Conferences on the Virtues
By Fr. Bruno Cocuzzi, ocd
Number 58
Contract of Purchase and
Sale
As stated at
the end of the last conference, we turn our attention to that part of the
Treatise on Commutative Justice that deals with bilateral onerous
contracts. The word “onerous” is a
literal translation of the Latin “onerosus”, and all that it means is that both
parties have the “burden” of an obligation to fulfill toward one another. And the first of these is the Contract of
Purchase and Sale.
Though you
already know essentially, what this contract is, a formal definition is: A bilateral agreement that obliges one
party to the contract to transfer possession and ownership of some
tangible good to the other, who in turn is obliged to pay the transferor a
pre-determined price.
Insofar as this
agreement obliges each of the parties of the contract to give the other
something of value, it differs from a gift.
(Remember that in the unilateral contract called a Gift or Donation, the
transferee must agree to accept the proferred good thing).
Because both
possession and ownership is transferred, the purchase and sale contract
differs from a contract to lend or to lease.
Since money is
given for merchandise or some other tangible good, this also differs from
contracts of exchange, where money or currency of one kind is given for that of
some other kind, as all you foreign travelers know from experience.
Included, as a
contract of exchange is the agreement to trade or “swap” merchandise for
merchandise.
That the goods
be sold for a predetermined price is also of the essence of a contract of
purchase and sale. This is true even at
a “Flea Market”, despite the fact that the predetermined price is minimal or
nominal.
This aspect
also distinguishes it from the “swapping” of merchandise, where (usually)
values are not precisely determined.
Thus, the three
essential elements of a contract of purchase and sale are:
1. the
mutual consent of the parties,
2. a
well determined object or quantity of merchandise, and
3. a
clearly stated amount of money as sale price.
When we say
purchase and sale agreement, most of us think it applies only to real estate,
or to agreements between merchants and the suppliers of merchandise and other
commercial transactions. But it also
applies to the simple (?) act of going into a department store or supermarket,
choosing goods from racks or shelves, taking them to the check-out counter, and
paying for them. That is because the
placing of the merchandise on the shelves and indicating a price is considered,
legally, as an offer to sell at the indicated price. The taking of the merchandise and bringing
it to the checkout counter is considered, legally, as acceptance of that
offer. Thus the mutual consent
(or agreement) between the owner(s) of the store and the customer is
concluded. Without a mutual consent,
obviously, there could be no contract.
Buying and Selling in General
By merchandise
is meant any and all things placed on the market for sale, and which are
not prohibited to be sold by particular laws.
The word includes not only tangible goods but also incorporeal rights
such as writings, accounts payable, inherited rights (only after the death
of the testator), mortgage rights, and patent rights, among others. Not included are the rights to use rented
equipment and inhabit lodgings.
The reason why
rights of inheritance cannot be sold before the death of the testator is
because that would open the door wide to abuses such as fraud and even,
perhaps, murder.
It goes without
saying that the price charged for saleable goods should be just. It is just (for fair) when the monetary
value attached to the goods is “commensurate” with the value of the
goods.
There are two
kinds of ‘value” that goods can have.
One is the ordinary
value and the other is the economic value.
The “ordinary”
value is that which is considered intrinsic to the goods themselves,
that is, their usefulness in general and the cost of producing
them.
The “economic”
value is that which in concrete circumstances the goods acquire in terms of the
plenitude or scarcity of the goods and the needs of the buyer. The needs of the buyer are measured in terms
of the usefulness to him of the goods, or the pleasure he desires to obtain
from them, and to what extent they are necessities of life.
In other words,
the economic price is usually the price the market will bear.
Actually
though, many factors affect the price of objects put on the market for
sale. We have already mentioned one of
them: the abundance or scarcity of the
goods.
On the part of
the buyers, another would be (a) the number of buyers wishing to buy the goods,
irrespective of its abundance or scarcity, and (b) the capacity of the buyers
to pay, i.e., their disposable income.
On the part of
the sellers, they charge more who are in the business of selling and who thus
have “overhead” and other costs of doing business. Those costs are factored into the price of their wares,
including the “risks” that might be involved in importing the goods or
otherwise making them available to the buying public.
With regard to
the manner of selling, the price of goods is greater
(a) when
bought from a merchant than when it is bought from a private individual.
(b) When
the goods are sold retail than when they are sold wholesale.
(c) The
price of salable goods also differs depending upon whether they are sold in the
ordinary course of business or sold at auction, and
(d) Whether
the seller solicits prospective buyers on the street or buyers themselves go
looking for the sellers.
Therefore, all
of the factors listed above need to be taken into consideration when the just
price of goods is determined. It
follows therefore, that the limits within which a “just price” may be found are
very wide. And that explains why prices
for the same goods often vary widely within the same geographical locale.
Since that is
the case, I am sure many of you are wondering:
how is it possible to determine when a seller has set an unjustly
high price upon his wares, and thus is guilty of cheating his buyer?
It seems to me
that this has to be determined by trying to discern whether the seller is
taking “unfair advantage” of the buyer.
Such a situation
would arise when the seller knows the buyer is desperately in need of something
and therefore makes him pay more than the “ordinary” price.
Likewise when
the seller sells goods of inferior quality at the price of higher quality
goods. This, of course, is out and out
fraud. Another kind of fraud is the
practice of adjusting measuring devices so that they read higher than the true
values.
Again, it is
unjust for grocers to raise the price of produce already in the store as soon
as (and just because) there has been a killing frost in the places where the
produce has been grown. The just thing
to do would be to leave the prices as they are. Later, when because of scarcity, the producers themselves ask the
grocers to pay more; the merchants may justly adjust their retail prices to
reflect their own higher costs.
Some, if not
all, of the above unjust practices, I do believe, are explicitly mentioned by
certain of the prophets of the Old Testament, when at the command of the Lord,
they excoriated the dishonest merchants in Israel.
Other dishonest
practices on the part of merchants would include underselling competitors for
the purpose of putting them out of business and thus obtaining a monopoly. At first the injustice is against the
competing merchants. Later, if the
prices were set at an unjustly high level, the injustice would be against the
buyers. Surely, that is the reason the
Government had to pass Ant-Trust legislation.
Another example
of gross injustice is the amount of money charged for certain pharmaceuticals
and medicines without which certain folks would, at most, be in danger of
death, or at least, be unable to continue living a normal life.
In view of all
the above, then it is possible to speak of
The duties of a Seller
He is obliged
in virtue of commutative justice:
1. To
transfer to the buyer ownership of the exact thing that he represented
to sell him. That is to say, exact as
to kind, quantity and quality.
2. To
make known to the buyer any defects that would make the goods incapable of
serving the purposes for which he knows the buyer has purchased the goods.
3. Upon
receipt for the agreed upon price, to surrender the goods to the possession of
the buyer without any unreasonable delays.
If there have been reasonable delays, the seller must also surrender to
the buyer any “profits” or “interest” that the goods may have earned during the
interval.
4. In
the case of sale of Real Property, the buyer must insure the title. Or, as my textbook states: insure the buyer
against eviction.
If the seller
is unable to prevent the buyer from being evicted, and he has acted in bad
faith, he is obliged to return the purchase price in full, and further, to
compensate the buyer for any and all losses he has incurred because of the
eviction.
If the seller
has acted in good faith, the seller would have to make restitution only after
judicial process has determined the extent of his liability.
The Duties of Buyers
After the
agreement has been reached with the seller, the buyer is obliged
1. To
pay the agreed upon price at the designated time and in the designated
manner. In the event the buyer pays
later than the contract calls for, he may have to pay interest as well. Interest would be legally owed in the event
the contract calls for it, or if demand for payment has been formally made, or
if the goods transferred are such that they earn daily interest.
2. To
pay in cash, or by a guaranteed check.
Just as the seller is obliged to guarantee that the merchandise is of
the kind, quality and quantity specified in the contract, so also must the
buyer use “good money” or its equivalent when paying for it.
3. To
take possession of the merchandise as soon as reasonably possible, and thus
take them out of the hands of the seller.
Unreasonable delays in doing so could possibly impose a hardship on the
seller in that he would have the burden of preserving them unharmed for the
buyer.
Are there any
reasons that permit the rescission of a purchase and sale contract prior to its
being fulfilled? Of course, and they
would be
1. By
mutual consent, but prior to either of the parties having fulfilled his part of
the contract.
2. Because
of error, fraud or force on the part of either party o the agreement. (We’ve discussed these reasons in a previous
conference).
3. If
the contract hinges on condition, and the condition is not met by the
predetermined time.
Of the above,
only the second would require a judicial rescission, since the existence of
error, fraud or force would have to be proven, as well as proof that without
them one of the parties would not have entered into the contract.
Since not all
producers of goods, nor indeed, everyone who has something to sell, have time
to actively engage in seeking purchasers for their goods, my textbook peaks
briefly of the duties of brokers.
They are also known as middlemen. The following are the rules which they must follow to discharge
their duties honestly and justly:
1. Fulfill
their commission faithfully, and with as much diligence and care as if they
were themselves the owners of the goods they are trying to sell.
2. They
have a strict right only to the fees agreed upon, if the fees are not
determined by civil legislation. They
are not permitted to take a portion of the “profits” besides.
3. However,
where producers customarily set-aside for brokers a portion of their profits to
induce them to devote the greater part of their efforts to serving the said
producers of goods, it is perfectly all right for the said brokers to accept
that additional “gift”.
Another kind of
purchase and sale transaction is the Public Auction. This kind of selling/buying may be voluntary
on the part of the owner of the goods, or it may be mandated by a judicial
decision, when for example, a judge decides that that is the best way to
liquidate the assets of the bankrupt debtor and thus augment the
proceeds in favor of the creditors.
(Latin auctus equals English augmented).
For this kind
of selling/buying, only one of the usual factors enters into the determination
of a just price. And that is,
the desire of those bidding.
This is essentially a contract of chance, since both the seller and the
buyer are gambling on getting more for less.
Thus, provided there is no fraud or other form of deception present, the
price offered by the highest bidder is considered just and lawful.
There can be,
however, a type of auction that is a hybrid in nature. In this type the auctioneer publicly states
that he reserve to himself the right to withdraw from the auction any article
for which he deems a suitably high bid has not been made.
In the former,
the pure auction, it is unjust and unlawful for the auctioneer to engage one or
more “shills”. A shill is a person
whose function is to bid up the price artificially.
In the mixed or
hybrid auction the use of shills is permitted.
There are some
“just rules” which sellers at auction are required to observe:
1. They
are to surrender the very article they have presented for auction. That is, they cannot display one specific
article and then surrender another article “just like it”.
2. Advertisers
of the Public Auction would commit an injustice if they gave false information
as to the time fixed for the auction in such a way as to favor personal friends
and associates. This would be done by
stating in the announcements that the auction would begin at a later than
actual time, so that most of those seriously interested would arrive too late
to bid up the price on things of significant value.
3. Bidders
would commit an injustice if they were to use deception to dissuade competing
bidders from bidding up the price on articles of significant value.
4. In
public auctions of real Estate, sellers are obliged to guarantee the title, but
are not required to guarantee against hidden defects or problems with the land
or buildings. It is perfectly lawful
for them to auction of the property “as is”.
Another kind of
purchase and sale agreement is called “pawning”. Actually, pawning, as we know it is only one of three types of
contract, which my textbook calls Retrovenditio (literally, a selling
back). This is what my textbook has
to say about this kind of contract:
Selling-back is a
purchase/sale agreement to which is annexed a further agreement (contract) in
which the parties themselves reserve the right to buy the item back from or
sell the item back to the other.
This can be
done to favor the seller, who has the right to buy the item back within a
predetermined time.
It can also be
done to favor the buyer, who reserves the right to sell the item back to the
original seller within a stated interval of time.
Finally, the
contract may give to the third party the right to buy the item within a
definite period of time.
Such a contract
is not, in itself, unjust, provided the original sale price is adjusted to
compensate for the burden placed upon the respective party. An honest estimate of the cost of the burden
can be made, and so a just price can be determined. Thus the price is diminished proportionately when the contract
favors the original seller or a third party.
On the other hand, it may be increased when the contract favors the
original buyer.
Considered in
itself, therefore, this kind of purchase/sale agreement is valid and licit,
since; in general, parties to the contract are perfectly free to subject the
agreement to reasonable conditions.
However, in
practice, a “selling-back” contract is dangerous for the seller, since he
exposes himself to exploitation on the part of the buyer. He may be forced to take much less for the
article “pawned” than justice requires, and he may be forced to agree to an unreasonably
short time in which to “redeem” the article.
Not only folks with addictions are extremely vulnerable to being
exploited by proprietors of pawn-shops, but even honest poor people who lack
the basic necessities of life.
We also hear
about something similar to the above (money for goods that can be redeemed)
that is practiced by “organized crime”.
A person desperate for cash who does not qualify for an ordinary bank
loan may be obliged to “buy” say $1,000, for $1,500, and be obliged to pay the
“purchase price” within a week to a month.
As you know, penalties for default could include a broken arm or
leg. (May the Lord have mercy on us
all!)
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