1. Performance and Obligations Under Sales and Leases
Chapter 23
Chapter 23: Performance and Obligations Under Sales and Leases
Performance and Obligations Under Sales and Leases
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Overview LO23-1: What is the perfect tender rule?
LO23-2: What is the difference between conforming and nonconforming goods?
LO23-3: What is the right to cure?
LO23-4: What is a revocation of the contract as compared to rejection of nonconforming goods?
LO23-5: What is commercial impracticability?

3. Chapter 23 Hypothetical Case 1
Amalgamated Machining, Incorporated ("Amalgamated") purchased an assortment of assembly line parts from Integrated Equipment Company, Inc. ("Integrated"), with delivery due from Integrated on August 1. On August 1, Integrated delivered several boxes of assembly line parts to Amalgamated's warehouse. Amalgamated's warehouse supervisor signed for the shipment and directed that the boxes be stored for later inspection, as he knew his employees would not have time to inspect the shipment at that time. Five days after receipt of shipment, two Amalgamated warehouse employees inspected the boxes, discovering that the assembly line parts were of a different and inferior brand than those their company had ordered from Integrated. Further, the shipment was ten units short of the number of parts Amalgamated had requested.
In waiting five days to inspect the shipment of assembly line parts from Integrated Equipment Company, Inc., did Amalgamated Machining, Incorporated compromise its right of rejection? If so, might the company have the right to revoke its acceptance of the shipment?
Chapter 23 Hypothetical Case: Amalgamated Machining, Incorporated ("Amalgamated") purchased an assortment of assembly line parts from Integrated Equipment Company, Inc. ("Integrated"), with delivery due from Integrated on August 1. On August 1, Integrated delivered several boxes of assembly line parts to Amalgamated's warehouse. Amalgamated's warehouse supervisor signed for the shipment and directed that the boxes be stored for later inspection, as he knew his employees would not have time to inspect the shipment at that time. Five days after receipt of shipment, two Amalgamated warehouse employees inspected the boxes, discovering that the assembly line parts were of a different and inferior brand than those their company had ordered from Integrated. Further, the shipment was ten units short of the number of parts Amalgamated had requested.
In waiting five days to inspect the shipment of assembly line parts from Integrated Equipment Company, Inc., did Amalgamated Machining, Incorporated compromise its right of rejection? If so, might the company have the right to revoke its acceptance of the shipment?
[Instructor: See Specific Obligations of Buyers and Lessees in Chapter 23]

4. Chapter 23 Hypothetical Case 2
According to the perfect tender rule of Uniform Commercial Code (UCC) Section 2-601, if goods or tender of delivery fail in any respect to conform to the contract, the buyer has the legal right to accept the goods, reject the entire shipment, or accept part and reject part. Obviously, this is an extremely pro-buyer rule, giving the buyer great flexibility in terms of how to respond to less-than-perfect goods, or a less-than-perfect delivery. For example, if the buyer orders ten pink plastic flamingoes to be delivered by the last day of the calendar year, and the seller delivers five pink plastic flamingoes on December 31, the buyer has the following options available under the UCC: 1) The buyer can accept the entire nonconforming shipment; 2) The buyer can reject the entire shipment; or 3) The buyer can accept part and reject part of the shipment.
From an ethical standpoint, should the buyer accept that portion of the shipment which conforms to the contract? In the above example (and again, from an ethical perspective), should the buyer accept the five pink plastic flamingoes delivered on December 31? In the fast-paced business world, is perfection too exacting of a standard to impose on a merchant seller?
Chapter 23 Hypothetical Case 2: According to the perfect tender rule of Uniform Commercial Code (UCC) Section 2-601, if goods or tender of delivery fail in any respect to conform to the contract, the buyer has the legal right to accept the goods, reject the entire shipment, or accept part and reject part. Obviously, this is an extremely pro-buyer rule, giving the buyer great flexibility in terms of how to respond to less-than-perfect goods, or a less-than-perfect delivery. For example, if the buyer orders ten pink plastic flamingoes to be delivered by the last day of the calendar year, and the seller delivers five pink plastic flamingoes on December 31, the buyer has the following options available under the UCC: 1) The buyer can accept the entire nonconforming shipment; 2) The buyer can reject the entire shipment; or 3) The buyer can accept part and reject part of the shipment.
From an ethical standpoint, should the buyer accept that portion of the shipment which conforms to the contract? In the above example (and again, from an ethical perspective), should the buyer accept the five pink plastic flamingoes delivered on December 31? In the fast-paced business world, is perfection too exacting of a standard to impose on a merchant seller?
[Instructor: See Specific Obligations of Sellers and Lessors in Chapter 23]

5. The Basic UCC Performance Obligation
Sellers and lessors are obligated to transfer and deliver conforming goods
Buyers and lessees are obligated to accept and pay for conforming goods in accordance with terms of contract
Good faith required in performance and enforcement of every contract
In terms of basic UCC performance obligations, sellers and lessors are obligated to transfer and deliver conforming goods, and buyers and lessees are obligated to accept and pay for conforming goods in accordance with the terms of the contract. Good faith is required in the performance and enforcement of every contract.

6. Good Faith Definition: Honesty in fact
In transaction between merchants, UCC also imposes obligation of reasonable commercial standards of fair dealing (commercial reasonableness)
Good faith is defined as honesty in fact. In a transaction between merchants, the UCC also imposes the obligation of complying with reasonable commercial standards of fair dealing.

7. Perfect Tender Rule
States that if goods or tender of delivery fail in any respect to conform to contract, buyer/lessee has right to:
accept the goods;
reject entire shipment; or
accept part and reject part
According to the perfect tender rule, if goods or the tender of delivery fail in any respect to conform to the contract, the buyer or lessee has the right to accept the goods, reject the entire shipment; or accept a portion and reject a portion of the nonconforming delivery.

8. Exceptions to Perfect Tender Rule
Industry norms
Past dealings between parties
Agreement between parties
Seller's/lessor's right to cure
Excuse from performance when identified goods destroyed through no fault of parties
Substantial impairment (as it relates to revocation of acceptance and installment contracts)
Commercial impracticability
Exceptions to the perfect tender rule include industry norms, prior dealings between the parties, the existing agreement between the parties, the seller or lessor's right to cure, an excuse from performance when identified goods are destroyed through no fault of the parties, substantial impairment (as it relates to the revocation of acceptance and installment contracts), and commercial impracticability.

9. Commercial Impracticability Doctrine
Delay in delivery or nondelivery, in whole or in part, does not constitute breach if performance made impracticable because contingency has occurred that was not contemplated when parties reached agreement
According to the commercial impracticability doctrine, a delay in delivery, in whole or in part, does not constitute breach if performance is made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement.

10. Inspection, Payment, and Acceptance
Buyers/lessees obligated to accept and pay for conforming goods in accordance with contract
Exceptions exist
Buyers/lessees typically inspect goods to ensure agreement conformity
The concept of reasonableness governs inspection process
Post-inspection, buyer has option to accept, partially accept, reject, or revoke acceptance
UCC guidelines govern right to exercise particular options post-inspection
Buyers/lessees are obligated to accept and pay for conforming goods in accordance with the contract; however, exceptions exist. Buyers/lessees typically inspect goods to ensure agreement conformity to the agreement. The concept of reasonableness governs inspection process.
Post-inspection, buyer has option to accept, partially accept, reject, or revoke acceptance; UCC guidelines govern the right to exercise particular options post-inspection.

11. Chapter 23 Hypothetical Case 3
Determined to carry on the tradition of placing a number of pink plastic flamingos in another person's yard as a practical joke, and with several co-workers in mind, Dorothy Hayes orders 100 pink plastic flamingos (for a total contract price of $500) from Tropical Novelties of Tampa, Inc. The contract specifies delivery of the flamingos to Hayes's home in Poughkeepsie, New York on or before September 1. On August 31, Amalgamated Package Service (APS) delivers five large boxes to Hayes's home. With much anticipation, Hayes tears open the boxes, only to find 50 pink plastic flamingos—50 short of the specified contract quantity. Disappointed that Tropical Novelties did not satisfy its part of the bargain, and realizing that $500 is a lot to pay for a practical joke, Hayes decides to terminate the contract. She calls Tropical Novelties and speaks with a sales representative, notifying the seller that she is canceling the contract due to its nonperformance and stating that she will be returning the 50 flamingos by package delivery service the following day. Tropical Novelties demands that she keep the 50 flamingos, notifies her that they will ship the remaining 50 the following day, and assures her that she will be held responsible for paying the $500 contract price.
Who wins?
Chapter 23 Hypothetical Case 3: Determined to carry on the tradition of placing a number of pink plastic flamingos in another person's yard as a practical joke, and with several co-workers in mind, Dorothy Hayes orders 100 pink plastic flamingos (for a total contract price of $500) from Tropical Novelties of Tampa, Inc. The contract specifies delivery of the flamingos to Hayes's home in Poughkeepsie, New York on or before September 1. On August 31, Amalgamated Package Service (APS) delivers five large boxes to Hayes's home. With much anticipation, Hayes tears open the boxes, only to find 50 pink plastic flamingos—50 short of the specified contract quantity. Disappointed that Tropical Novelties did not satisfy its part of the bargain, and realizing that $500 is a lot to pay for a practical joke, Hayes decides to terminate the contract. She calls Tropical Novelties and speaks with a sales representative, notifying the seller that she is canceling the contract due to its nonperformance and stating that she will be returning the 50 flamingos by package delivery service the following day. Tropical Novelties demands that she keep the 50 flamingos, notifies her that they will ship the remaining 50 the following day, and assures her that she will be held responsible for paying the $500 contract price.
Who wins?
[Instructor: See Specific Obligations of Buyers and Lessees in Chapter 23]

12. Chapter 23 Hypothetical Case 4
Kokomo Leisure Time, a manufacturer of above-ground pools, receives an order for 10,000 pools from a major club warehouse retailer, Mallmart. The company manufactures and ships 5,000 of the pools before a tornado severely damages its factory. Kokomo Leisure Time notifies Mallmart that it will be unable to fulfill the latter half of the order.
Is this an exception to the perfect tender rule? If yes, why is it an exception? Defend your answer.
Chapter 23 Hypothetical Case: Kokomo Leisure Time, a manufacturer of above-ground pools, receives an order for 10,000 pools from a major club warehouse retailer, Mallmart. The company manufactures and ships 5,000 of the pools before a tornado severely damages its factory. Kokomo Leisure Time notifies Mallmart that it will be unable to fulfill the latter half of the order.
Is this an exception to the perfect tender rule? If yes, why is it an exception? Defend your answer.
[Instructor: See Specific Obligations of Sellers and Lessors in Chapter 23]