Copyright © 2006 B. Paul Husband
Successful sales are the lifeblood of most horse businesses. Properly transacted sales can be highly rewarding. Poorly transacted sales can be a snakepit for the unwary.
Whether you are selling inexpensive family horses, or champions for hundreds of thousands, or even millions of dollars, you should protect yourself by including some legal safeguards into the sale. Here are some suggestions to minimize hassles and make selling your horses an enjoyable and profitable experience.
Do It In Writing
Whether the sale is for $100 cash, or $100,000 on terms, it should be reflected in writing. A written agreement gives greater certainty than an oral agreement. Under the Uniform Commercial Code, it is necessary to have a written agreement to have a legally enforceable sale of a horse for more than $500, although there are a few exceptions to this rule.
Having a written agreement offers protection for both the seller and buyer. A written agreement makes the warranties, if any are given, more certain. If you are a seller and want to exclude warranties that are implied by law, the exclusion must be in writing to be effective. If you want to create a security interest in connection with a sale on terms, you must have a written agreement. In most states, a written agreement is also necessary to enable a seller or a buyer to recover attorneys' fees if you have to hire one to enforce or rescind the sales transaction. Usually the written agreement has to specifically state that in the event of a dispute, the winner gets their attorneys' fees paid by the losers.
One of the biggest problem areas with sales is with warranties. Warranties can be either "express', that is, made orally or in writing by a seller, or, in some situations, they are implied by law. Both express and implied warranties can form the basis for post-sale disputes.
A written warranty is preferable from either the buyer's or seller's perspective. From a buyer's standpoint, a written warranty is the best way to prove whatever was warranted or promised. An oral warranty can be valid. An oral representation that becomes part of the basis of a bargain is an express warranty. In a dispute, there is always a danger that the trier of fact will believe what an untruthful seller testifies that he or she said, or did not say, about the horse which would have constituted an express warranty.
From the seller's standpoint, a written warranty will prove both what was warranted, and what was not warranted. A seller must also be aware of warranties which are implied by law. There are two implied-at-law warranties: the implied warranty of merchantability, and the implied warranty of fitness for intended use.
The implied warranty of merchantability is usually not a problem. If the horse will pass as described in contract without objection, the warranty of merchantability is satisfied. In other words, if it is a horse, not a cow or a donkey, it is merchantable as a horse. A lame gelding is still merchantable as a gelding. A barren mare is still merchantable as a mare.
The problems more often arise with the implied warranty of fitness for intended use. An implied warranty of fitness for intended use can arise when (1) the seller knew or ought to have known the buyer's purpose in seeking a horse; (2) the seller knew, or ought to have known, that the buyer was relying on the seller's skill and judgment in supplying a suitable animal; and (3) the buyer in fact relied upon the seller's skill or judgment to supply a horse suitable for the buyer's known purpose.
Unhappy buyers have been known to lie about what they told the seller, and what they were told by the seller, if they later became dissatisfied with their purchase. Again, the desirability of a written agreement that can exclude an implied warranty of fitness for intended use is highlighted.
For example, if a reputable breeder has sold a $400 weanling colt to a buyer, who told her nothing other than he wanted to buy a horse -- and the buyer merely asked if breeder had one for sale for less than $500, then later, when the colt turned out at maturity to have only one testicle descended, an unethical buyer might then sue the breeder, claiming falsely that he told the seller that he was relying upon her to furnish a suitable halter show stallion, and the seller had failed to furnish a horse fit for that intended use. In this case, if the truth is believed, the buyer will lose -- the three conditions to create the implied warranty of fitness for intended use (see above) did not occur.
On the other hand, if a man approaches a breeder and says: "I would like to buy a suitable horse for my daughter. She has just started taking riding lessons and I know nothing about horses. Would you help me find a safe, gentle, well trained riding horse for her? She is eight years old and weighs 65 pounds." This is the kind of approach that can create an implied warranty of fitness for intended use. If the breeder replied: "I have just the horse for you, sir", and then sells him a 16'2" hand, 1300 pound unbroke two year old colt who had previously bitten 3 grooms and was a wobbler -- this would be a breach of the implied warranty of fitness for intended use. The seller knew the buyer's purpose, knew that he was being relied upon to furnish a suitable animal, then failed to do so.
In order to avoid risking a false claim from a malicious buyer at some future time, the implied warranties must be excluded. This can be accomplished, but only by specific and properly worded written exclusions. Prominent words such as, "AS IS, WITH ALL FAULTS" are usually sufficient to exclude the implied warranties of merchantability and fitness for intended use.
Be a Secured Creditor
One major problem faced by unprepared sellers is a default by a purchaser who is buying a horse on an installment contract, or worse yet, a bankruptcy by the purchaser. Whether or not the seller can recover the horse in the event of a buyer's default or bankruptcy depends on whether or not the seller is a "secured creditor", and the status of the seller's security interest, within the meaning of Uniform Commercial Code Article 9. The term "secured" or "security" in this context means that there is specific property made available, which is specially designated, and, to a certain extent, which is held safe from the claims of other creditors, from which the remaining obligations of a party to a contract can be satisfied. In horse sales, this is usually the horse itself.
Having a written security clause can offer a seller a certain degree of protection. If a horse is sold without a written security clause, and a buyer defaults, the seller cannot necessarily get the horse back -- the seller may have only a "general unsecured" claim for money against the defaulting buyer. But, if there is a security clause, the seller can get the horse back from the buyer, unless the buyer has given someone else a better security interest -- either in the horse specifically -- or maybe in just all of the buyer's personal property, including the horse.
Perfect Your Security Interest
To prevail over the secured creditors, it is vastly preferable to have taken the steps necessary to "perfect" the security interest. Generally, a perfection of a security interest is accomplished by filing a UCC-1 Financing Statement in the proper manner in the state in which the debtor is located.
A Registration Certificate is Not a Security Interest
A registration certificate is not a document of title, such as the title to your car. It is evidence of ownership, but it does not, in and of itself, give you the legal right of possession or control over the horse you are selling.
Although it may be wise to retain the registration certificate in a seller's name until the buyer has completed her performance, a retained registration certificate is not a good substitute for a properly drafted security clause in a sales contract. Remember, in order to have an effective security interest, it must be in writing. Additionally, in order to have protection against a trustee in bankruptcy, or even other secured creditors of a buyer, it is important that the seller perfect his or her security interest.
Save Money and Be Better Protected with Other Contract Clauses
A good sales contract will also include other clauses, such as an "attorneys fees" clause which entitles a seller (or a buyer) to recover fees if they are forced to hire a lawyer and sue, or commence an arbitration to obtain the performace of the other party.
An aware of attorneys fees as damages against the loser of a lawsuit is called the "British Rule". If you do not specify the "British Rule" in an agreement in writing, the general "American Rule" applies. Under the American rule, each side bears their own attorneys fees -- attorneys fees are not recoverable from the losing party. This American Rule can effectively deny justice to a seller (or buyer) in many cases, because if the amount in controversy is relatively small (in this context, less than $10,000 is relatively small), then the cost of the attorney's fees to secure a defaulting buyer's or seller's performance may be equal to, or more than, what would be gained.
Some other clauses which will appear in a good written sales contract include specifications of jurisdiction (what court or other tribunal has the power to decide a controversy) and venue (where can the case be heard) in the event of a dispute, a clause which provides which state's (or province's or country's) law governs, and an integration clause. An integration clause states that the entire agreement between the parties is set forth in the written agreement in which the clause appears.
Unless you are very familiar with the law, the assistance of a qualified attorney is advisable.
Successful selling is essential to the success of most horse businesses. By protecting yourself through properly drawn written agreement, and by perfecting your security interest, you can steer clear of many legal pitfalls and focus your attention on breeding, raising and selling your horses.
The foregoing is a general article and is not intended as specific legal advice. Individual circumstances and applicable law vary. For legal advice concerning your matter, please contact a qualified attorney.
P. Paul Husband is an equine law and tax attorney serving horse businesses throughout the United States and internationally. He can be contacted at (818) 955-8585 or through his website: www.husbandlaw.com