Part 2: Sale Agreement Buying & Selling a Homebuilt

In November Pete Axelrod discussed some of the legal risks of selling an amateur-built aircraft. He outlined many of the common issues between buyers and sellers that lead to conflict, or worse, lawsuits. This month we'll address how you can use a sale agreement-a contract-to improve communication between buyers and sellers and to minimize risks of conflict and suits that may arise out of a sale. 

Do You Need a Sale Agreement? 
In Oregon and in most states, when you sell goods for $500 or more the law requires a written agreement that expresses its essential terms and is signed by the party against whom enforcement of the agreement is desired. In other words, if you want a court to enforce a sale agreement involving a sale of goods for $500 or more, you need to have a written agreement. If the agreement is for the sale of goods for less than $500, you don't need to have a written agreement to have a court enforce the agreement, assuming you are otherwise able to establish the terms of an oral agreement.

This is commonly known as the statute of frauds. In Oregon and Washington, where I practice, it's found in the Oregon Revised Statutes at Chapter 72.2010 and in the Revised Code of Washington Chapter 62A2-201. To learn if your state has a similar statute, you can usually find it by consulting the index of your statutes under the headings and subheadings "sales" then "contracts" then "enforceability."

When more than $500 is involved the statute requires some written expression of what is being bought and sold and by whom. This reduces the potential for fraud by those who would claim the existence of a sale agreement when there was none or terms of the agreement other than those, which were negotiated.

A willing buyer and seller may orally agree to sell an experimental aircraft and exchange the aircraft for cash. Some people complete successful sales without any problems just this way. When sophisticated, honest buyers and sellers know what they are buying and selling there usually isn't any confusion or misunderstanding.

Such sales can be and are conducted just like used car sales, and much of the sale agreement considerations are similar. But an experimental aircraft is not a used car and some considerations-like the seller's product liability-are different. Because state statutes of fraud require a written document to enforce a sale agreement, and for many other reasons, I recommend that people use at least a simple bill of sale for any significant sale. Preparing a bill of sale always facilitates clearer communication between the buyer and seller and minimizes the risk of conflict whenever the amount of money involved is significant. In short, both the buyer and seller get a chance to write out exactly what the deal is.

In addition to satisfying the statute of frauds, a sale agreement can do many things for the buyer and seller. It can define the nature and extent of the goods being sold. And it can clearly outline how and when the purchase price is to be paid and what remedies or penalties will apply if the price is not paid per the agreement terms.

Agreement Terms
To begin, the agreement should identify the buyer and the seller. It should also clearly identify the aircraft to be sold by stating the make, model, registration number, and its equipment. It should also identify any extra materials, tools, kit parts, jigs, construction materials or supplies, plans, kit construction manuals, builder logs, notes, and photographs, as well as the logs for the aircraft, engine, propeller, and avionics, etc. that will be sold. Itemize any exceptions for equipment or
parts that are not part of the sale. Once you have identified what you are selling or buying, you should state the price and any other "consideration" to be paid-a trade, for example. If the buyer isn't paying cash, clearly state the terms for payment.

State the price in U.S. currency (or other) and indicate how, when, and where the buyer will make payment. If there are any financing considerations, state any interest and late payment penalties that are to be due, as well as any pre-payment penalties. Identify what will be done in the event the payments are not made on time.

In the agreement state who will bear the risk of loss to the aircraft hull during the payment period and whether the buyer or seller must have hull insurance, how much coverage must be obtained, and who will be paid in the event of loss. Naturally, these considerations are irrelevant in a cash
sale. In a cash sale always insist upon certified funds or make sure the buyer's check clears the bank before you make delivery.

The seller should warrant that he owns the items being sold free and clear of any encumbrances to his title in them, and that he will defend his title to the same at his expense. If the seller doesn't own the articles free and clear, the agreement should clearly identify the encumbrances and include the plan for payment of expenses for clearing them. If a bank or other financing is involved, closing the sale with an escrow agent may be a good idea, especially when significant sums are involved. Again, the agreement should indicate how and when this will happen. A buyer should always examine the state of a seller's title by getting a title report. In the agreement the seller should warrant whether the aircraft will be in any particular condition or whether the sale condition is only warranted "as is, where is." Also state whether the buyer has had an opportunity to inspect the aircraft to his or her satisfaction. A buyer's pre-purchase inspection by a competent mechanic is always a good move-unless the mechanic doesn't know the aircraft model. In that case, first find one who does know the aircraft and who is willing to spend the time necessary to really check it out. Also indicate whether the builder logs, notes, photographs, and all logbooks have been inspected.

If the buyer has trained in a similar aircraft or test flown the aircraft to be sold, indicate that in the agreement. State any significant findings about the aircraft's condition such as the engine is out of annual or the brake lines are leaking. When recorded, these findings tend to avoid later disputes about the aircraft's condition and representation. If there are repairs to be made at the seller's expense before completing the sale, itemize what is to be done, when, to what inspection criteria, and, who will pay the expense.

Address whether the buyer agrees to indemnify and hold the seller harmless from liability arising out of the buyer's use of the aircraft. Does the buyer agree not to sue the seller for any bodily injury or other damages that result from the buyer's use of the aircraft?

Consider whether the buyer will agree to retain an attorney to defend the seller and pay any judgment that might result if someone else suffers bodily injury or property damage resulting from buyer's use of the aircraft. Will the buyer be obligated to maintain a certain sum of insurance for bodily injury and property damage that might arise out of the buyer's use of the aircraft. And will the seller be named an additional insured on the insurance policy and have policy cancellation notice rights.

Finally, address what recourse the parties have to enforce the agreement, such as arbitration or filing suit, as well as where suit can be filed and what state law shall apply. Also state whether attorney fees and litigation expenses may be collectable as part of the damages. These are just some of the major issues a sale agreement should address.

There are others. What goes in a sale agreement is specific to the particular transaction, the needs of the parties, and the price and terms negotiated. For small transactions a simple form of bill of sale will satisfy the statute of frauds. But it probably won't get you any liability protection or address any special considerations. An aviation attorney can help you tailor such an agreement to your needs.

What an agreement can and can't do
A sale agreement establishes the legal rights and responsibilities between parties to the sale. A sale agreement does not prevent you from being sued, but it should diminish this risk. While a sale agreement might contractually obligate someone to pay for your defense if you are sued, or
to reimburse you for any damages that might result, it will not guarantee that anyone will be able to pay such demands if you were to make them. So be careful with whom you deal.

A sale agreement does not make anyone do anything. To do that you have to get a court to agree with your interpretation of the agreement, and to then enter a judgment order commanding someone to do something for you, like paying you money. The court cannot make someone pay you money they don't have, of course. When someone can't pay their debts they go to the Bankruptcy Court for relief. But a well thought out sales agreement can go a long way to ensure a successful happy transaction.

The next article in this series will address a specific clause in sale agreement-a hold harmless clause-and explain protection it affords and what it cannot do.