4 Sales Formation & Terms Product Liability Performance of Sales Contract Remedies for Breach of Sales Contracts McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Remedies for Breach of Sales Contracts 22 C H A P T E R Remedies for Breach of Sales Contracts “Every great mistake has a halfway moment, a split second when it can be recalled and perhaps remedied.” Pearl S. Buck, novelist, What America Means to Me (1943)

Learning Objectives Agreements as to remedies Seller’s remedies Buyer’s remedies 22 - 4

Agreements as to Remedies Parties may agree to remedies in the contract Agreed remedy applied in the event of a breach of contract to reduce risk Example: “If delivery is not made by September 1, Seller will pay Buyer $1,000 as liquidated damages.” 22 - 5

Liquidated Damages In a liquidated damages clause, parties agree on the amount of damages to be paid to the injured party Enforced if amount is reasonable and if actual damages would be difficult to prove Example: Baker v. International Record Syndicate, Inc. If not enforceable because amount is a penalty or unconscionable, injured party may recover the actual damages suffered 22 - 6

Limitation or Exclusion In a limitation or exclusion clause, parties agree to limit either the remedies that the law makes available or the damages that can be covered [2–719(1)] Limitations commonly placed on liability for consequential damages But attempt to limit consequential damages for injury to a person by consumer goods is prima facie unconscionable [2–719(3)] 22 - 7

Star-Shadow Productions, Inc. v. Super 8 Sync Sound System Facts: Star-Shadow rented a camera and purchased film, but neither film nor camera worked until supplier Super 8 finally resolved problem Star-Shadow sued Super 8 for consequential damages and Super 8 pointed to limitation of liability clause: “Limitation of Liability: This product will be repaired if defective in manufacture or packing. Except for such replacement this product is sold without warranty or liability even though defect, damage, or loss is caused by negligence or other fault. . . .” Star-Shadow Productions, Inc., and Bruce J. Haas produce and film low-budget movies. One of their projects, “The Night of the Beast,” was scheduled for filming from March 12 through 18, 1994, at the General Stanton Inn in Charlestown, Rhode Island. In preparation for the filming, Star- Shadow rented a Beaulieu 7008 Pro 8-millimeter camera and bought 108 rolls of Super 8 Sound high-resolution color negative film from Super 8 Sync Sound System. Unfortunately, on the first day of filming, Star-Shadow’s cameraman was unable to use the Super 8 film because of loading and jamming problems. A representative of Super 8, Lisa Mattei, offered advice by phone and subsequently traveled to Charlestown with a replacement camera and Kodak Reverse film. When her trouble shooting efforts proved fruitless, she replaced the Super 8 film with Kodak Reverse film and the camera operated successfully. On March 22, 1994, Star-Shadow returned the camera and Star-Shadow’s account was credited for the unused film. Star-Shadow subsequently sued Super 8 for damages allegedly caused by the Super 8 film’s inability to operate correctly. Super 8 filed a motion for summary judgment arguing that it had complied with all the terms of the contract by replacing the defective film and crediting Star-Shadow’s account for the unused film. Super 8 pointed to the limitation of liability clause contained on price sheets and film boxes provided to Star-Shadow to show that Super 8 could not be subject to any additional liabilities. The limitation of liability clause’s pertinent part reads: “Limitation of Liability: This product will be repaired if defective in manufacture or packing. Except for such replacement this product is sold without warranty or liability even though defect, damage, or loss is caused by negligence or other fault. . . .” 22 - 8

Star-Shadow Productions, Inc. v. Super 8 Sync Sound System Procedural History and Holding: Trial court found for Super 8 On appeal, Star-Shadow argued the limitation of liability clause failed to adequately protect them from damages caused by the defective film Appellate court stated: “…fact that Star-Shadow has no protection other than their bargained-for remedy of replacement film does not make the limitation of liability clause unconscionable… affirmed…” The trial court granted the motion for summary judgment. The judge found that the limitation of liability clause contained on the Super 8 film package was valid; therefore, Super 8 could not be held liable for damages beyond the value of replacement film. Star-Shadow appealed. Appellate court: “Star-Shadow maintains that the limitation of liability clause failed its essential purpose—to adequately protect the filmmakers from damages arising from defective film…. We have held in an analogous situation that the purchase price of goods is “not a premium for . . . insurance,” and consequently, limitation of liability clauses are not unconscionable merely because buyers are not fully protected for damages that may arise from the malfunction of their purchased goods or service….filmmaker free to purchase raw stock insurance…. fact that Star-Shadow in this case has no protection other than their bargained-for remedy of replacement film does not make the limitation of liability clause unconscionable…. Star-Shadow received what it bargained for, and the risk of equipment failure properly lay on them, not Super 8….Affirmed.” 22 - 9

Seller’s Remedies If buyer breaches the contract and seller has goods, seller has several remedies: Cancel the contract [2–703(f)] and withhold delivery of goods [2–703(a)] Resell manufactured goods and recover damages (difference between resale price and price buyer agreed to pay by contract [2–706]) A buyer may breach a contract in a number of ways. The most common are: (1) by wrongfully refusing to accept goods, (2) by wrongfully returning goods, (3) by failing to pay for goods when payment is due, and (4) by indicating an unwillingness to go ahead with the contract. 22 - 10

Seller’s Remedies - More Recover purchase price of goods (must hold goods for buyer) Recover damages for rejection/repudiation (1) difference between contract price and current market price for the goods and (2) “profit” that seller lost when buyer did not go through with the contract [2–708] See Jewish Federation of Greater Des Moines v. Cedar Forrest Products Co. Jewish Federation of Greater Des Moines v. Cedar Forrest Products Co.: Cedar Forrest Products Company (CFP) manufactures precut building packages for shelters, pavilions, gazebos, and other structures typically utilized in park, camp, and recreational facilities. The Jewish Federation of Greater Des Moines (Jewish Federation) contracted with CFP for the manufacture of a 3,500 square foot building with unique and customized features. With the signing of the Purchase and Sales Agreement, Jewish Federation sent CFP a deposit of $53,605; shortly thereafter it prematurely sent the remaining balance of $160,813 for a total contract price of $214,418. After a series of redesign discussions and change orders, Jewish Federation informed CFP it was rescinding the contract and requesting return of all monies paid. CFP returned $160,530.54, but retained $53,887.46 as lost profits it would have made had Jewish Federation not breached the contract. In anticipation of the building project, CFP purchased cedar paneling, insulation, floor plywood, and cedar timber. It had not begun to assemble the building when Jewish Federation breached the contract. After the breach, CFB was able to sell the purchased items to other customers for the same price as called for in the Jewish Federation contract. Jewish Federation filed an action for the return of the remaining $53,887.46, claiming there had been no meeting of the minds and the agreement was merely a quote based on a preliminary schematic drawing; CFP counterclaimed for breach of contract. The trial court found the agreement was a completely integrated contract which Jewish Federation had breached and determined that CFP was only entitled to retain $13,470.13 for “incidental damages.” CFP appealed. Appellate court: “The primary issue on appeal is the proper measure of damages for a lost volume seller under these particular circumstances. ….As a lost volume seller, CFP is entitled to its lost profits of $53,887.46 pursuant to Section 2–708(2) which includes the incidental damages of $13,470.17 awarded by the district court. Judgment reversed in favor of CFP.” 22 - 11

Seller’s Remedies - More If buyer is insolvent and has the goods, seller may: Recover purchase price Reclaim goods in possession of buyer If goods are in transit, seller may stop shipment 22 - 12

Duty to Mitigate Damages Seller should select alternative that will minimize loss [2–704(2)] Example: Madsen v. Murrey & Sons Co., Inc. Seller, who did not complete manufacture of goods on buyer’s repudiation, but rather dismantled and largely scrapped the existing goods, was held not to have acted in a commercially reasonable manner 22 - 13

Seller’s Remedies & The CISG Under the (CISG), aggrieved seller has five potential remedies when a buyer breaches the contract: (1) suspension of seller’s performance (2) “avoidance” of the contract (3) reclamation of goods in buyer’s possession (4) an action for the price (5) an action for damages 22 - 14

Buyer’s Remedies If seller breaches the contract, the buyer has several remedies: Buy other goods (cover) and recover damages from seller based on any additional expense that buyer incurs in obtaining the goods [2–712] Example: KGM Harvesting Co. v. Fresh Network A seller may breach a contract in a number of ways. The most common are: (1) failing to make an agreed delivery, (2) delivering goods that do not conform to the contract, and (3) indicating that he does not intend to fulfill the obligations under the contract. KGM Harvesting Co. v. Fresh Network: KGM Harvesting Company, a California lettuce grower and distributor, and Fresh Network, an Ohio lettuce broker, began dealing with each other and over the years the terms of the agreement were modified. As of May 1991, their agreement called for KGM to deliver 14 “loads” of lettuce a week at a price of 9 cents a pound. A load of lettuce consists of 40 bins, each of which weighs 1,000 to 1,200 pounds. At an average bin weight of 1,100 pounds, one load would equal 44,000 pounds, and the 14 loads called for in the contract would weigh 616,000 pounds. At 9 cents per pound, the cost would be approximately $55,440 per week. Fresh Network, in turn, resold all of the lettuce to another broker (Castellani Company) who sold it to Club Chef, a company that chopped and shredded it for the fast food industry (specifically, Burger King, Taco Bell, and Pizza Hut). The transactions between Fresh Network and Castellani, and in turn between Castellani and Club Chef, were on a cost-plus basis. This meant each paid its buyer its actual cost plus a small commission. In May and June 1991, when the price of lettuce went up dramatically, KGM refused to supply Fresh Network with lettuce at the contract price of 9 cents per pound. Instead, it sold the lettuce to others at a profit between $800,000 and $1,100,000. Fresh Network then went out on the open market and purchased lettuce to satisfy its obligations to Castellani Company. Castellani covered all of Fresh Network’s extra expense except for $70,000. Fresh Network then sought to recover from KGM as damages the difference between what it was forced to spend to buy replacement lettuce and the contract price of 9 cents a pound (approximately $700,000). KGM objected on the grounds that Fresh Network had been able to pass some of the increased cost along to Castellani. Appellate court: “In the instant case, buyer “covered” in order to fulfill its own contractual obligations to the Castellani Company. Accordingly, it was awarded the damages called for in cover cases—the difference between the contract price and the cover price. In appeals from judgments rendered pursuant to section 2–712, the dispute typically centers on whether the buyer acted in “good faith,” whether the “goods in substitution” differed substantially from the contracted for goods, whether the buyer unreasonably delayed in purchasing substitute goods in the mistaken belief the price would go down, or whether the buyer paid too much for the substitute goods. …In this case, however, none of these typical issues is in dispute….Instead, seller takes issue with section 2–712 itself, contending that despite the unequivocal language of section 2–712, a buyer who covers should not necessarily recover the difference between the cover price and the contract price…. In this case, the damage formula of section 2– 712 put buyer in the identical position performance would have…Judgment affirmed for Fresh Network (buyer).” 22 - 15

Buyer’s Remedies - More Recover damages based on difference between contract price and current market price of goods [2–713] Recover damages for any nonconforming goods accepted by buyer based on difference in value between what buyer received and what buyer should have received [2–714] Example: Jetpac Group, Ltd. v. Bostek, Inc. Damages include incidental damages, consequential damages, damages for non-delivery, and damages for defective goods. 22 - 16

Buyer’s Remedies - More Obtain specific performance of the contract where goods are unique and cannot be obtained elsewhere [2–716] 22 - 17

Seller’s Remedies & The CISG Under the (CISG), aggrieved buyer has four potential types of remedies when a seller breaches the contract: (1) “avoidance” of the contract (2) an adjustment in price (3) specific performance (4) an action for damages 22 - 18

Test Your Knowledge True=A, False = B If buyer refuses to accept conforming goods, seller may recover damages, such as lost profit If an insolvent buyer has the goods, the seller may reclaim the goods from buyer If seller breaches the contract by failing to deliver the goods, buyer may “cover” and recover damages True. 22 - 19

Test Your Knowledge Multiple Choice Widgets agreed to deliver 500 cases of grommets to ToyCo by Sept. 1. Widgets knew ToyCo needed the grommets to make toys for delivery by Dec. 1. Widgets delivered the order Nov. 29. ToyCo may: (a) buy grommets elsewhere to cover (b) sue for damages (c) obtain specific performance (d) both A and B (e) all of the above The correct answer is (d). 22 - 20

Thought Question Assume Nancy had a car to sell that she knew had been in an accident and repaired. Is it ethical to sell a damaged and repaired car without telling the potential buyer? Opportunity to discuss ethics in sale of goods. Note that this action may be illegal under state consumer protection laws. 22 - 21