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.
Goods in Possession of Bailee

b.
c.
5.
Bailment
Merchant Seller
Non-Merchant Seller
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.
Seller’s Breach – 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
[Com Code § 2510(1)]
2.
Seller’s Breach – Buyer Revokes Acceptance – 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 insurance coverage [Com Code § 2510(2)]
3.
Buyer’s Breach – where conforming goods have been identified and the
buyer repudiates the contract, the seller may treat the risk of loss as resting
on the buyer
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”
A. Title Warranties
1.
Good Title – when goods are sold, the seller must transfer
2.
Free From Security Interest – the seller must also deliver the
3.
Disclaiming Warranty of Title and No Security Interest –
“good title” and the transfer must be rightful
[Com Code § 2312(1)(a)]
goods “free from any lien or encumbrance” which the buyer has
no knowledge of
a seller must disclaim either of the two above warranties by using
specific language in the contract [Com Code § 2312(2)]
4.
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
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Chapter 1