The Sales Contract: Performance, Breach, and Remedies for Breach CHAPTER SEVENTEEN

Copyright © Houghton Mifflin Company. All rights reserved.17 | 2 Performance of the Sales Contract Usually the seller is the first party to perform in a UCC sales contract, followed by the buyer. If there is a dispute on the contract: The UCC gap filler provisions can fill in missing terms. Trade customs can also be used to fill in gaps. Further, the UCC requires that each party act in GOOD FAITH to complete its portion of the contract. Additionally, failure to cooperate in carrying out the contract can be viewed as a breach of contract.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 3 Obligations of The Seller The seller has the following obligations: –Provide goods that conform to the description in the contract –Properly notify the buyer that the goods are ready for delivery, and make the goods available to the buyer Delivery will be based upon the agreement between the seller and the buyer. Often goods are made available to the buyer at the seller’s place of business or residence. If the goods are available at a location different from the seller’s place of business or residence, that is the place for delivery.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 4 Obligations of the Seller (continued) When the seller is required to ship the goods, proper delivery occurs when the seller places the goods in the possession of a third-party carrier. If the seller is to deliver the goods, delivery occurs when the goods are delivered to the destination point and the buyer is notified of their arrival. If the seller does not notify the buyer and an unreasonable delay or loss occurs, the buyer is entitled to reject the shipment.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 5 Perfect Tender Rule The perfect tender rule obligates the seller to tender goods that exactly meet the description in the contract. If the perfect tender rule is not met, the buyer has three options: Reject all the goods Accept all the goods Accept part of the goods and reject the rest

Copyright © Houghton Mifflin Company. All rights reserved.17 | 6 Obligations of the Buyer The buyer’s obligations arise after the seller’s duty under the contract is completed. The buyer has the obligation to inspect the goods. –Goods are usually inspected before the buyer pays for them. –If goods are COD, the buyer must pay before inspection.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 7 Obligations of the Buyer (continued) Once there is a valid tender of delivery, a buyer or lessee who takes any of the following actions will have shown his or her acceptance: Signifies to the seller or lessor in words or by conduct that the goods conform to the contract, or, if the goods are nonconforming, that they will be accepted anyway Fails to reject the goods in a reasonable time Acts inconsistently with the seller’s ownership rights in the delivered goods –The seller has a right to cure a defective performance as long as he or she does so within a reasonable time.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 8 Obligations of the Buyer (continued) The buyer must reject the goods within a reasonable time and must take reasonable steps to notify the seller of his or her intentions. A buyer who rejects has the obligation to hold the goods with reasonable care. If the seller fails to give instructions, the buyer may: Place the rejected goods in storage Ship them back to the seller Resell the goods with the proceeds going to the seller

Copyright © Houghton Mifflin Company. All rights reserved.17 | 9 Buyer Remedies for Breach by the Seller When a seller breaches a sales contract, the buyer may pursue the following remedies: –Sue for breach of warranty –Cancel the contract and cover –Cancel the contract and sue for damages –Seek specific performance or replevin

Copyright © Houghton Mifflin Company. All rights reserved.17 | 10 Sue for Breach of Warranty A buyer who receives nonconforming goods may accept them and then recover damages for breach of warranty. A warranty is a guarantee by the seller that The goods are not defective, and The goods are fit for their intended purpose. Warranty suits can be used after inspection and acceptance when the goods are later found to be nonconforming. The buyer can usually recover damages for breach of warranty. Usually damages are the amount of cash necessary to put the buyer in the same position as if the contract had been performed properly.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 11 Cancel the Contract and Cover When nonconforming goods are legitimately rejected, the buyer may cancel the contract and recover any amount of the purchase price already paid. Then the buyer can purchase substitute goods elsewhere. If there is a difference between the contract price and the “cover price” (price paid to obtain the goods on the market), the buyer can recover this amount from the seller.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 12 Cancel the Contract and Sue for Damages If the seller breaches, and the buyer may also: Recover any part of the purchase price paid, and Sue for damages for non-delivery. Damages are the difference between the contract price and the market price at the point the buyer learns of the breach, plus any expenses. A buyer that suffers no real damages may still recover nominal damages (usually $1).

Copyright © Houghton Mifflin Company. All rights reserved.17 | 13 Seek Specific Performance or Replevin For a court to order specific performance, the subject matter of the contract must be of a special, unique nature. For example, A painting by Picasso is unique. The UCC also includes goods that cannot be obtained elsewhere in the definition of unique. Replevin – if the buyer withholds goods that are not unique but have been identified and ordered and the goods cannot be obtained elsewhere, the buyer can obtain a court order of replevin, which orders the seller to deliver the goods to the buyer.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 14 Remedies Available to the Seller A buyer breaches by rejecting conforming goods or failing to pay for the goods. The seller may: Cancel the contract Resell the goods and sue for damages Sue the buyer for the purchase price Sue the buyer for damages for nonacceptance Withhold delivery of the goods Reclaim the goods from the buyer

Copyright © Houghton Mifflin Company. All rights reserved.17 | 15 Remedies Available to the Seller (continued) Cancel the contract: –The seller rescinds all performance due to the buyer under the contract. The seller may also pursue any of the other remedies the UCC offers. Resell the goods and sue for damages: –The seller can resell the goods and sue for the difference between the contract price and the resale price plus any expenses of the sale.

Copyright © Houghton Mifflin Company. All rights reserved.17 | 16 Sue to recover the purchase price: –If the seller is in possession of the goods and is unable to sell the goods elsewhere, the seller may hold the goods and sue for the purchase price. –The seller may also use this remedy if the buyer accepted the goods and then refused to pay for them. Remedies Available to the Seller (continued)

Copyright © Houghton Mifflin Company. All rights reserved.17 | 17 Sue to recover damages for nonacceptance. –If the buyer refuses to accept goods, the seller may choose to sue the buyer for damages for not accepting the goods. This is usually the remedy chosen if the seller is unable to sell the goods or prefers not to sell them. Damages are the difference between the market price at the time and place of delivery and the unpaid contract price, plus expenses of the breach. Remedies Available to the Seller (continued)

Copyright © Houghton Mifflin Company. All rights reserved.17 | 18 The seller may legally withhold delivery if the seller discovers the before delivery that the buyer is insolvent (broke). The seller may reclaim goods if, after the delivery, the seller discovers that the buyer is insolvent. The demand must be made within ten days of the sale. The seller may not reclaim if the goods have been sold to a third party in GOOD FAITH. The seller may sue the buyer for damages. Remedies Available to the Seller (continued)