Chapter 20: Remedies for Breach of Sales and Lease Contracts

Introduction to Remedies for Breach of Sales and Lease Contracts

• Parties to a sales or lease contract owe a duty to perform the obligations specified in their agreement

  • An obligation is an action a party to a sales or lease contract is required by law to carry out

• When one party breaches a sales or lease contract, the Uniform Commercial Code (UCC) provides the injured party with a variety of prelitigation and litigation remedies

  • Breach is a failure of a party to perform an obligation in a sales or lease contract

Seller and Lessor Performance

• The seller’s or lessor’s basic obligation is the tender of delivery, the obligation of a seller to transfer and deliver goods to the buyer or lessee in accordance with a sales or lease contract

  • It requires the seller or lessor to

    1. Put and hold conforming goods at the buyer’s or lessee’s disposition

    2. Give the buyer or lessee any notification reasonably necessary to enable delivery of goods

Place of Delivery

• The UCC stipulates place of delivery based on the following rules:

  1. Noncarrier cases

     • Unless otherwise agreed, the place of delivery is the seller’s or lessor’s place of business

       • If the seller or lessor has no place of business, the place of delivery is the seller’s or lessor’s residence

     • If the parties have knowledge at the time of contracting that identified goods are located in some other place, that place is the place of delivery

  2. Carrier cases

     • Shipment contract: sales contract that requires the seller to send the goods to the buyer but not to a specifically named destination

       • Under such contracts, the seller must put the goods in the carrier’s possession and contract for the proper and safe transportation of the goods and promptly notify the buyer of the shipment

       • Delivery occurs when the seller puts the goods in the carrier’s possession

     • Destination contract: sales contract that requires the seller to deliver the goods to the buyer’s place of business or another specified destination

       • Unless otherwise agreed, destination contracts require delivery to be tendered at the buyer’s place of business or other location specified in the sales contract

       • Delivery occurs when the goods reach this destination

Perfect Tender Rule

• A seller or lessor is under a duty to deliver conforming goods

• The perfect tender rule is a rule that says if the goods or tender of a delivery fail in any respect to conform to the contract, the buyer may opt to:

  1. Reject the entire shipment

  2. Accept the whole shipment

  3. Reject part and accept part of the shipment

• The UCC allows the parties to a sales or lease contract to limit the effect of the perfect tender rule

  • For example, they may decide that (1) only the defective or nonconforming goods may be rejected, (2) the seller or lessor may replace nonconforming goods or repair defects, or (3) the buyer or lessee will accept nonconforming goods with appropriate compensation from the seller or lessor

Installment Contracts

• An installment contract is a contract that requires or authorizes goods to be delivered and accepted in separate lots

  • Such a contract must contain a clause that states “each delivery in a separate lot” or equivalent language

• The UCC alters the perfect tender rule with regard to installment contracts

  • The buyer or lessee may reject the entire contract only if the nonconformity or default with respect to any installment or installments substantially impairs the value of the entire contract

Destruction of Goods

• The UCC provides that if goods identified in a sales or lease contract are totally destroyed without the fault of either party before the risk of loss passes to the buyer or the lessee, the contract is void

  • Both parties are then excused from performing the contract

• If the goods are only partially destroyed, the buyer or lessee may inspect the goods and then choose either to (1) treat the contract as void OR (2) to accept the goods

  • If the buyer or lessee opts to accept the goods, the purchase price or rent will be reduced to compensate for damages

UCC Duty of Good Faith & Reasonableness

• Generally, the common law of contracts only obligates the parties to perform their contracts according to the express terms of their contract

  • There is no breach of contract unless the parties fail to meet these terms

• However, the UCC adopts two broad principles that govern the performance of sales and lease contracts:

  1. Good Faith

     • Merchants are held to a higher standard of good faith than nonmerchants

  2. Reasonableness

     • The words reasonable and reasonably are used throughout the UCC to establish the duties of performance by the parties to sales and lease contracts

Buyer and Lessee Performance

• The buyer or lessee in a sales or lease contract owes certain duties of performance under the contract

  • These duties are either specified in the contract itself or are created by UCC Articles 2 and 2A

• Once the seller or lessor has properly tendered delivery, the buyer or lessee is obligated to accept and pay for the goods in accordance with the sales or lease contract

• If there is no agreement, the provisions of the UCC apply

Right of Inspection

• The right to inspect is the right of a buyer or lessee of goods to inspect goods that are tendered, delivered, or identified in a sales or lease contract prior to accepting or paying for them

• Buyer has the right to inspect goods before paying for them

• Buyer may reject nonconforming goods

• Parties may agree to time, place, and manner of inspection

• If a contract is silent, inspection must occur at reasonable time and place

Acceptance

• Acceptance is an act that occurs when a buyer or lessee takes either of the following actions after a reasonable opportunity to inspect the goods that are the subject of a contract:

  1. Signifies to the seller in words or by conduct that the goods are conforming or that the buyer will take or retain the goods despite their nonconformity, OR

  2. Fails to effectively reject the goods within a reasonable time after their delivery or tender by the seller

Payment

• Payment is due from buyer when and where goods delivered or property is delivered

• Goods can be paid in any manner acceptable in ordinary course of business

  • If cash required, buyer must be given an extension to procure the cash

  • If the buyer pays by check, payment is conditional on the check being honored (paid) when it is presented to the bank for payment

Case 20.1 Acceptance of Goods

• Case

  • Accent Commercial Furniture, Inc. v. P. Schneider & Associates, PLLC

  • N.Y. Sup. Ct., Appellate Division, 110 A.D.3d 1415 (2013)

• Facts

  • Plaintiff ordered goods

  • Incorrect goods were delivered, corrected goods were subsequently delivered and accepted

• Issue

  • Does Plaintiff owe Accent the remaining balance?

• Decision

  • The court held that Schneider owed Accent the remaining balance of the purchase price

Revocation of Acceptance

• Buyer can revoke acceptance if:

  1. Goods are nonconforming,

  2. Nonconformity substantially impairs value of goods to the buyer, AND

  3. One of the following:

     • (a) Seller’s promise to timely cure are not met

     • (b) Goods were accepted before nonconformity was discovered & nonconformity was difficult to discover

     • (c) Goods were accepted before nonconformity discovered and sellers assured that goods were conforming

• Revocation of acceptance is not effective until the seller or lessor is so notified

  • In addition, the revocation must occur within a reasonable time after the buyer or lessee discovers or should have discovered the grounds for the revocation

  • The revocation, which must be of a lot or commercial unit, must occur before there is any substantial change in the condition of the goods

Seller and Lessor Remedies

• Often, a buyer or lessee may breach a sales or lease contract

  • The UCC provides various remedies to sellers and lessors if a buyer or lessee breaches a contract

• Remedies:

  • Right to Withhold Delivery

  • Right to Stop Delivery of Goods in Transit

  • Right to Reclaim Goods

  • Right to Dispose of Goods

  • Unfinished Goods

  • Right to Recover the Purchase Price or Rent

  • Right to Recover Damages for Breach of Contract

    Right to Cancel a Contract

Right to Withhold Delivery [Seller and Lessor Remedies]

• Right to withhold delivery is the right of a seller to refuse to deliver goods to a buyer on breach of a sales or lease contract by the buyer or the insolvency of the buyer or lessee

• The seller has the right to withhold delivery if:

  • The buyer wrongfully revokes acceptance of the goods

  • The buyer fails to make a payment when due

  • The buyer wrongfully rejects the goods

  • The buyer repudiates the contract

• If part of the goods under the contract have been delivered when the buyer or lessee materially breaches the contract, the seller or lessor may withhold delivery of the remainder of the affected goods

Right to Stop Delivery of Goods in Transit [Seller and Lessor Remedies]

• Often, sellers and lessors employ common carriers and other bailees (e.g., warehouses) to hold and deliver goods to buyers and lessees

  • The goods are considered to be in transit while they are in possession of these carriers or bailees

• Right to stop delivery of goods in transit is the right of a seller to stop delivery of goods in transit if he or she learns of the buyer’s insolvency or if the buyer repudiates the contract, fails to make payment when due, or gives the seller some other right to withhold the goods

• A seller or lessor who learns of the buyer’s or lessee’s insolvency while the goods are in transit has a right to stop delivery of the goods in transit, regardless of the size of the shipment

Right to Reclaim Goods [Seller and Lessor Remedies]

• Right to reclaim goods is the right of a seller or lessor to demand the return of goods from the buyer or lessee under specified situations

• If the goods are delivered in a credit sale and the seller then discovers that the buyer was insolvent, the seller has 10 days to demand that the goods be returned

Right to Dispose of Goods [Seller and Lessor Remedies]

• Right to dispose of goods is the right of a seller to dispose of goods in a good faith and commercially reasonable manner

• The seller or lessor may recover any damages incurred on the disposition of the goods

• The seller or lessor may also recover any incidental damages (reasonable expenses incurred in stopping delivery, transportation charges, storage charges, sales commission, and the like incurred on the disposition of the goods)

Unfinished Goods [Seller and Lessor Remedies]

• Unfinished goods are goods subject to a sales or lease contract that are not completed

• Seller may choose to (1) cease manufacturing OR (2) complete manufacturing and resell, release, or otherwise dispose of them to another party

Right to Recover the Purchase Price or Rent [Seller and Lessor Remedies]

• Right to recover the purchase price or rent is the right of a seller to recover the contracted-for purchase price or rent from the buyer

  1. If the buyer fails to pay for accepted goods

  2. If the buyer breaches the contract and the seller cannot dispose of the goods

  3. If the goods are damaged or lost after the risk of loss passes to the buyer

• The seller or lessor may also recover incidental damages from the buyer or lessee

Right to Recover Damages for Breach of Contract [Seller and Lessor Remedies]

• Right to recover damages for breach of contract is the right of a seller to recover damages measured as the difference between the contract price (or rent) and the market price (or rent) at the time and place the goods were to be delivered, plus incidental damages, from a buyer or lessee who repudiates the contract or wrongfully rejects tendered goods

• If the preceding measure of damages will not put the seller or lessor in as good a position as performance of the contract would have, the seller or lessor has the right to recover lost profits that would have resulted from the full performance of the contract plus an allowance for reasonable overhead and incidental damages

Right to Cancel a Contract [Seller and Lessor Remedies]

• Right to cancel a contract is the right of a buyer or lessee of goods if the buyer or lessee breaches the contract by rejecting or revoking acceptance of the goods, failing to pay for the goods, or repudiating all or any part of the contract

  • The cancellation may refer only to the affected goods or to the entire contract if the breach is material

Lost Volume Seller

• Lost volume seller is a seller who could have produced more of an item and sold it to a new buyer can sue a defaulting buyer to recover the profit it would have made from the defaulting buyer

• A seller may recover lost profits if:

  • The seller could not find another buyer for the goods and the seller had an unlimited number of goods to sell.

  • This is a lost volume seller situation

• A seller may not recover lost profits if:

  • The seller had only one item or a limited number of items and could produce no more, the seller cannot recover lost profits if the seller sold the item(s) to another buyer(s)

• Example Carpet Store purchases hundreds of oriental rugs from manufacturers that it sells to customers in its store. Mary contracts to purchase an oriental rug for $3,000 from Carpet Store. This rug cost Carpet Store $1,200. Mary defaults and does not take possession of the rug. Carpet Store sells the rug to another buyer for $3,000. Here, Carpet Store can recover lost profits from Mary because the buyer of the rug that Mary did not buy might have purchased a different rug from Carpet Store and, therefore, Carpet Store would have had two sales if Mary had not breached the sales contract. Therefore, Carpet Store can recover $1,800 of lost profits from Mary.

Buyer and Lessee Remedies

• If a seller or lessor breaches a sales or lease contract, the UCC provides a variety of remedies to the buyer or lessee for the seller’s or lessor’s breach

• Remedies:

  • Right to Reject Nonconforming Goods or Improperly Tendered Goods

  • Right to Recover Goods from an Insolvent Seller or Lessor

  • Right to Obtain Specific Performance

  • Right to Replevy Goods

  • Right to Cancel a Contract

  • Right to Cover

  • Right to Recover Damages for Nondelivery or Repudiation

  • Right to Recover Damages for Accepted Nonconforming Goods

Right to Reject Nonconforming Goods or Improperly Tendered Goods [Buyer and Lessee Remedies]

• Right to reject nonconforming goods or improperly tendered goods is the right of a buyer to reject goods that do not conform to a contract

• If the goods or the seller’s or lessor’s tender of delivery fails to conform to the contract, the buyer or lessee may (1) reject the whole, (2) accept the whole, OR (3) accept any commercial unit and reject the rest

• Nonconforming or improperly tendered goods must be rejected within a reasonable time after their delivery or tender

• The seller or lessor must be notified of the rejection

• If the buyer or lessee chooses to reject the goods, he or she must identify defects that are ascertainable by reasonable inspection

• Any buyer or lessee who rightfully rejects goods is entitled to reimbursement from the seller or lessor for reasonable expenses incurred in holding, storing, reselling, shipping, and otherwise caring for the rejected goods

Right to Recover Goods from an Insolvent Seller or Lessor [Buyer and Lessee Remedies]

• Right to recover goods from an insolvent seller or lessor is the right of a buyer who has wholly or partially paid for goods before they are received to recover the goods from a seller who becomes insolvent within ten days after receiving the first payment

  • This remedy is often referred to as capture

• To do so, the buyer or lessee must tender the unpaid portion of the purchase price or rent due under the sales or lease contract

• Only conforming goods that are identified in the contract may be recovered

Right to Obtain Specific Performance [Buyer and Lessee Remedies]

• Right to obtain specific performance is the right of a buyer or lessee of goods to obtain the goods from a seller or lessor if the goods are unique

• Specific performance is a remedy that orders the breaching party to perform the acts promised in the contract

  • Specific performance is usually awarded in cases in which the subject matter is unique, such as in contracts involving land, heirlooms, and paintings

Right to Replevy Goods [Buyer and Lessee Remedies]

• Right to replevy (recover) goods is the right of a buyer or lessee to recover goods from a seller or lessor who is wrongfully withholding the goods

  • The buyer or lessee must show that he or she was unable to cover or that attempts at cover will be unavailing

  • Thus, the goods must be scarce but not unique

Right to Cancel a Contract [Buyer and Lessee Remedies]

• Right to cancel a contract is the right of a buyer or lessee of goods if a seller or lessor fails to deliver conforming goods or repudiates the contract; The right of a seller or lessor of goods if the buyer or lessee breaches the contract by rejecting or revoking acceptance of the goods, failing to pay for the goods, or repudiating all or any part of the contract

• The contract may be canceled with respect to the affected goods, or if there is a material breach, the whole contract may be canceled

• A buyer or lessee who rightfully cancels a contract is discharged from any further obligations on the contract and retains his or her rights to other remedies against the seller or lessor

Right to Cover [Buyer and Lessee Remedies]

• Right to cover is the right of a buyer or lessee to purchase or lease substitute goods if a seller or lessor fails to make delivery of the goods or repudiates the contract or if the buyer or lessee rightfully rejects the goods or justifiably revokes their acceptance

• The buyer’s or lessee’s cover must be made in good faith and without unreasonable delay

• If the exact commodity is not available, the buyer or lessee may purchase or lease any commercially reasonable substitute

• A buyer or lessee who rightfully covers may sue the seller or lessor to recover as damages the difference between the cost of cover and the contract price or rent

• The buyer or lessee may also recover incidental and consequential damages, less expenses saved (such as delivery costs)

Right to Recover Damages for Nondelivery or Repudiation [Buyer and Lessee Remedies]

• Right to recover damages for nondelivery or repudiation is the right of the buyer or lessee of goods to recover damages if a seller or lessor fails to deliver the goods or repudiates the sales or lease contract

• The measure of damages is the difference between the contract price (or original rent) and the market price (or rent) at the time the buyer or lessee learned of the breach

• Incidental and consequential damages, less expenses saved, can also be recovered

• Example Trader​ Bill's contracts to purchase​ 1,000 bushels of organic brussels sprouts from Illinois Farms​ $20,000. The contract requires delivery on September 1. If Illinois Farms does not deliver the​ 1,000 bushels of organic brussels sprouts by September​ 1, Trader​ Bill's has the right to cover by purchasing very similar organic brussels sprouts from another farm and would be entitled to recover the cost of the brussels sprouts in excess of​ $20,000 from Illinois Farms

Right to Recover Damages for Accepted Nonconforming Goods [Buyer and Lessee Remedies]

• Right to recover damages for accepted nonconforming goods is the right of a buyer or lessee of goods who has accepted nonconforming goods to recover damages from the breaching seller or lessor

• The buyer or lessee must notify the seller or lessor of the nonconformity within a reasonable time after the breach was or should have been discovered

• Failure to do so bars the buyer or lessee from any recovery

• If the buyer or lessee accepts nonconforming goods, he or she may deduct all or any part of damages resulting from the breach from any part of the purchase price or rent still due under the contract

Additional Performance Issues

• Assurance of Performance

• UCC Statute of Limitations

• Agreements Affecting Remedies

• Liquidated Damages

Assurance of Performance

• Each party to a sales or lease contract expects that the other party will perform its contractual obligations

  • If one party to a contract has reasonable grounds to believe that the other party either will not or cannot perform its contractual obligations, an adequate assurance of performance may be demanded in writing

    • Adequate assurance of performance from the other party if there is an indication that a contract will be breached by that party

• Performance may be suspended until adequate assurance of due performance is received from the other party

UCC Statute of Limitations

• The UCC statute of limitations is a rule that provides that an action for breach of any written or oral sales or lease contract must commence within 4 years after the cause of action accrues

  • Parties may reduce time to 1 year

  • Parties cannot extend the time beyond 4 years

Agreements Affecting Remedies

• The parties to a sales or lease contract may agree on remedies in addition to or in substitution for the remedies provided by the UCC

• The parties may limit the buyer’s or lessee’s remedies to repair and replacement of defective goods or parts or to the return of the goods and repayment (refund) of the purchase price or rent

• The remedies agreed on by the parties are in addition to the remedies provided by the UCC unless the parties expressly provide that they are exclusive

• If an exclusive remedy fails in its essential purpose (e.g., there is an exclusive remedy of repair, but there are no repair parts available), any remedy may be had, as provided in the UCC

Liquidated Damages

• Liquidated damages are damages that will be paid upon a breach of the contract that are established in advance

  • Preestablished damages

  • Substitute for actual damages

• In a sales or lease contract, liquidated damages are valid if they are reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy

UCC Doctrine of Unconscionability

• UCC Article 2 (Sales) and Article 2A (Leases) have adopted the equity doctrine of unconscionability, which, if applicable, will cause the contract to not be enforceable

• To prove unconscionability, there must be proof that:

  • The parties had substantially unequal bargaining power

  • The dominate party misused its power in contracting

  • It would be manifestly unfair or oppressive to enforce the contract against the weaker party

• If a court finds that a contract or any clause in a contract is unconscionable, the court may refuse to enforce the contract, it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result