1. Chapter 20 Performance of Sales and Lease Contracts

2. 2 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.

3. 3 §1: Good Faith Requirement Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. 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.

4. 4 §2: Seller’s Obligations Seller has a duty to “tender” delivery of “conforming goods.” Tender means “delivery” to agreed place: With reasonable notice. At a reasonable hour. In a reasonable manner. Exactly, unless otherwise agreed.

5. 5 Place of Delivery (Carriers) [1] Shipment contracts. Seller has a duty to: Put goods into hands of independent carrier. Make contract for transportation. Obtain and promptly deliver or tender to the Buyer any documents necessary. Promptly notify Buyer that shipment has been made.

6. 6 Place of Delivery (Carriers) [2] 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.

7. 7 Place of Delivery [Non-Carriers] 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 the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

8. 8 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.

9. 9 Exceptions to the Perfect Tender Rule (Click on Each Link Below) Agreement of the PartiesAgreement of the Parties. CureCure. Substitution of CarriersSubstitution of Carriers. Installment contractsInstallment contracts. Commercial ImpracticabilityCommercial Impracticability. Destruction of identified goodsDestruction of identified goods. Partial PerformancePartial Performance. Then Proceed 

10. 10 §3: Buyer’s Obligations Furnish facilities reasonably suited for receipt of the goods. Make payment at the time and place the Buyer receives the goods. Credit has to be prearranged. Credit period begins on the date of shipment. Pay with cash, credit card, check. But if Seller asks for cash, Seller has to give Buyer time to get cash.

11. 11 Buyer’s Obligations Buyer has right to inspect before paying: Costs of inspection borne by Buyer. However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

12. 12 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.

13. 13 Revocation of Acceptance Notify Seller of breach. Revoke only if substantial nonconformity; and Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.

14. 14 §4: Anticipatory Repudiation Party communicates he will not perform by time of contract performance. Non-breaching party may suspend performance and: Treat the A.R. as material breach and pursue a remedy; or Wait a reasonable time.

15. 15 §5: International Contracts and Letters of Credit Parties. Account: Buyer. Issuer: Bank. Beneficiary: Seller. Issuer is bound to pay the beneficiary who has complied with the terms and conditions of the letter of credit, usually requiring a bill of lading to the issuer to prove shipment has been made.

16. 16 Case 20.1: Maple Farms v. Elmira School (Commercial Impracticability) FACTS: Maple Farms agreed to supply Elmira with all of the milk the district needed for the school year. The parties agreed to a fixed price—the June market price. By December, the market price was 23 percent higher than the contract price. Because it had similar contracts with other school districts, Maple Farms stood to lose a great deal of money. Maple Farms sued to be released from the contract on the grounds of commercially impracticable because of the increase in the price of milk.

17. 17 HELD: FOR ELMIRA. An increase in the price of milk was not unexpected because the previous year the price had risen 10 percent and the price of milk had traditionally varied. Also, general inflation should have been anticipated. Maple Farms had reason to know these facts and could have contracted with the district to protect itself. Case 20.1: Maple Farms v. Elmira School (Commercial Impracticability)

18. 18 Case 20.2: Industria De Calcados v. Maxwell Shoe (Acceptance) FACTS: Maxwell ordered through Fingerhut 12,042 pairs of shoes manufactured by Calcados and paid part of the price with a check. When the shoes arrived, they were cracked and peeling. Maxwell stopped payment on the check and told Fingerhut that it was rejecting the shoes. Maxwell never told Calcados directly that it was rejecting the goods. When Calcados did not respond, Maxwell had the shoes refinished, sold them, and kept the money.

19. 19 FACTS (cont’d) Calcados sued Maxwell for breach of contract. Trial Court held Maxwell had accepted the shoes when it had them refinished, “on the grounds that an alteration or repair of a defect in goods is an act inconsistent with the seller’s ownership” under UCC 2–606(1)(c). HELD: The court awarded damages to Calcados reduced by the amount that Maxwell had paid for the refinishing. Case 20.2: Industria De Calcados v. Maxwell Shoe (Acceptance)

20. 20 Case 20.3: Banco International v. Goody’s Family Clothing (Anticipatory Repudiation) FACTS: Banco and Goody’s contracted for the delivery of windsuits (jogging suits) in three shipments, the first shipment due by September 30 or the order would be cancelled. Banco sent Goody’s some production samples that had actually been produced by another manufacturer. By August 23, Banco had not started production despite assurances from Banco. Goody’s canceled the contract and Banco sued alleging breach of contract. Goody’s argued anticipatory repudiation.

21. 21 HELD: FOR GOODY. Anticipatory repudiation was indicated by Banco’s failure to start performance within a reasonable time to meet the contract deadlines and by Banco’s misrepresentations concerning the status of its performance. “It is not necessary for [anticipatory] repudiation that performance be made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of the continuing obligation.” Case 20.3: Banco International v. Goody’s Family Clothing (Anticipatory Repudiation)

22. 22 Agreement of the Parties Parties agree that some defective goods will be acceptable. Parties agree that defective goods can be replaced or repaired within a certain time. Return

23. 23 Seller’s Cure Seller has the right to “Cure” (ship conforming goods to Buyer) if: Agreed time of performance has not yet expired; or If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past. Return

24. 24 Substitution of Carriers If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable. Return

25. 25 Commercial Impracticability Occurrence of an unforeseen contingency that makes performance impracticable. Nonoccurrence was a basic assumption on which the contract was made. If only partial impracticability, Seller must allocate what he/she has. Return

26. 26 Installment Contracts Installment Contracts can be rejected if: installment is substantially non- conforming and can’t be cured. non-conforming installment substantially impairs the entire contract. Return

27. 27 Destruction of Goods If no fault of either party and it occurs Before risk passes to Buyer then Both Seller and Buyer are excused from performance. Return

28. 28 Partial Performance Sometimes unforeseen event only partially affects Seller’s capacity to perform. In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance. Buyer has the right to reject. Return