Chapter 22: Performance and Breach of Sales and Lease Contracts Clarkson  Miller  Cross Chapter 22: Performance and Breach of Sales and Lease Contracts

Introduction Seller must transfer and deliver conforming goods. Buyer must accept and pay for conforming goods. In the absence of an agreement between Seller and Buyer, UCC Article 2 controls as set out below.

§1: Performance Obligations The UCC’s Good Faith Provision. Good faith means honesty in fact. Contract Performance: For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. Merchants are held to a higher standard of care than non-merchants. 

Performance Obligations Good Faith and Contract Performance. Seller’s obligation is to transfer and deliver conforming goods. Buyer’s obligation is to accept and pay for conforming goods. Court imposes good faith standards when contract is unclear.

§2: Obligations of the Seller or Lessor Tender of Delivery: occurs when seller makes conforming goods available to buyer. Requires reasonable notice, reasonable hour, and manner. Generally, all goods in one installment (unless agreed upon by parties).

Obligations of the Seller or Lessor Place of Delivery. Parties can agree goods tendered at a particular destination for buyer to take possession. If the contract does not specify, then place is the seller’s place of business (or the location of the goods.) 

Obligations of the Seller or Lessor Place of Delivery. Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence. If both parties know goods are elsewhere (warehouse), then place of delivery is where the goods are.

Obligations of the Seller or Lessor Delivery Via Carrier. Shipment Contracts. Seller has a duty to: Put goods into hands of independent carrier. Make contract for transportation.

Obligations of the Seller or Lessor Delivery Via Carrier. Shipment Contracts. Seller has a duty to: Obtain and promptly deliver or tender to the Buyer any documents necessary. Promptly notify Buyer that shipment has been made.

Obligations of the Seller or Lessor Delivery Via Carrier. Destination contracts. Seller has duty to: Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to: Accept the goods; Reject the entire shipment; or Accept part and reject part.

The Perfect Tender Rule CASE 22.1 Wilson Sporting Goods Co. v. U.S. Golf and Tennis Centers, Inc. (2012). Exceptions: Agreement of the Parties: agree that some defective goods will be acceptable. 

The Perfect Tender Rule Exceptions: Cure. Seller has right to repair or replace defective goods within the time of contract performance. -->

The Perfect Tender Rule Exceptions: Cure. Reasonable Grounds Required: seller has reasonable grounds to believe buyer will accept nonconforming tender. 

The Perfect Tender Rule Exceptions: Cure. Limits Right to Reject Goods: substantially restricts right of rejection; buyers must act in good faith and give specific reasons for refusing acceptance.

The Perfect Tender Rule Exceptions: Installment Contracts. Can be rejected if: installment is substantially non-conforming and can’t be cured, OR the non-conforming installment substantially impairs the entire contract.

The Perfect Tender Rule Exceptions: Commercial Impracticability. Perfect tender rule no longer applies. Seller must notify the buyer as soon as practicable the shipment is delayed or undeliverable. 

The Perfect Tender Rule Exceptions: Commercial Impracticability. Foreseeable versus Unforeseeable Contingencies: only unforeseeable events provide a defense. CASE 22.2 Maple Farms v. City School District of Elmira (1974).

The Perfect Tender Rule Exceptions: Commercial Impracticability. Partial Performance. What happens if the unforeseeable event only partially affects the seller’s ability to perform? Seller can re-allocate goods with timely notice to buyer.

The Perfect Tender Rule Exceptions: Destruction of Identified Goods. If no fault of either party and it occurs, Before risk passes to Buyer then, Both Seller and Buyer are excused from performance.

The Perfect Tender Rule Exceptions: Assurance and Cooperation. Right of Assurance (in writing). Until received, the other party has the right to ‘suspend’ performance or delivery. Duty of Cooperation. If a party is not cooperating, the other party has the right to suspend performance.

§3: Obligations of the Buyer or Lessee Payment. Unless agreed otherwise, payment is made where goods are received. Credit has to be prearranged. Pay with cash, credit card, check.

Obligations of the Buyer or Lessee Right of Inspection. Buyer has absolute right to inspection before payment, unless C.O.D. Goods must be conforming before payment.

Obligations of the Buyer or Lessee Acceptance. Buyer can accept goods: By words or conduct. If Buyer had reasonable amount of time and failed to reject. Buyer performs an act which indicates he thinks he is the owner.

Obligations of the Buyer or Lessee Partial Acceptance. If some of the goods do not conform to the contract, and seller has failed to cure, buyer can make a partial acceptance. But buyer cannot accept less a single commercial unit.

§4: Anticipatory Repudiation Occurs when a party communicates intention he will not perform when performance due. 

Anticipatory Repudiation Suspension of Performance Obligations. Nonbreaching party may suspend performance and treat the AR as material breach and pursue a remedy; or wait a reasonable time. 

Anticipatory Repudiation A Repudiation May Be Retracted. UCC permits breaching party to ‘retract’ repudiation by any method that clearly indicates their intent. However, no retraction if the nonbreaching party has materially changed their position.

§5: Remedies of the Seller or Lessor When buyer or lessee is in breach, seller has various remedies under UCC, depending on circumstances. Important considerations: which party has possession of the goods, whether goods are in transit, and whether the buyer has rejected/accepted the goods.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Cancel (Rescind) the Contract. Seller must notify buyer. Buyer is not discharged from remaining obligations.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Withhold Delivery. If material breach by buyer, seller can withhold delivery of all goods. If non-material breach, seller can withhold delivery of this installment. Seller can withhold delivery of all goods if buyer is insolvent.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Resell or Dispose of Goods: Seller can resell and keep profits from sale and hold buyer liable for difference. 

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Resell or Dispose of Goods: Unfinished Goods: seller can (1) cease manufacturing, (2) complete manufacture. Seller can sell and hold buyer responsible for deficiency.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Resell or Dispose of Goods: Resale Price is Insufficient. Seller can recover any deficiency between the resale and contract price, along with incidental costs. If no deficiency, seller can sue for lost profits.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Recover the Purchase Price (or Lease Payments) Due. Seller can recover purchase price plus incidentals. If unable to resell, seller must hold goods for buyer. Seller can sell goods anytime prior to collecting judgment.

Remedies of the Seller or Lessor Goods in Possession of Seller. Right to Recover Damages for Buyer’s Nonacceptance. If buyer repudiates - or wrongfully chooses to accept - goods, seller can bring action to recover damages (lost profits, OR contract price – market price, + incidentals).

Remedies of the Seller or Lessor When Goods are In Transit. Goods are “in transit” when seller has tendered goods to carrier. Seller can stop goods in transit if: Buyer is insolvent - Seller can stop entire shipment of goods. Buyer is in breach - Seller may stop a whole truckload or whole container.

Remedies of the Seller or Lessor When Goods are In Transit. Seller has the right to stop delivery of the goods until: (1) Buyer receives the goods. (2) Carrier or bailee acknowledges rights of buyer in the goods (reshipment or holding goods for buyer).

Remedies of the Seller or Lessor When Goods are In Transit. Seller has the right to stop delivery of the goods until: (3) Negotiable document of title has been transferred to buyer’s possession.

Remedies of the Seller or Lessor When Goods are In Possession of Buyer or Lessee. Seller may sue for the purchase price. Seller may also sue Buyer if goods were “specially-made” which Seller cannot resell. 

Remedies of the Seller or Lessor When Goods are In Possession of Buyer or Lessee. Seller may also sue for the purchase price if the goods were destroyed and the risk had already passed to the Buyer.

Remedies of the Seller or Lessor When Goods are In Possession of Buyer or Lessee. In some situations, seller can reclaim goods received by an insolvent buyer if demand made within 10 days of receipt. Seller’s right to reclaim goods is subject to rights of a good faith purchaser.

§6: Remedies of the Buyer or Lessee When Seller or Lessor Refuses to Deliver the Goods. Buyer has the right to: (1) Cancel (rescind) the contract. (2) Recover Goods paid for if seller insolvent: whether partial or full payment.  Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

§6: Remedies of the Buyer or Lessee When Seller or Lessor Refuses to Deliver the Goods. Buyer has the right to: (3) Sue to obtain specific performance and recover damages. (4) Cover: in some situations.  Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee When Seller or Lessor Refuses to Deliver the Goods. Buyer has the right to: (5) Replevy goods if held by third person. (6) Recover Damages. Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee When Seller or Lessor Delivers Nonconforming Goods. Buyer has the right to: Reject Goods. Timeliness and Reason for Rejection. Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions. Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee When Seller or Lessor Delivers Nonconforming Goods. Buyer has the right to: Reject Goods. Duties of Merchant Buyers and Lessees When Goods Rejected: Good faith obligation to follow instructions. Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee When Seller or Lessor Delivers Nonconforming Goods. Buyer has the right to: Recover Damages and keep the goods. CASE 22.3 Fitl v. Strek (2005).  Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee When Seller or Lessor Delivers Nonconforming Goods. Buyer has the right to: Recover Damages and keep the goods. Recover any loss in ordinary course of events. With notification to seller. Measure of damages: difference between value of accepted goods and goods as warranted. Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

§ 7: Additional Provisions Affecting Remedies Exclusive Remedies. Consequential Damages. Lemon Laws. liquidated damages or 20% of total price of goods or $500 whichever is greater Limitation can agree to another exclusive remedy if exclusive remedy fails in its essential purpose, the remedy is no longer exclusive can exclude consequential damages, but in in consumer sales Waiver clauses are not enforceable in consumer transactions FTC

§ 8: Dealing with International Sales Contracts Letter of Credit Transactions. The issuer (a bank) agrees to issue a letter of credit and to determine whether the beneficiary (seller or lessor) performs certain acts. In return, the account party (buyer or lessee) promises to reimburse the issuer for the amount paid to the beneficiary. 

Letter of Credit Transactions

§ 8: Dealing with International Sales Contracts Remedies for Breach of International Sales Contracts. CISG provides remedies similar to the UCC. Article 74 provides for money damages, foreseeable consequential damages. 

Dealing with International Sales Contracts Remedies. Damages are difference between contract price and market price. Article 28 provides for specific performance where a country would normally grant it in their own law. Parties can agree to what law they will use.