Many people wish they still lived in a horse world where a horse sale could easily be done on a handshake. For the safe buyer or seller, those days are over. Whether you blame it on me - the attorney - or on the changing world, the fact is that contracts are now necessary to protect people when selling ...Many people wish they still lived in a horse world where a horse sale could easily be done on a handshake. For the safe buyer or seller, those days are over. Whether you blame it on me - the attorney - or on the changing world, the fact is that contracts are now necessary to protect people when selling ...
Many people wish they still lived in a horse world where a horse sale could easily be done on a handshake. For the safe buyer or seller, those days are over. Whether you blame it on me – the attorney – or on the changing world, the fact is that contracts are now necessary to protect people when selling horses. Although many buyers and sellers are aware of the need for a sales contract, this critical step is often skipped. Whether the horse person does not know what to put in the contract, they do not like contracts, or they feel they do not have time, some people avoid the use of contracts in sometimes large dollar sales of horses. While it would be hard for most to believe, horses sell on a regular basis from $500.00 to $150,000.00, without the use of contracts.
This article – Part IV in a five-part series – will address and identify the benefits of using contracts in horse sales. Additionally, the key elements of sales contracts will be identified and discussed.
Why Use Contracts
At the very least, a written contract presents the terms expected by each party. If there are any misunderstandings as to the oral agreement, the proposed written agreement will identify any such misunderstandings prior to finalizing the agreement. Thus, the parties will be able to discuss any disputed issues before entering into the agreement. Take for example where two parties agree to enter into a lease agreement for a breeding mare, where the first party will provide the mare and the second party will provide breedings to the stallion. The oral agreement is that they will have an "every-other-foal" lease, with the first party receiving the first foal. Without a written agreement, it may not be clear what happens if the first foal dies, who is responsible for paying the nominations and registrations of the foals, or even if the mare dies. The preparation of a written agreement usually forces the parties to contemplate these issues and put them in writing.
The written contract also protects each party’s ability to enforce its rights down the road. If, for example, a breeding contract states that a mare owner is entitled to a live foal guarantee, then the mare owner will have the ability to enforce its right to actually get a live foal. Without the written live foal guarantee, it may become the stallion owner’s word against the mare owner’s word as to the deal between them.
One common misperception of a contract in the horse industry is that people can "avoid" the enforcement of a contract. Contracts are a party of everyday life outside of the horse industry. Those contracts, as well as contracts in the horse industry, will survive challenges in the court of law – if written correctly.
Finally, the contract can provide an excellent business or tax record. Especially, for those running a horse operation as a business, as the need to ensure documentation of each transaction will help show that you are running your horse operation as a business. If you become the unfortunate candidate of an audit, the IRS will expect you to have operated your horse business as one would operate any business, which includes getting your transactions documented in writing. An auditor usually will not be persuaded by the argument that this is how it is done in the horse industry. Thus, the contract can help protect you down the road if you are audited, as it verifies that you operate your horse operation as a business.
Key Elements of a Horse Sales Contract
Contracts do not have to be drafted by an attorney. Other contracts prepared by non-lawyers are held up in court.
1. Identify the Parties. Identify the buyer and seller of the horse, including their address, phone number and social security (or federal tax identification) number. The seller on the contract must be the same person(s) listed on the horse’s registration papers. If the seller and the registered owner are not the same person, a dispute could arise as to whether the seller had the authority to sell the horse. If a partnership or corporation owns a horse, the breed registry may require a specific person’s signature, or more than one person to sign a transfer. If you have any question as to ownership or required signatures, you should contact the breed registry. In an abundance of caution, I recommend you always contact the registry to confirm ownership of the horse.
2. Identify the Horse. The horse should be described in detail, including its name, age, color, markings, breed and registration number (if registered). The identification of the horse should also include any special nominations. For example, if the buyer represents that the horse is Sweepstakes nominated, this portion of the contract should identify such nomination. Be sure to identify, in this action, if the horse sells bred, with a breeding, or with a foal.
3. Date of Sale. The sale contract, either at the top or by the signatures of the parties, should have a date. The date proves especially important when a dispute follows the sale, as the date often determines the time that a warranty or statute of limitations begins to run. This could also have tax implications, for capital gains and depreciation computations.
4. Price and Terms of Sale. The contract should include the sales price. If the buyer and seller agree to some form of trade, or trade and exchange of money, such exchange should be clearly spelled out. If, at the time of executing the contract, full price has been tendered, the contract should reflect that the amount was paid in full. On the other hand, if the buyer will be making payments for the purchase of the horse, the payment schedule should be clearly spelled out, including monthly payments, interest rate, and where to send the payments. Equally as important, the parties should agree as to what will happen if the buyer fails to make payments on the horse. Further, if the buyer purchases the horse on payments, the contract should identify who will retain possession of the horse and the horse’s registration papers until the amount is paid in full.
5. Risk of Loss. Risk of Loss identifies when the buyer takes responsibility of the horse. When the risk of loss passes to the buyer, the buyer takes on all risks, including injury or death of the horse and responsibility for injuries caused by the horse, as well as the responsibility for caring for (or arranging/paying for the care of) the horse. Risk of loss often passes at either the signing of the contract, or when the buyer takes possession of the horse, depending on the agreement of the parties. Take for example a common situation where a buyer buys a horse on July 1, and agrees to pick up and pay for the horse on July 5. If the horse gets injured or dies on July 4, a dispute will be just around the corner as to who owned the horse at the time of the death (and therefore must bear the loss).
6. Warranties. Warranties are promises made to the seller regarding the ability or fitness of the horse. Often times sellers sell horses without any warranties whatsoever. If you are the seller, and you intend to sell the horse without any warranties, you should state that "This horse sells ‘as-is’ with no warranties or representations whatsoever." Of course, buyers want to have warranties. The most common warranty desired by an owner includes the warranty of soundness. Most sellers will offer the buyer the opportunity to have a veterinarian examine the horse instead of offering such a warranty.
7. Pre-purchase Exam. If the seller offers the buyer the right to have a veterinarian examine the horse, the seller should state that: "In exchange for any warranties, seller has offered the buyer the opportunity to have the horse examined by a veterinarian of buyer’s choice." If the buyer declines the pre-purchase exam, sellers are encouraged to include a notation in the contract which states that the buyer declined to have a pre-purchase exam performed on the horse.
8. Insurance. If the seller agrees to sell a horse on installment payments, insurance should be considered. A sticky situation will arise if the horse gets injured or dies before final payment has been made by the buyer. In order to eliminate a dangerous situation, the seller may want to require the buyer to insure the horse for at least the amount due on the contract. In some circumstances, where expensive show, breeding, jumping or working horses are involved, loss of use insurance may also be important.
9. Attorney Fees. While no one ever wants to contemplate the worst, sometimes it is best to plan for it. If a dispute arises in a horse sale transactions, attorneys will probably be involved. While courts are not required to enforce such provisions, they will consider them. Additionally, attorney’s fees provisions tend to deter lawsuits. A buyer contemplating a lawsuit against the seller will think twice about pursuing a lawsuit if they risk the chance of having to pay for both attorneys.
10. Signatures. All parties to the contract should sign the contract document. The sale of a horse owned by John and Jane Doe requires both signatures. The seller should require all buyers to sign the contract as well, as the parties to the contract are the people responsible for paying for the horse.
A Word of Caution
Be careful with form contracts. Form contracts, found in books or purchased at stores, can be good starting points, but should not be solely relied upon by you, as they often do not specifically address your situation or comply with your state’s laws.If you sell horses on a regular basis, you should seriously consider contacting your attorney to prepare custom contracts which directly address your needs and concerns. An attorney can prepare form contracts for your use, which specifically address your needs. For example, if you regularly sell horses on installment, an attorney can draft a contract, with appropriate blanks which you can fill out for all such sales.
Proper Execution of the Contract
Once you have prepared a good contract, proper execution proves important in the contract’s future reliability. All parties should have adequate time to review the contract. Further, the party providing the contract should not try to "explain away" the contract. In other words, let the party receiving the contract read and review the contract on their own. Do not try to get the other party to rely upon your explanation of the contract in lieu of them reading the contract.
Once each party has read the contract and feels comfortable with the terms, the contract should be signed by each party to the contract. Each party should have at least a copy of the fully executed contract, so that each party will have the ability to rely upon and enforce the contract if needed in the future.
The equine industry in the United States circulates millions of dollars each year. Because of the magnitude of investment, and the need to protect oneself, contracts must become an everyday habit in the horse industry. Not many people would ever buy any other large item without a contract. That practice needs to continue in the horse industry.
Part 1 – The Sellers Obligations.
Part II – The Buyer’s Duties.
Part III – The Prepurchase Exam.