LEGAL ASPECTS OF HORSE MANAGEMENT
LESSON FIVE: SALES
Generally
The buying and selling of horses, and
horse-related supplies and goods, occurs within the framework of commercial and
sales laws. It is also a frequent area
for legal disputes. (Note:
this Lesson deals strictly with (Uniform
Commercial Code) UCC law and sales; other actions, such as for fraud, may arise
from a sales transaction).
Although horse owners typically refer
to their horses as “babies,” in the eyes of the law they are deemed merely
“goods.” Consequently, they are placed on an equal legal plane with a chair,
car or any other product. (But much more expensive to keep!). Even an unborn horse is
deemed a “good” that may be bought and sold.
A consequence of this categorization is that horse transactions fall
within the scope of the Uniform Commercial Code, a uniform set of laws
governing commercial transactions in the United States (adopted in all states,
though Louisiana relies on its own civil law for UCC article 2 Sales). Note:
you may access (for free) your state’s version of the UCC online, on the
state’s website.
The UCC is broken down into
Articles. The focus of this Lesson will
address Article 2, which involves sales.
Other UCC articles may indeed be relevant in a horse transaction, but
are beyond the scope of this lesson (e.g. secured transactions).
UCC article 2 applies to
everyone—private consumers, as well as merchants. However, there are sections that apply just
to “merchants”, particularly in the area of warranties (discussed below), and
thus it is important to recognize who falls within this term. Section 2-104(1)
defines a “merchant” as: “a
person that deals in goods of the kind or otherwise holds itself out by
occupation as having knowledge or skill peculiar to the practices or goods
involved in the transaction or to which the knowledge or skill may be
attributed by the person's employment of an agent or broker or other
intermediary that holds itself out by occupation as having the knowledge or
skill.” In the horse world, a trainer,
instructor, professional rider, or breeding farm operator would be the type of
person deemed a “merchant.”
Contract
Formation
Generally
The UCC has a liberal view of
contracts, as it is designed to promote and encourage commercial
transactions. The provisions of the UCC
are intended to avoid “traps” and the liberal view of a valid transaction is
limited merely by a test of “reasonableness.”
A formally drafted sales contract is not necessary, and, in general, a
contract for the sale of goods may be made in any manner that shows the
existence of an agreement between the buyer and seller. Contracts may be written, oral, or indicated
by the parties’ conduct.
As stated in Lesson 4, a contract
generally requires an offer, acceptance and consideration. Under the UCC acceptance may be in any
commercially reasonable manner, unless specifically required to be
otherwise. Offers may be revoked anytime
prior to acceptance. However, the UCC
provides in the case of a merchant, it may not be revoked for up to 90 days if
it is accompanied by a signed writing giving assurance that it will be kept
open.
If the offer is accepted, but the
acceptance changes material terms of the offer, the acceptance becomes a counteroffer
which removes the first offer. No
contract will be formed unless the counteroffer is accepted. However, in the case of merchants—who
typically deal with form contracts—additional or different terms in the
acceptance will become part of the contract unless the offer specifically
limits the acceptance to the offer terms, the terms materially alter it, or, if
the one making the offer objects in a timely manner to the new terms.
For example: Athena Farm offers to sell a horse to Mark, a
horse dealer. The Farm sends Mark a form
contract of sale indicating the horse is to be picked up by Mark upon payment
by certified check for $4,000. Mark
sends back to the Farm a form contract indicating that he will purchase the
horse for $4,000 cash and delivery to be made by the Farm. Mark’s acceptance is obviously different from
the offer. Is there a valid contract?
To analyze the above problem you need
to recognize that both the Farm and Mark are merchants, and consequently may be
subject to special UCC provisions. The
issue is whether there was a valid acceptance, since it differed from the
offer. The answer lies in UCC §
2-207—this would constitute a valid acceptance unless the variation was
material. A different result would be
had in the event that the parties were not merchants; in such a case, a
different form acceptance would constitute a counter offer that would give the
opportunity to the first party to either reject or accept it.
The UCC also modifies the common law
of contracts to promote confidence in sales transactions. For example, the rule permitting revocation
of a contract prior to acceptance is varied to require certain offers to remain
open—so-called firm offers. (See
Lesson 4 Contracts for revocation of contracts, generally).
Section 2-205 of the UCC provides that
where a merchant makes an offer to buy or sell goods, and there is a signed
writing that provides assurances it will be held open until a certain time, the
offer is not revocable for lack of consideration during the stated time. (The
period of irrevocability may not exceed 3 months).
The
Statute of Frauds - Generally
Given that the purpose of the UCC is
to encourage the free making of commercial transactions, the rules of contract
formation are relatively loose. Thus,
while the UCC statute of frauds dictates that a contract for sale over $500
must be in writing to be enforceable.
What constitutes a “writing” does not involve a
complex or rigid contract analysis.
The writing requirement does not
dictate the usage of an official “contract” or “agreement”, but rather can be
anything written that is signed by the party to be charged, and contains
language indicating that a contract has been made, and identifies the parties
to the contract and the quantity of goods sold.
For instance, a simple “contract” handwritten on a napkin or paper towel
would qualify.
The absence of terms will not render
the contract invalid, though it will not include quantities beyond that stated
in the writing. And, if so warranted by the
facts, a party's conduct may result in a finding that an agreement
existed—despite the lack of a formal drawn up contract. A bill of sale, while
often used in a horse sale and is a good idea, is not mandatory. Title may transfer without it.
This is not, of course, to say that a
written sales agreement is unnecessary.
Quite the opposite is true. A
written sales agreement reduces the risk of litigation by clearly defining the
parties’ duties. However the UCC does
reduce the likelihood that an agreement will fail due to some irrelevant
technicality.
If the party to be charged is a
merchant, the lack of a signed contract will not be fatal where the other party
sends a written confirmation or contract and the receiving party does nothing
to challenge it.
For example: Misty River Farm offers to sell a yearling to
Kim for $2,000. The Farm writes on a
slip of paper that it will hold open the offer until the next evening. Kim decides to purchase the yearling, but in
notifying the farm the next morning was told by the Farm’s owner that he “had
decided to sell her for $2,500. Can Kim
still purchase the horse for $2,000?
Yes, the offer was “firm” in that it was made by a merchant, signed, and
for a set period of time. If the offer
was verbal, and not signed, it would not be firm and the Farm would be
permitted to back out. If the offer was
made by a non-merchant the UCC rule would also not apply since it specifically
applies to only offers by merchants.
Caution must be exercised in the
language used.
For example: What if Misty River Farm signs a piece of
paper that says “this offer will lapse 48 hours from today...”? In this case, it is arguable that the offer
is not firm since it is vague and seems to state that the offer will merely lapse
after two days—not that the offer would not be revoked during that period of
time. This problem could be avoided
merely by adding the language “this offer may be accepted, and it may not be
revoked, for the next 48 hours.”
Contract Terms
As noted above, the UCC—and its goal
of promoting commercial reasonableness--enables agreements to be legally
enforceable despite the fact that they may not strictly follow general contract
law principles. This holds true as well
in connection with determining what the parties agreed to.
The parties to a sale agreement
sometimes do not include all terms of the agreement at the time it is made. Any
such omissions will not necessarily destroy the enforceability of the agreement
such as where terms are to be agreed to later, or where there are means to fill
the gaps with external evidence. If the parties wish to modify an existing
sales contract, the modifications should be in writing if they increase the
value of the sale to $500 or more.
The course of performance, trade usage
and course of dealing plays a big role in determining the nature of the
parties’ agreement. Such evidence may
not only be used to determine the meaning of certain terms, but can also be
used to supply a missing term. In
addition, parties to the agreement that are engaged in a particular trade are
deemed to know the relevant customs when making an agreement.
The UCC generally takes a liberal view
of when a contract has been entered. Not
even all of the contract terms need to be present in order for a valid
agreement to exist. Even the price term
can be missing—in such a case the court will supply it based upon the
evidence. A contract will not fail due
to indefiniteness as long as the parties intended a contract, and there is some
way of figuring a remedy.
Unlike contracts generally, the UCC
does not require additional consideration to support a modification. However, an agreement that expressly
prohibits modification except for a signed writing may not be orally modified,
except that in the case of merchants the signed writing must be signed by the
other party.
Performance
The performance of a sales contract
relates to each party doing as obligated under its terms. For instance, in a simple horse sale, a
seller agrees to sell a horse for a certain amount and delivers the horse to
the buyer who then pays the seller. In
general, the seller has the risk of loss prior to the time the good is
delivered, though parties can and do agree otherwise. To avoid any question as to when risk of loss
transfers, a contract for sale should state it expressly. For example, “seller agrees to transport and
deliver horse to buyer on Friday 10/24, and upon such delivery title and all
risk of loss transfers to the buyer.”
Sometimes performance of a contract
becomes impracticable; for instance a horse under contract of sale dies. If the good to be delivered is completely
destroyed—such as in a horse dying—the buyer will be excused from performing. The seller will also be excused from performing
if the good that was destroyed was specifically identifiable to the
contract—for example a particular horse.
If a good is not specifically identifiable a seller could tender an
alternate good.
A performance may also be substituted
for that originally agreed to, such as when the agreed upon mode of delivery
cannot be accomplished, or, where the agreed upon method of payment has
failed. In both of these situations a
commercially reasonable method of delivery, or of payment, may be substituted.
Does a seller need to perform under a
contract of sale if the buyer becomes insolvent? No, in such a case the seller can refuse to
deliver unless a cash payment is made.
Similarly, if the seller is insecure about the buyer’s performance a
seller can suspend performance until assurances by the buyer are given.
Seller’s
Duties/Obligation
It is the seller’s obligation to
transfer the ownership of the good—for instance the horse—and he/she may also
be required to perform further obligations depending upon the nature of the
agreement between the buyer and seller.
The seller is also obligated to convey the goods, without any security
interest or other claim against the goods, unless the buyer knew of such claim
or interest at the time of sale. It is
also generally the seller’s duty to provide for delivery of the goods, though
such may be deemed the buyer’s duty where the parties so agree. For instance, in a contract for the sale of a
horse the buyer may agree to be responsible for picking-up the horse, and title
to the horse, and the risk of loss, would transfer at that time.
Warranties
Buyer—as well as seller—should beware
in a sale of goods; warranties can and do arise that result in liability.
In a sale of goods certain warranties
arise, unless otherwise excluded. For
instance, in every sale under the UCC there is a warranty that the seller has
title to the object of the sale, free of all claims or interests of which the
buyer was aware. This warranty may only
be excluded where the buyer has reason to know that the seller does not have
clear title, or is selling on someone else’s behalf.
Warranties may be express or
implied. An express warranty is a
representation concerning the goods made by the seller—such as a
description. For instance, if the seller
contracts to sell to the buyer a registered Arabian there is an express
warranty that the horse is an Arabian as well as registered. Express warranties may arise in a sale by a
merchant as well as a layperson.
It is important to differentiate
between an express warranty and opinion. An express warranty would be a
statement of fact. An opinion would be
subjective, such as “that horse is the best jumper” or “this horse will win
ribbons.” Such statements are mere
opinions and give the buyer no recourse in the event that the horse is not the
“best” jumper or does not “win” ribbons.
Likewise a general statement by the seller that a horse “does not have
any problems” is to be taken as mere puffing, not an express warranty that the
horse is perfect.
In addition to express warranties,
certain implied warranties arise in a sales transaction. With respect to goods that are sold by a
merchant—such as a horse sold by a dealer or trainer or farm—there is an implied
warranty that the goods are merchantable.
Goods are merchantable if they are fit for the ordinary purpose for
which they are used. This warranty does
not arise in a sale of goods by an ordinary consumer.
An example of breach of
merchantability is as follows: Katie
owns a breeding farm where she breeds and sells show jumpers. Katie sells to Karen a 5-year-old jumping
prospect. The horse has navicular and
should not be ridden or jumped. This
horse is not merchantable, as it is not fit for the ordinary purpose of a
jumping horse.
Not just merchant sellers are liable
under warranty law. In a sale by either
a merchant or nonmerchant an implied warranty of fitness for particular purpose
may arise. This warranty does not arise
automatically in every sale (such as the implied warranty of merchantability)
but arises in a sale by a merchant or a nonmerchant where the buyer is
purchasing the good for a specific purpose, and the seller is aware of the
purpose, and knows or should know that the buyer is relying on his/her
expertise in selecting the good. If
there is no special purpose, no reliance on the seller, and no expertise of the
seller the warranty does not arise.
An example of the warranty of fitness
for particular purpose is as follows:
Harry wanted to purchase a young stallion as a breeding prospect. He contacted Jim at Meadow Farm and was shown
a bay 2-year-old colt that Jim stated “will make a great daddy.” Harry relied on Jim’s selection of the horse,
since he figured that Jim would know best since he had several stallions that
he bred. In fact the horse had not yet
been bred, and was a cryptorchid rendering him useless for breeding
purposes. Under these facts there has
been a breach of the implied warranty of fitness for particular purpose.
Warranties may, in a given case, be
disclaimed. Indeed, a merchant seeking
to avoid the warranty of merchantability must disclaim it to keep it from
arising. A disclaimer of the implied
warranty of merchantability must do so expressly, in writing, and must state
the word “merchantability.” An example
of such a disclaimer would be: The
seller hereby disclaims any and all warranties that have or may arise from the
sale of the horse, including, but not limited to, any express or implied
warranties, as well as any implied warranty of merchantability or fitness for
particular purpose.
The language of the above disclaimer
would effectively disclaim the warranties, though it must also be conspicuous
such that the buyer is, or should be, aware of it. (E.g. it’s a good idea to have a disclaimer
set apart from lengthy text, and to be in capital letters with large
typesetting.)
It cannot be overemphasized that a
disclaimer should be obvious to the buyer.
A disclaimer that is vague, unclear, or difficult to find will likely be
struck down leaving a seller with potential liability. Likewise, a disclaimer must be written
(unlike a contract generally). Thus,
while a horse may be sold with no written contract or memorialization, and will
nonetheless be valid, a disclaimer must be expressly written.
You should also be aware that even
where a contract for sale is “as is” an action may nonetheless be brought where
it relates to a material element of the agreement. For instance, in the sale of a 12-year-old
horse “as is” the buyer could bring an action since the age of the horse
expressly stated is an express warranty of age that cannot be disclaimed.
While the laws of warranties are
fairly standardized from state to state, in light of the UCC, you should
nonetheless consult your state’s consumer laws, as some preclude all warranty
disclaimers.
Remedies
Buyer’s remedies
If the seller fails or refuses to
tender goods, repudiates the contract, or the buyer rightfully revokes
acceptance, the buyer has the following remedies:
--The buyer may cancel and
recover so much of the price as was paid
--“Cover” and sue for damages
--Recover damages for
non-delivery
--If the goods have been
identified, recover them
--in a proper case get
specific performance or replevin the goods.
Where the buyer rightfully rejects the
goods or acceptance, the buyer has a security interest in goods that he/she
possesses or controls for any payments made on their price, and any costs
associated with their inspection, transportation, or care and custody, and may
resell them as an aggrieved seller.
Where a buyer “covers” the replacement
of contracted goods, the buyer can obtain damages that include the difference
in value between the cost of cover and the contract price, plus any incidental
and consequential damages. Subtracted
from any such total amount are the costs saved as a result of the seller’s
breach.
For example, Stardust Farm had a
contract with a hay seller to purchase 5 tons of hay at $180.00/ton. The seller had his entire crop ruined and
failed to deliver. The Farm covered by
purchasing the same amount of hay for $200.00/ton. Because the replacement hay could not be
delivered for a week later, the Farm was forced to buy individual bales of hay
for a week, totaling $250.00. What are
the Farm’s damages? The Farm can obtain
the cost of cover—the $20.00 difference in value between the contract price and
cover price times the number of tons that were contracted. In addition the Farm could receive damages
for consequential and incidental damages caused by the breach (i.e. increased
cost of purchasing individual bales for a week). All damages must be commercially reasonable.
What if the cost of cover was
$150.00/ton? If the amount saved by the breach
is greater than the incidental and consequential damages there would be no
damages and no recovery.
While the buyer has the right to cover
and obtain damages representing the difference in value, he/she is not
obligated to. Rather, where the seller
fails to deliver, or repudiates the contract, the buyer can recover the
difference in the market price of the goods at the time of breach and the
contract price, and any consequential and incidental expenses, less any amounts
saved as a result of the breach.
Note: incidental damages are all
damages resulting from the seller’s breach, such as expenses incurred in
inspecting, caring for, or transporting the rejected goods. Consequential damages include losses that
result from requirements of which the seller is aware, and which cannot be
prevented by cover. For example: Terry
entered a valid, written contract to purchase a breeding stallion for
$25,000. The seller failed to deliver
the stallion after deciding that he did not want to sell. Terry could sue the seller for the difference
in value between the contract price and the market price for the horse at the
time of breach, as well as all consequential and incidental damages.
Similarly, with respect to goods that
have already been accepted, the buyer can recover the difference in value
between the contract price and the value of the goods accepted. (Together with consequential and incidental damages).
For example: Karen purchased an 8-year-old warmblood to
compete in jumper classes and stand as a stallion. The horse was delivered, and accepted, at
which time Karen realized that the horse had a cribbing problem (a fact that
was not disclosed at the time of sale) rendering the horse unmerchantable. Karen’s damages would be the difference in
value between the horse contracted for and the value of a cribber.
In
a case where the goods are unique and buyer may be entitled to obtain specific
performance of the contract, or obtain replevin of the goods. Unique goods are those that cannot be substituted.
However, it should be noted that many courts are reluctant to order specific
performance or equitable relief where the buyer may be adequately compensated
by a monetary damage award.
Seller’s Remedies
In the event that the buyer wrongfully
rejects conforming goods, or otherwise breaches, the seller is entitled to
certain remedies. The seller may
--Suspend
deliver
--Stop
delivery by any bailee
--Identify
conforming goods
--Resell
and recover damages
--Recover
damages for nonacceptance, or in some cases the price
--Cancel
Where a seller sues for damages, the
amount of such damages would be the difference in the contract price and market
price measured at the time the goods were tendered. The seller may also recover the price of the
goods, but only in the event that they cannot be resold in the ordinary course
of business.
A seller may conduct a private or
public sale to resell the goods. If it
is a private sale, the buyer is entitled to notice. If the resale price is less than the contract
price the seller may recover the difference from the buyer. If the resale price is higher it is a bonus
to the seller—the buyer is not entitled to recover such amount.
Deposits
Deposits are frequently utilized in the
horse world, and can be the cause of dispute where a seller or buyer
breaches. The parties’ agreement may
state that the buyer loses his/her deposit to the seller in the event of
breach. However, the UCC limits such
liquidated damages with a reasonableness condition, in light of the harm
suffered. For example, if two persons
agree to the sale/purchase of a horse for $500,000 and the buyer puts down a
$100,000 deposit, and then breaches five minutes after entering the contract,
the seller could be challenged should he/she attempt to keep the full deposit,
since it is completely out of line with any harm suffered. Note: this is the type of sales dispute that
can typically stay out of court and be settled.
Most sellers do not want the damage to their reputation that would occur
in this case if they were to keep the full amount and thus most agree to return
most or all of the deposit.
In addition to liquidated damages,
sellers can—and frequently do—limit the extent of the buyer’s recovery. It is perfectly appropriate to state that a
buyer is limited to return and replacement.
On a practical note, any such agreement should be clear and limit the
seller’s freedom in selecting a “replacement.”
For example: Todd purchased a
horse from Bill under a contract that stated that Todd was limited to return
and replacement for the horse in the event a problem was uncovered within 30
days of sale. Todd discovered the horse
had severe heaves and could not eat hay.
He sought to return the horse under the contract and pick a replacement,
to which the seller replied that he got to pick the replacement horse. Since the buyer and seller have completely
different interests in selecting a replacement, there should be no ambiguity in
such a provision as to what the replacement will be.
This Lesson gives you a very general
overview of some (but not all) the legal issues that arise in horse
transactions. Both merchants and
nonmerchants have certain rights and liabilities under the UCC and case law. For those operating, or intending to open, a
horse business, it is wise to take care in drafting agreements. While formalities are not required from a
legal standpoint, from a practical matter it is better to proceed with an
unambiguous contract that details both parties’ rights and
responsibilities. Amateur horsepersons
would also be wise to take care in entering horse transactions. Many a person has gone horse shopping to buy
a horse, and realized after the fact that the oral vague agreement they entered
gives them little security if there is a problem with the horse or the seller.
An attorney can be very useful in this
area, and the legal expense of having a contract drafted or reviewed will
likely be significantly less than the cost of litigating a dispute.