call Spa Zone the following day to tell them that the product was ready for pick-up. That night, however, SSNP was the victim of a robbery and all of the product was stolen. Title in the goods had not passed to Spa Zone because although SSNP had put the goods in a deliverable state, the buyer had not been notified. SSNP would bear the loss. 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 with reference to the goods 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. Example SSNP agreed to buy raw materials from Cowichan Naturals, with the purchase price to be determined by the weight of the materials. The raw materials had been manufactured and set aside by Cowichan Naturals to fill SSNP’s order, but Cowichan Naturals had not yet weighed them. Cowichan Naturals wanted to fill another customer’s order with the materials it had set aside for SSNP, but was not sure whether that was allowed. Rule 3 applies; title had not yet passed to SSNP because the goods had not been weighed (and SSNP had not been notified). Cowichan Naturals was free to use the goods for another purpose provided, of course, that it obtained other materials to satisfy its contractual obligations to SSNP. 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: a. when they signify their approval or acceptance to the seller or does any other act adopting the transaction; or b. if they do not signify their approval or acceptance to the seller but retains the goods without giving notice of rejection, when a time that has been fixed for the return of the goods expires, and if no time has been fixed, on the expiration of a reasonable time. Example SSNP had a standing contract with Aura Spa that provided that SSNP would ship a certain amount of product to Aura Spa each month, and Aura Spa would be permitted to return any product that it was not able to sell within 30 days. SSNP shipped 200 packages of product to Aura Spa on August 15. On September 7, there was a flood in Aura Spa’s facility, and all the product was destroyed. Aura Spa did not signify approval or acceptance of the product, nor did it do anything to ratify the transaction. Since the time period agreed upon for return of the goods had not expired, title had not passed and the goods belonged to SSNP. SSNP must bear the loss. 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, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property passes to the buyer, and such assent may be express or implied and may be given either before or after the appropriation is made. Example Upscale Salons placed an order with SSNP for 500 packages of Sea Goddess. The contract stated that SSNP would notify Upscale Salons by email when the product was ready for pick-up. At the time the contract was formed, SSNP had 2000 packages of ­Sea Goddess in its warehouse. The following day, a worker in the SSNP warehouse took 500 packages of Sea Goddess and set them aside in the loading dock area. A label was affixed to the 500 packages stating that it was to be picked up by Upscale Salons. The shipping manager in the warehouse then emailed Upscale Salons to say that its product was ready to be picked up. After the email had been sent, the warehouse worker inadvertently crushed the 500 packages while backing up a fork lift, seriously damaging the product. The goods in this situation were unascertained goods, because although they were in existence when the contract was formed, they had not been set aside for the contract, or unconditionally appropriated. As such, Rule 5 applies; title to the goods passed to Upscale Salons when the goods were set aside and marked specifically for Upscale Salons and the email was sent. Upscale Salons had expressly assented, in advance, to SSNP unconditionally appropriating goods to the contract. The product was the property of Upscale Salons when it was damaged, and Upscale Salons must bear the risk of damage. Quiz Question 23.15 Mark as: None Review What is the normal rule for when title passes if there is an unconditional contract for the sale of specific goods in a deliverable state? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The buyer will have title to the goods regardless of whether payment or delivery has been made. b The seller will have title to the goods until the seller has been paid and the goods have been delivered. c The buyer will have title only once the goods are delivered. d The seller will have title until payment is received. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.16 Mark as: None Review Which statement best describes a similarity in rules 2 and 3 of the provincial Sale of Goods Acts? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.  Property does not pass until the act or thing is done to put the goods into a deliverable state and the buyer has a received notice. b The buyer will have title to the goods regardless of whether payment or delivery has been made. Property does not pass until the act or thing is done to put the goods into a deliverable state and the buyer has c paid for the goods. d The seller will have title to the goods until the seller has been paid and the goods have been delivered. Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.17 Mark as: None Review What is the general rule for when title passes to the buyer in a contract for unascertained goods that have not yet been created? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Title will pass when the buyer pays for the goods. b Title will pass when the seller delivers the goods to the buyer. Title will pass when the goods are in a deliverable state and unconditionally appropriated to the contract by the c parties. d Title will pass when the goods are in a deliverable state and the buyer has paid for the good. Show Submitted Answer Show Correct Answer Check My Answer Remedies 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. For example, if the buyer breaches the contract by cancelling an order, the seller is entitled to damages for that breach. If title has not passed to the buyer, the seller still owns the goods. The seller is therefore entitled to the normal measure of damages for non-acceptance , recognizing that the seller has an obligation to mitigate the loss. If title has passed to the buyer, the buyer owns the goods and must pay the full amount of its obligation under the contract (i.e., the purchase price). The seller’s claim in that case is known as action for the price. Figure 23.1 What are the legal issues raised in connection with shipping goods? [D] Generally, when a term of a contract of sale is breached, classification of the relevant term of the contract is essential to determining the remedy to which the innocent party is entitled. The breach of a condition by the seller will give the innocent party the right not only to claim damages but also to reject the goods and treat the contract as ended. This is known as the right of repudiation and means that the purchaser may choose not to comply with the rest of its obligations under the contract. For example, the salon chain that received Sea Goddess that did not correspond with the description on SSNP’s website was not obligated to accept further shipments from SSNP. The chain was entitled to terminate its contract with SSNP, return the product, and find another supplier. When a warranty is breached, the innocent party is entitled only to claim damages or, in the case of an innocent buyer, to ask the court to reduce 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. Similarly, a seller cannot refuse to supply goods as a result of a breach of warranty by the buyer, but may only claim for the damages it has suffered as a result of the breach. Quiz  Question 23.18 Mark as: None Review Why is the determination of when ownership is transferred important in the context of contracts for the sale of goods? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a because of the historic legal maxim “risk follows title” b because goods can be possessed without being owned c because the right to sue ends when title passes to the buyer d because the goods must be paid for when title passes to the buyer Show Submitted Answer Show Correct Answer Check My Answer Quiz Question 23.19 Mark as: None Review What is the legal term for an unpaid seller’s right to claim under sale of goods legislation in circumstances where the title to goods has transferred to the buyer? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a account for profits b breach of contract c action for price d stoppage in transit Show Submitted Answer Show Correct Answer Check My Answer Business Law in Practice Revisited 1. What legal issues arise in regard to the sale of Sea Goddess to spas and salons? The common law principles of contract and tort law will apply to the sale of goods by SSNP. Accordingly, SSNP must abide by its obligations as set out in the contract for the sale of its goods, and it must take reasonable care to avoid causing injury. In addition, unless the contract of sale modifies or excludes the terms implied by the Sale of Goods Act, SSNP must also honour these implied terms, including the implied conditions that the goods will match their description, that the goods will match a sample provided, that the goods will be of reasonable quality, and that the goods will be reasonably suitable for the purpose for which they are intended. Finally, SSNP will need to know when ownership of the goods will transfer from SSNP to the buyer—if the contract does not make this clear, then the rules in the Sale of Goods Act will apply. 2. What should SSNP be aware of when negotiating the contract of sale with spas and salons? SSNP should ensure that the contract of sale is clear and comprehensive. The contract should provide specifications for the goods so the quality and attributes of the goods are clearly understood and agreed upon. SSNP should decide whether it wants to exclude or modify the implied conditions and warranties contained in the Sale of Goods Act. If SSNP decides to exclude or modify the implied terms, then that should be made clear in the contract of sale. SSNP may want to describe in the contract precisely how and when ownership of the goods will shift from SSNP to the buyer, so that confusion is avoided and recourse to the rules of the Sale of Goods Act is not required. 3. What terms should SSNP use in regard to the shipping of Sea Goddess? SSNP will have to decide which shipping terms are most appropriate for the way it conducts its business and the nature of the product being shipped. SSNP may prefer to ship goods FOB, in order to reduce its shipping costs, but the purchaser may insist on the goods being shipped CIF. In any event, SSNP should remain aware of the financial condition of its purchasers and, if one of them becomes insolvent after SSNP has shipped goods, then SSNP should consider its rights to stop the goods in transit in order to minimize any losses it may suffer. 4. What happens if a shipment of Sea Goddess is lost or damaged before it reaches the buyer? Risk generally follows title. Therefore, the goods will be at the risk of SSNP until title to the goods shifts to the buyer. If the goods are lost or damaged before title has transferred to the buyer, then SSNP will be responsible for the loss. If the loss or damage occurs after title has transferred to the buyer, then the buyer will be responsible. SSNP should purchase insurance coverage that covers the goods up until the time that title transfers to the buyer, but not longer. The buyer should purchase insurance coverage to cover the goods from the point at which the buyer has title. Chapter Summary The law that applies generally to the sale of goods is the law of contract and tort. However, these common law principles have been modified in every province by sale of goods legislation, which provides increased certainty and greater protection for buyers of goods. The sale of goods legislation in each province implies conditions and warranties into contracts for the sale of goods, unless the transaction is a business transaction and the parties have agreed to exclude those implied terms. The legislation also provides rules to establish when title to the goods shifts from seller to buyer in a sale of goods transaction—this is important to determine who bears the risk if the goods are lost or damaged. Finally, the Sale of Goods Act provides remedies in the event of a breach of the sale of goods contract. All sellers of goods must be knowledgeable about the provisions of sale of goods legislation in order to properly and intelligently structure their sale of goods transactions. Businesses often use standardized shipping terms in order to conveniently refer to a set of commonly used shipping and delivery terms. Shipping conventions include FOB, CIF, and COD. Chapter Study Key Terms and Concepts action for the price The seller’s claim when the buyer has breached the contract and title to the goods has passed to the buyer. bill of lading A shipping document that serves as a contract between the seller and the carrier. caveat emptor “Let the buyer beware” or “let the buyer take care.” CIF A contractual term making the seller responsible for insurance and shipping. COD A contractual term requiring the purchaser to pay the carrier in cash upon delivery of the goods. damages for non-acceptance Damages to which a seller is entitled if a buyer refuses to accept goods prior to the passing of title.