December 8, 2017
An issue that manifests itself in any number of scenarios is the seemingly odd question: Can a seller contract to sell something that he does not own.
Somewhat surprisingly, the answer can be “yes.”
Hypothetical sale of stock
Let’s take a theoretical situation in which a seller promises to sell to a buyer 1,000 shares of the Procter & Gamble Corporation for $100 per share on the 2nd of January, 2018 (a date that as of this writing has not yet come), but the seller does not own any Procter and Gamble at the time of making such agreement. Is that contract enforceable against the buyer? As against the seller?
Sure. If the seller does not own 1,000 shares of Procter & Gamble Corporation at the time of the contract, he had better make arrangements to get that stock under his ownership or to find a party who does own those shares who will fulfill the seller’s promises.
OK, but what about real property?
But come on, that’s perfectly fine as to a publicly-traded stock, but what about property that is entirely unique, not replaceable with “equal or like-kind” property, and under the control of a third party?
Well, the same principle applies. If the seller is going to make a binding promise to sell that asset, and he wants to avoid being sued for breach of contract, he had better figure out how to either get title to the property before the promised closing date, or otherwise arrange for the cooperation of the property owner.
The basis for fraud?
The story is as old as the bridge. A gullible tourist goes to New York City and a local shyster sells them the Brooklyn Bridge. The seller does not own the bridge at the time of the contract, so it’s an enforceable contract, right?
Well, in that classic case, and in the case of other instances of fraud, selling property that the seller does not own could well be a badge of fraud. If he knew at the time of contracting that he did not have title, and could not obtain title to the property in question, then the promise to sell that asset clearly would be fraud.
What if the seller claims that he thought he would be able to obtain the asset before the promised closing date, but was just unsuccessful. Depending on his intentions, and the affirmative representations made by seller in conjunction with the sale, the failure of performance could be simple breach of contract, or it could be actionable fraud.
The peril for the seller
The peril for the seller who does not own the asset he promises to sell is that in order to avoid claims both for breach of contract and fraud, he will need to “pay the price” to get that asset into his name before the date of his performance. In the case of Procter and Gamble Stock, if the price on the NYSE rises of $150 per share before the first of the year, he may just need to take a loss at $50 per share to assure fulfillment of his contractual obligations. In the case of unique property owned or controlled by a third party, the seller may be in great peril as he will be under the mercy of that seller to “name his price” and terms to transfer the asset to the seller who has promised it any a date certain to a certain buyer.
This concept comes into play in various scenarios. And the first instinct of parties — and attorneys — is to think you can’t promise to sell that which you don’t own. A seller can. But he should carefully consider the consequences of that decision.