Chapter 22: Performance and Breach of Sales and Lease Contracts

Under the UCC, remedies are ______ in nature

cumulative

The aggrieved party is not limited to one exclusive remedy

Conforming goods

Goods that conform to contract specifications

OBLIGATIONS OF THE SELLER OR LESSOr

The basic duty of the seller or lessor is to deliver the

goods called for under the contract to the buyer or

lessee.

• To fulfill the contract, the seller or lessor must either

deliver or tender delivery of conforming goods to the

buyer or lessee

tender of delivery

A seller’s or lessor’s act of placing conforming goods at the

disposal of the buyer or lessee and giving the buyer or lessee whatever notification is

reasonably necessary to enable the buyer or lessee to take delivery

Unless the parties have agreed otherwise, all goods called for by a contract must be

Tendered at a reasonable hour

• Kept available for a reasonable time to enable the buyer to take possession [UCC 2–

503(1)(a)]

• Tendered in a single delivery rather than in several lots or installments [U

place of delivery

if the contract does not indicate where the goods will be delivered, then

the place for delivery will be one of the following:

1. The seller’s place of business

2. The seller’s residence, if the seller has no business location [UCC 2–308(a)]

3. The location of the goods, if both parties know at the time of contracting that the

goods are located somewhere other than the seller’s business [UCC 2–308(b)]

Shipment Contracts

A shipment contract requires or authorizes the seller to ship goods by a carrier, rather than to deliver them at a particular destination

1. Place the goods into the hands of the carrier.

2. Make a contract for their transportation that is reasonable according to the

nature of the goods and their value. (if not, buyer can reject)

3. Obtain and promptly deliver or tender to the buyer any documents

necessary to enable the buyer to obtain possession of the goods from the

carrier.

4. Promptly notify the buyer that shipment has been made

destination contracts

In a destination contract, the seller agrees to deliver

conforming goods to the buyer at a particular destination.

• The goods must be:

• Tendered at a reasonable hour

• Held at the buyer’s disposal for a reasonable length of time

• The seller must give the buyer appropriate notice and any

necessary documents to enable the buyer to obtain delivery

from the carrier

perfect tender rule

A common law rule under which a seller was required to deliver to the buyer goods that conformed perfectly to the requirements stipulated in the sales contract.

tender of non-conforming goods is a breach of contract

if goods or tender of delivery fails in any respect to conform to the

contract, the buyer or lessee may either:

• Accept the goods

• Reject the entire shipment

• Accept part or reject part

agreement of the parties (exception to perfect tender rule)

The parties may agree that defective goods or parts

will not be rejected if the seller or lessor is able to repair or

replace them within a reasonable period of time.

cure

The seller or lessor has a right to attempt to “cure” (repair, adjust, or replace) a defect when the

following are true:

1. A delivery is rejected because the goods were nonconforming. **if they thought the tender nonconforming was fine, thats diff; they can still cure even if contract time has expired (example: price allowance)

2. The time for performance has not yet expired.

3. The seller or lessor provides timely notice to the buyer or lessee of the intention

to cure.

4. The cure can be made within the contract time for performance.

substitution of Carriers

If an agreed-on carrier becomes impracticable or unavailable

through no fault of either party, and a commercially reasonable

substitute is available, this substitute performance is sufficient

tender to the buyer and must be used [UCC 2–614(1)].

• The seller or lessor is required to arrange for a substitute carrier and

normally is responsible for any additional shipping costs

installment contract

Under the Uniform Commercial Code, a contract that

requires or authorizes delivery in two or more separate lots to be accepted and paid for

separately.

• With an installment contract, a buyer or lessee can reject an installment only if the

nonconformity substantially impairs the value of the installment and cannot be cure

if buyer doesnt say anything and accepts the next installement, contract is reinstated

Commercial Impracticability

When occurrences unforeseen by either party when a contract

was made make performance commercially impracticable, the

seller or lessor must notify the buyer or lessee as soon as

practicable that there will be a delay or nondelivery

DOES NOT extend to foreseeable circumstances

Commercial Impracticability and Partial Performance

If the unforeseen event only partially affects the capacity of the seller

or lessor to tender total performance, the seller or lessor must

distribute any remaining goods or deliveries fairly and reasonably

among the parties to whom it is contractually obligated

buyer must be notified of this and has the right to accept or reject

Destruction of Identified Goods

f an unexpected event, such as a fire, totally destroys goods through no

fault of either party before risk passes to the buyer or lessee, and the

goods were identified at the time the contract was formed, the parties are

excused from performance

If the goods are only partially destroyed, the buyer or lessee can inspect

them and either:

• Treat the contract as void

• Accept the damaged goods with a reduction in the contract price

Assurance and Cooperation

If one party has “reasonable grounds” to believe that the other party will

not perform, the first party may in writing “demand adequate assurance of

due performance” from the other party and “suspend” further

When the performance of one party depends on the cooperation of the

other, and cooperation is not forthcoming, the first party can either:

• Proceed to perform the contract in any reasonable manner

• Suspend performance without liability and hold the uncooperative party in breach

OBLIGATIONS OF THE BUYER OR LESSEE

pay for the goods tendered.

• Once the seller or lessor has adequately tendered delivery, the

buyer or lessee is obligated to accept the goods and pay for them

according to the terms of the contract.

payment (buyer)

In the absence of any specific agreements, the buyer or lessee must make payment

at the time and place the goods are received [UCC 2–310(a), 2A–516(1)].

• When a sale is made on credit, the buyer is obligated to pay according to the

specified credit terms, not when the goods are received.

• The credit period usually begins on the date of shipment [UCC 2–310(d)].

payment (lessee)

Under a lease contract, a lessee must make the lease payment that was specified in

the contract [UCC 2A–516(1)].

• Payment can be made by any means agreed on between the parties—cash or any

other method generally acceptable in the commercial world.

• If the seller demands cash, the seller must permit the buyer reasonable time to obtain it [UCC

2–511].

right of inspection

Unless the parties otherwise agree, or for C.O.D. (collect on delivery)

transactions, the buyer or lessee has an absolute right to inspect the goods before

making payment.

Inspection can take place at any reasonable place and time and in any reasonable

manner.

• The buyer bears the costs of inspecting the goods but can recover the costs from

the seller if the goods do not conform and are rejected

acceptance AFTER inspection

1. The buyer or lessee indicates (by words or conduct) to the seller or lessor

that the goods are conforming or that they will retain them in spite of their

nonconformity [UCC 2–606(1)(a), 2A–515(1)(a)].

2. The buyer or lessee fails to reject the goods within a reasonable period of

time [UCC 2–602(1), 2–606(1)(b), 2A–515(1)(b)].

3. In sales contracts, the buyer will be deemed to have accepted the goods if

they perform any act inconsistent with the seller’s ownership

[UCC 2–606(1)(c)].

partial acceptance

A buyer or lessee cannot accept less than a single commercial unit.

• The UCC defines a commercial unit as a unit of goods that, by commercial usage, is

viewed as a “single whole” for purposes of sale.

• A commercial unit cannot be divided without materially impairing the unit’s:

• Character

• Market value

• Usea

anticipatory repudiation

An anticipatory repudiation is a breach of contract in which, before the time for

contract performance, one party clearly communicates to the other the intention

not to perform.

Suspension of Performance Obligations

When anticipatory repudiation occurs, the nonbreaching party has a choice of two

responses:

1. Treat the repudiation as a final breach by pursuing a remedy

2. Wait to see if the repudiating party will decide to honor the contract despite the avowed

intention to renege [UCC 2–610, 2A–402]

• In either situation, the nonbreaching party may suspend performance.

repudiation retraction

Once retraction is made, the rights of the repudiating party under the

contract are reinstated.

• There can be no retraction, however, if since the time of the repudiation the

other party has either:

• Canceled or materially changed position

• Indicated that the repudiation is final

REMEDIES OF THE SELLER OR LESSOR

depend on the circumstances existing at the time of the breach.

If the buyer or lessee breaches the contract BEFORE the goods

have been delivered, the seller or lessor has the right to pursue

the following remedies:

1. Cancel (rescind) the contract

2. Withhold delivery of the goods

3. Resell the goods and sue to recover damages

4. Sue to recover the purchase price or lease payments due

5. Sue to recover damages for the buyer’s nonacceptance of goods

The Right to Cancel the Contract

If the buyer or lessee breaches the contract, the seller or lessor

can choose to simply cancel the contract [UCC 2–703(f), 2A–

523(1)(a)].

• The seller must notify the buyer or lessee of the cancellation, and at

that point all remaining obligations of the seller or lessor are

discharged.

• The buyer or lessee is not discharged from all remaining obligations,

however.

• Buyer/Lessee are in breach, and the seller can pursue remedies available

under the UCC for breach.

The Right to Withhold Delivery

when the buyers or lessees are in breach; is possible whether the buyer or lessee:

• Has wrongfully rejected or revoked acceptance of contract goods

• Has failed to make a payment

• Had repudiated the contract

• Is insolvent (unable to pay debts as they become due) unless the buyer or lessee pays

in cash [UCC 2–702(1), 2A–525(1)]

The Right to Resell or Dispose of the Goods

Any resale of the goods must be made in:

• Good faith

• A commercially reasonable manner

• The seller must give the original buyer reasonable notice of the resale, unless the goods:

• Are perishable

• Will rapidly decline in value [UCC 2–706(2), (3)]

• The seller can:

• Retain any profits made as a result of the sale

• Hold the buyer or lessee liable for any loss 

When the goods contracted for are unfinished at the time of the breach, the seller or

lessor can do either of the following:

• Cease manufacturing the goods and resell them for scrap or salvage value

  • Complete the manufacture and resell or dispose of the goods, and hold the buyer or lessee liable for

  any deficiency

true or false: In lease transactions, the lessor can lease the goods to another party and recover

damages from the original lease.

true

The Right to Recover the Purchase Price or Lease Payments Due

If a seller or lessor is unable to resell or dispose of the goods and sues for the

contract price or lease payments due, the goods must be held for the buyer or lessee

unless resale becomes possible.

• The seller or lessor can resell the goods at any time before collecting the judgment

from the buyer or lessee.

• If the goods are resold, the net proceeds from the sale must be credited to the buyer or lessee

because of the duty to mitigate damages.

The Right to Recover Damages for the Buyer’s Nonacceptance

Ordinarily, the amount of damages equals the difference between the contract price or

lease payments and the market price or lease payments at the time and place of tender of the goods, plus incidental damages

[UCC 2–708(1), 2A–528(1)].

• When the ordinary measure of damages is inadequate to put the seller or lessor in as

good a position as the buyer’s or lessee’s performance would have, the proper measure of damages is the lost profits of the seller or lessor, including a reasonable allowance for

overhead and other expenses [UCC 2–708(2), 2A–528(2)]

WHEN THE GOODS ARE IN TRANSIT

When the seller or lessor has delivered the goods to a carrier or a bailee but the

buyer or lessee has not yet received them, the goods are said to be in transit.

Effect of Insolvency and Breach

If the seller or lessor learns that the buyer or lessee is insolvent, the seller or

lessor can stop the delivery of the goods still in transit, regardless of the quantity

of goods shipped.

• If the buyer or lessee is in breach but is not insolvent, the seller or lessor can stop

the goods in transit only if the quantity shipped is at least a carload, a truckload, a

planeload, or a larger shipment [UCC 2–705(1), 2A–526(1)].