Unit 7: Special Contracts: Sale of Goods and Negotiable Instruments (Chapter 13 and 14)

Sales of goods: is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a
money consideration called the price

Sale: occurs if the buyer obtains ownership of the goods as soon as the contract is created

Agreement to sell: occurs if the buyer does not obtain ownership of the goods until some time after the contract is
created

Property passes: when the ownership or title in goods is transferred from the seller to the buyer

Risk: is any loss or damage that may occur to the goods

Passing of Property-Default Rules

Type of Contract
Rule: 1
An unconditional contract for the sale of specific
goods that are already in a deliverable state
Rule: 2
A contract for specified goods that requires the
seller to do something to put the goods into a
deliverable state
Rule: 3
A contract for specified goods that requires the
seller to do something to the goods (such as
weigh, measure, or test them) in order to
determine the price
Rule: 4
A delivery of goods “on sale or return”
Rule: 5
A contract for unascertained or future goods by
description
Property Passes
At the time of contract, even if delivery and payment occur
later
When the seller has done that thing and the buyer has been
notified
When the seller has done that thing and the buyer has been
notified
When the buyer has signified approval or adopted the
transaction or retained the goods beyond a reasonable time
When goods of that description, that are in a deliverable
state, are unconditionally appropriated to the contract by
one party with the other party’s assent

Terms in Contracts of Sale

- Terms regarding the seller’s title to sell
- Terms regarding the nature of the goods themselves
o Goods sold by description must match that description
o Goods sold by sample must correspond with the sample
o Goods must be of merchantable quality
o Goods must be fit for their intended purpose

- Terms regarding delivery and payment

Sale by sample: occurs when the parties agree to deal in goods that match a particular specimen

Caveat emptor: means “let the buyer beware”

Goods are merchantable: if a reasonable person would buy them without a reduction in price despite knowing
their imperfections
 Implied Terms-Default Rules
Title to sell - Condition that the seller has title to sell
- Warranty that the buyer will receive clear title
Nature of the goods - Condition that goods sold by description will match that description
- Condition that goods sold by sample will match the sample in quality and
that the buyer will have reasonable opportunity to compare the goods to
the sample and that the goods are free from unmerchantable defects
- Condition that goods are of a merchantable quality if they are purchased by
description from someone who normally deals in such goods
- Condition that goods will be fit for their intended purpose if the buyer relies
on the skill or judgment of a seller who normally deals in such goods and if
the seller knows of that reliance
Delivery and payment - Delivery and payment shall be concurrent
- Condition that delivery will occur on time and warranty that payment will
occur on time
- Delivery will occur at the seller’s place of business
- Condition that seller will deliver goods that conform to the contract

Deposit: is a sum of money that the buyer pays upon entering into a contract and that the seller is allowed to keep if
the agreement is not performed

Action for the price: occurs when the seller sues the buyer for the price of the goods

Lien: allows a person to retain possession of property until another person fulfills an obligation

Insolvency: occurs when a person is unable pay debts as they become due

Stoppage in transit: occurs when an unpaid seller instructs a carrier to not deliver goods to a buyer

Special Remedies for Unpaid Sellers

Remedy Nature
Action for price The seller is entitled to sue for the price of the goods, even if that price exceeds the
damages arising from the buyer’s breach.
Lien The seller is entitled to retain possession of the goods until payment is made, even if
property has passed to the buyer.
Stoppage in transit The seller is entitled to prevent a carrier from delivering the goods to the buyer, even
if property has passed to the buyer.
Repossession The seller is entitled to recover possession of the goods from the buyer, even though
property and possession have passed to the buyer.

Negotiable instrument: consists of a contract that contains an obligation to pay money

Nature and Requirements of Negotiable Instruments

Type of Instrument Nature Basic Requirements
Cheque An order by one party (drawer) that directs a bank - Written and signed
(drawee) to provide money to someone (payee) - Parties identified
Bill of exchange An order by one party (drawer) that directs another - Certain sum of money
party-who may or may not be a bank (drawee)-to - Time of payment
provide money to someone (payee) - Unconditional
Promissory Note A promise by one party (maker) to pay money to obligation
someone (payee)
Cheque: is created when a person orders a bank to pay specific amount of money to someone

Drawer: is the person who “draws,” or creates, a cheque

Drawee: is the bank that is ordered to pay the money

Payee: is the person who is entitled to receive the money from the bank

Postdated cheque: is dated in the future

Cheque is staledated: when the payee does not seek payment within a reasonable time

Cheque is overdrawn: when the drawer’s account does not hold enough money to satisfy it completely

Countermand: occurs when a customer orders a bank to refuse payment on a cheque

Certification: occurs when a drawee bank promises to honour a cheque

Bill of exchange: is created when one person orders another person to pay a specific amount of money to a third
person

Acceptance: occurs when the drawee promises to pay a bill

Promissory note: is created when one person gives another person a written promise to pay a specific amount of
money

Acceleration clause: states that the entire amount of the promise becomes due immediately if a single instalment is
not paid on time

Negotiable instrument: is payable to bearer if any person who holds it is entitled to receive payment

Negotiable instrument is payable to order: if the party entitled to receive payment is named

Notice of dishonour: consists of a statement that the person who was primarily liable on the instrument failed to pay

Immediate parties: are parties dealt directly with each other

Holder: is a person who has possession of a negotiable instrument

Holder in due course: is a person who acquired a negotiable instrument under specific conditions

Personal defence: is one that affects the parties themselves rather than the instrument

Defect in title defence: occurs when an instrument is obtained improperly

Real defence: occurs when an instrument is fundamentally flawed

Consumer instrument: is a bill of exchange, cheque, or promissory note that is used by a consumer to buy goods or
services from a business on credit