Private Sales of Horses
- Jul 12, 2007
A private sale is exactly what the term implies, a transaction between a buyer and seller, and possibly a bloodstock agent or trainer, outside the structure and confines of a public auction setting. A private sale represents one of the cornerstones of capitalism and free enterprise, the idea that parties should be free to contract without interference for what they want. Unless a contract is for an illegal purpose, there are few restrictions on the bargaining between the parties.
When the object of the contract is the sale of a horse, everything is open for negotiation--the identity of the horse, the purchase price, the terms of the sale, warranties, time and method of delivery, and the passing of the risk of loss.
Cash or Credit?
Cash sales are common and quite simple--the parties agree on a price, then money and the horse change hands. The seller and buyer should execute a written bill of sale and/or a purchase agreement every time a horse is sold. There is no standard form for either document, but, at a minimum, the bill of sale and purchase agreement for a cash transaction should include:
1. Identity of the parties, contact information, and a complete description of the horse.
2. Demand from the seller that the horse undergo a complete and thorough physical inspection, including a pre-purchase examination by a veterinarian of the buyer's choosing and acknowledgment by the buyer that an opportunity for such inspection was offered. A seller cannot force a buyer to have a horse examined by a veterinarian prior to purchase. If the opportunity for such an examination was offered and refused, however, the buyer assumes responsibility for any conditions that would have been discovered by a pre-purchase checkup. If a pre-purchase veterinary examination was done, the results of the examination might be included as well.
3. Language similar to the following, in conspicuous type and location, unless the seller intends to offer a warranty of some kind. (It may difficult or impossible to disclaim some warranties, although sellers often try to do so. Whether this or similar language works to disclaim all warranties will be a question of state law for the courts in each jurisdiction to resolve.)
SELLER MAKES NO WARRANTIES OR REPRESENTATIONS WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE HORSE, INCLUDING WARRANTIES CONCERNING THE PHYSICAL CONDITION, HEALTH, OR SOUNDNESS OF THE HORSE, OR WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE MERCHANTABILITY OR FITNESS OF THE HORSE FOR ANY PARTICULAR PURPOSE, ALL OF WHICH WARRANTIES ARE HEREBY EXCLUDED. THE PARTIES TO THIS AGREEMENT ACKNOWLEDGE THAT THE HORSE IS SOLD "AS IS" AND "WITH ALL FAULTS." BUYER ACKNOWLEDGES THAT HE HAS CONDUCTED SUCH INVESTIGATIONS AND INSPECTIONS, INCLUDING THE USE OF A QUALIFIED VETERINARIAN, AND IS SATISFIED WITH THE HORSE'S CONDITION.
4. The purchase price and the terms for payment. Will the purchase price be paid in one lump sum, for example, or will the seller accept a down payment with the balance due on delivery? Is a personal check acceptable to the seller or is cash or a cashier's check required?
5. Warranty by the seller of clear and marketable title. If there are liens on the horse, they should be identified. Even if no liens or security interests are identified by the seller, a prudent buyer will check the accuracy of that information. Depending on the jurisdiction, liens and security interests can and should be registered with either a state or local agency. In many jurisdictions registration is made through the secretary of state. Those records should be checked.
6. A statement setting a date on which the risk of loss passes from the seller to the buyer.
7. A statement outlining when, where, and how the horse will be delivered by the seller to the buyer.
8. The date upon which the buyer becomes responsible for boarding expenses and third-party charges if the buyer does not take immediate delivery of the horse.
9. An agreement between the parties as to the governing law, and where any disputes will be litigated if non-judicial resolution is not possible. A requirement that disputes be submitted to binding arbitration may be appropriate.
10. Statement of liability for sales tax. The sale of a horse may be subject to state sales tax. This is a question for your local attorney. If sales tax is due on the transaction, the seller usually will be required to collect the tax from the buyer, then forward the tax to the state treasury. A failure to collect the applicable sales tax from the buyer does not eliminate the seller's liability to the state for the tax, and an unexpected tax bill can reduce the profits from a sale. The sales agreement should state clearly that the buyer is responsible for any applicable sales tax, and the seller should follow through and actually collect the tax due.
11. Prohibition against assignment by the buyer of any interest in the sale agreement without consent of the seller. For example, a buyer might negotiate the purchase of a horse with a seller, then assign (or transfer) any rights he or she might have as a buyer to a third party. Assignment can be a problem for a seller, who might not want to do business with the third party for some reason.
12. Signatures of the parties and the effective date of the agreement.
The majority of horse sales, just like most other transactions in the horse business, proceed from inception to conclusion without problems, despite a generally high level of informality. As a result, it is easy to assume that there will not be problems in any of your business dealings.
This is not a realistic way to do business, however. Instead, hope for the best, but prepare for the worst. Plan business transactions with an eye toward preventing problems by making sure that the parties to a sale understand their rights and obligations before money changes hands. A well-drafted bill of sale should recognize the competing interests of the buyer and the seller, and it should protect both parties.
Another option, especially for expensive animals, is an installment purchase, similar to buying an automobile and financing it for a number of months or years. Bank financing may be available, particularly in parts of the country where the horse business represents an important part of the economy, but many commercial lenders will be reluctant to loan money with a horse as collateral. More often the seller simply agrees to accept installment payments for the horse, in effect loaning the buyer the purchase money. Interest always will be a part of a commercial loan and may or may not be added if the seller provides the financing.
Installment sales present more opportunity for problems, because the transaction is stretched over a sometimes-lengthy period. The process is complex and fraught with danger for the unwary, and installment sellers and installment buyers should take all possible steps to protect themselves. One simple step is for the seller to ask for financial references from a potential buyer and then to check them. A credit check also might be in order, especially for a high-priced horse. The advice of an attorney is highly recommended, either to draft the installment sales agreement or to review an agreement you are asked to sign if buying on time.
Most important, and this should not come as a surprise, is that the installment purchase agreement should be in writing. In addition to the elements of a cash sales agreement or bill of sale already identified, an installment agreement or bill of sale should address, at a minimum, the following:
1. The seller should retain a security interest in the horse until the purchase price is paid in full. Loans generally require collateral to secure payment of the debt, and here the collateral is the horse. Discussed more fully in Chapter 6, a security interest in a horse allows the seller to keep his or her hand, legally if not physically, on the animal until the price is paid in full. It also is advisable for the seller to require the buyer to execute a separate promissory note for the purchase price. By doing so, the seller has additional legal options and protection if the buyer defaults. The seller should take whatever steps are required by state law to register the security interest.
2. The payment terms, including interest, and any penalty due if the buyer is late making one or more payments. The agreement also should set out in detail the circumstances that will constitute default on the part of the buyer.
3. A requirement that, until the purchase price is paid in full, the buyer provide adequate veterinary and farrier care, food, water, and shelter for the horse.
4. A requirement that until the purchase price is paid in full, the buyer will maintain adequate insurance on the horse. (Although desirable protection for the seller, requiring insurance may not be economically feasible for some buyers. If this is the case it might be possible for the parties to share the insurance premiums.)
5. Authorization to recover attorney fees if one party defaults and legal action is necessary to enforce the contract. This provision can be important considering the ever-growing cost of litigation.
Warranties, Express and Implied
Caveat emptor, let the buyer beware, is a principle that should be familiar to buyers and sellers alike. It means, simply, that buyers have a responsibility to examine carefully any item before purchase, and that failure to do so generally leaves the buyer without legal recourse in the event of a problem. Some people also interpret the maxim to mean that sellers bear no responsibility for the integrity of a sale, but that simplistic approach fails to take into account various warranties that may apply to a transaction.
The Uniform Commercial Code (UCC) is a body of law that governs a wide variety of commercial transactions, including most sales of goods. Some version of the code has been adopted by all fifty states, and buyers and sellers should be aware that the code comes into play every time a horse is bought or sold. The code governs the sale of "goods"; horses, foals in utero, and most shares in stallions and other horses fall under that definition.
The Uniform Commercial Code serves as a general guide to how sales should operate. If a dispute arises a court also may use the code to fill in specific missing terms in a sales contract. State versions of the code are similar in most respects, but there may be nuances in your jurisdiction's law. Your attorney is the best source of information about local law.
Sellers want to encourage a potential client to buy their horses, but they generally do not want to make specific promises about the horse's ability or guarantees about future success in the show ring, on the racetrack, or even as a pleasure horse. Buyers, on the other hand, have specific ideas about what they want in a horse and may expect assurances from the seller that the horse fits the bill.
Neither approach is totally realistic, and Article 2 of the Uniform Commercial Code attempts to set a middle ground between the concerns of the seller and the desires of the buyer when it comes to warranties. Usually associated with automobiles, large appliances, and electronics, a warranty is nothing more than a promise or guarantee from the seller that the article being sold will perform in a certain way. Sales of horses may encompass a wide range of warranties, and a breach of warranty may be grounds for the buyer to cancel or rescind the sale and demand return of the purchase money.
Warranties fall into two general categories: express or implied. An express warranty requires some affirmative action on the part of the seller, while an implied warranty arises as an operation of law and does not depend on the seller's actions.
An express warranty is created when the seller makes any affirmation of fact or promise about the goods that are being sold, in this case a horse, so long as the affirmation becomes a material part of the transaction. A statement is material to the sale if the buyer relies on it in deciding whether to buy the horse. If a seller manages to make an affirmative statement about the horse that is not material to the sale, courts generally apply the "no harm, no foul" rule if breach of warranty is claimed by the buyer.
A statement from a seller to a buyer that "this filly is eligible to compete in the yearling futurity at the American Saddlebred World Championship" creates an express warranty, assuming that the buyer relies on that fact when deciding whether to buy the animal. This is true even if the seller was just chatting with the buyer and did not intend to create a warranty. If it turns out the horse had not been entered for the futurity, there has been a breach of warranty, and the buyer can cancel the sale.
An express warranty also can arise from a description of the horse by a seller. A buyer who purchases a horse advertised as a three-year-old can cancel the sale for breach of warranty if the animal actually is some other age, for example. Or a parent looking for a show pony can cancel the sale if the height of the advertised "pony" turns out to be 15 hands, two inches too tall to compete in pony classes recognized by the United States Equestrian Federation.
Less obvious is an advertisement for a horse described as a "stallion." While the seller might intend to communicate only the fact the horse is not a gelding, use of the word "stallion" in the description also could be a warranty the horse is fertile and sound for breeding.
Finally, an express warranty can be created by a sample or model. This type of express warranty is most applicable to sales of large lots of similar consumer goods and protects a buyer by warranting that all the goods in the lot will be identical to the sample or model. A hardware store buying one hundred snow shovels, for example, is entitled to rely on the appearance of a salesman's sample of the shovel in deciding whether to make the purchase.
A possible application to the horse business might be the widespread use of photographs and videotapes in advertising. Some breed organizations register horses based on a particular color or color pattern. A photograph of an Appaloosa, for example, might create an express warranty that the horse actually looks like it does in the photograph and can be registered because it fits the breed's color standard. Likewise, a mare owner searching for a stallion should be entitled to rely on a photograph of the horse in an advertisement. Use of a retouched photograph that hides a conformation defect or a color pattern that would prevent registration could be a breach of warranty.
A seller can create an express warranty without intending to do so. The only requirement is that a seller makes a statement about some fact material to the sale. This does not mean that every statement by a seller creates a warranty, however. Some statements by a seller do not relate to a material fact. Others, called "puffing" or "puffery," are either opinions about general quality or are simply outrageous or unbelievable. Puffing does not form the basis of an express warranty because a reasonable buyer would not rely on the statements in deciding whether to buy the horse in question.
Advertising stating that a farm's sale yearlings are "superior" to the horses in every other consignment is too general to constitute an express warranty. Likewise, telling a potential buyer that the horse under consideration is the fastest, prettiest, or smartest filly on the planet are examples of puffing. They are statements no reasonable buyer would accept as true and will not form the basis for legal action if the horse turns out not to be the fastest, prettiest, or smartest.
In addition to any express warranties a seller might make, either on purpose or inadvertently, the law may impose certain implied warranties on the horse being sold.
One of the most important is the warranty of title, which means when a seller offers a horse for sale, the law implies a promise there is a good and marketable title to the animal. This also means there are no liens or other security interests about which the buyer is unaware. In other words, when a horse is offered for sale, the buyer is entitled to believe the seller is the owner and has the legal right to transfer full title. A fundamental rule of property law is you cannot sell what you do not own.
A second type of implied warranty is the warranty of merchantability, which applies to sellers who hold themselves out as having some particular knowledge or expertise about horses. Most professionals in the horse business would satisfy this standard. If the seller thus qualifies as a "merchant" under the Uniform Commercial Code, the horse being sold must satisfy the contract description and must be suitable to the general purposes for which it is being sold.
Merchantability is a somewhat amorphous guarantee and simply means that a horse being sold as a dressage prospect, for example, has no condition that would prevent it from being trained for dressage. Nothing beyond general suitability is promised.
A third type of implied warranty, the warranty of fitness for a particular purpose, may arise if before the sale is complete the seller becomes aware of any particular purpose the buyer has in mind for the horse and learns the buyer is relying on the seller to provide such an animal. In this situation, the buyer is entitled to rely on the seller's implied promise the horse will suit the intended purpose. Fitness for a particular purpose is more specific than the general warranty of merchantability.
Consider the following transaction, which is common in the horse business. A buyer goes to a trainer and says he is looking for a dressage horse capable of winning at third- and fourth-level competitions. He also says he is relying on the trainer to find such a horse. The trainer's knowledge that the buyer is looking for a particular kind of horse is relying on the seller's expertise and advice means any horse sold probably comes with an implied warranty that the animal is ready to compete successfully at third and fourth level.
A seller can, under some circumstances, disclaim the implied warranties of merchantability and fitness for a particular purpose. Such disclaimers should be, and in the case of a disclaimer of fitness for a particular purpose generally must be, in writing.
A seller can disclaim most implied warranties by using the Uniform Commercial Code magic words "as is" or "with all faults and defects," although the market for such a horse may be extremely limited. Disclaimers of implied warranties must be in writing if there is a written sales contract, in which case the disclaimer must be conspicuous. Oral disclaimers are only effective to the extent they can be proven, which can be difficult or impossible without having them in writing.
Whether an "as is" sale effectively disclaims express warranties made by the seller is more problematic. Courts may refuse to enforce such disclaimers on the public policy theory that a seller should not be allowed to make express promises, and then negate them on a technicality.
A seller should request that a buyer examine the horse completely before finalizing the sale, and a buyer should consider a pre-purchase veterinary examination a necessity. If the buyer either has the horse examined or declines to do so there no longer are any implied warranties covering conditions that could have been discovered during the examination.
It is important for prospective buyers to understand what a pre-purchase veterinary examination can, and cannot, accomplish. The American Association of Equine Practitioners has issued "Guidelines for Reporting Purchase Examinations," which outline the requirements of a pre-purchase exam.
In brief, the examining veterinarian should give the buyer a report in writing identifying the horse and indicating the date and place of the examination. The report should include "all abnormal or undesirable findings," and the veterinarian should "give his or her qualified opinion as to the functional effect of these findings." The veterinarian should not state an opinion about the suitability of the horse to a particular purpose, however, and a buyer should not demand one.
The position of the American Association of Equine Practitioners is that suitability for a particular purpose is a business decision that should be made by the buyer based on a variety of factors, only one of which is the purchase examination. If you are new to the horse business, you should consider having your trainer or some other more experienced person accompany you to examine the horse.
The situation may require the buyer to employ the veterinarian who also is the animal's regular treating veterinarian. If this undesirable scenario is necessary, buyers should be aware that confidentiality concerns will prevent the veterinarian from disclosing anything about the horse's condition not resulting from the pre-purchase examination.
Finally, if a buyer discovers a problem after completing the sale but before "accepting" the horse, the animal can be rejected and returned to the seller. Under the Uniform Commercial Code, a buyer still can reject the horse within a reasonable time after taking physical possession of the animal. In other words, acceptance of the horse and taking physical possession are not the same under the code. If the problem goes undiscovered for a significant period of time, however, the code does not authorize returning the animal to the seller. Instead, the buyer must file a lawsuit for damages based on the seller's breach of either an express or implied warranty. At this point, the parties might consider some form of non-judicial alternative dispute resolution, which is discussed in Chapter 2.
Intentional misrepresentation by a seller almost certainly will give rise to various breach of warranty claims. More important, such conduct may constitute fraud, which can be a separate cause of action if a lawsuit is filed. Although state laws vary, the general requirements necessary to prove a claim of fraud regarding a sale are:
1) A material misrepresentation by the seller that the seller knew was false;
2) The seller's intent that the buyer rely on the misrepresentation;
3) Actual reliance on the misrepresentation by the buyer;
4) Some harm suffered by the buyer as a result of the reliance on the misrepresentation.
Risk of Loss
Buyers and sellers have different and often opposing interests in a horse sale, and the ultimate goal of pre-sale negotiations is to accommodate those differing interests as much as possible. One way this can be accomplished is through the allocation of risk of loss.
Risk of loss is a legal term for the financial responsibility for damage to property when transferred from the seller to the buyer. In other words, the party bearing the risk of loss in a horse sale is the party who will suffer a financial loss if the animal is injured or dies. Risk of loss always starts with the seller and is transferred to the buyer at some point during the transaction.
At public auctions the risk of loss generally passes from seller to buyer at the fall of the auctioneer's hammer. In private sales, on the other hand, transfer of the risk of loss can be negotiated between the parties. A seller will want the risk of loss quickly transferred to the buyer. A buyer, on the other hand, wants the risk of loss retained by the seller for as long as possible.
Consider, for example, the sale of a show jumper from a seller in New York to a buyer in California, with the horse to be shipped by van from the East Coast to the West Coast. The seller would like the risk of loss to be passed to the buyer before the horse steps onto the van, so that the buyer bears the financial risk of the horse being injured in transit. The buyer, of course, would prefer the risk of loss to stay with the seller until the horse arrives safely in California. When the risk of loss actually passes from seller to buyer can be a bargaining chip for either party, with agreement between the parties the only requirement in a private sale.
About the Author
Milt Toby is an author and attorney who has been writing about horses and legal issues affecting the equine industry for more than 40 years. Former Chair of the Kentucky Bar Association's Equine Law Section, Milt has written eight nonfiction books, including national award winners Dancer’s Image and Noor. He teaches Equine Commercial Law in the University of Louisville's Equine Industry Program.
POLL: University Equine Hospitals