Sales and Lease Contracts: Performance and Breach (Chapter 22)

Performance and Breach of Sales and Lease Contracts

Chapter Introduction

• The performance required under a sales or lease contract consists of the duties and obligations each party has as per the contract terms.
• Seller/lessor's basic obligation: transfer and deliver conforming goods.
• Buyer/lessee's basic obligation: accept and pay for conforming goods per the contract. [UCC 2–301, 2A–516(1)]
• Obligations of good faith and commercial reasonableness underlie every sales and lease contract.
• For a merchant, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade [UCC 2–103(1)(b)].
• Difficult circumstances may lead to a breach of contract.
• When a breach occurs, the aggrieved party seeks remedies.
• UCC remedies are cumulative, not limited to one exclusive remedy.

Obligations of the Seller or Lessor

• The seller/lessor's basic duty is to deliver goods as called for under the contract to the buyer/lessee.
• To fulfill the contract, the seller/lessor must deliver or tender delivery of conforming goods.
• Conforming goods: goods that conform to contract specifications.

Tender of Delivery

• Tender of delivery: a seller’s or lessor’s act of placing conforming goods at the disposal of the buyer or lessee and giving reasonable notification to enable the buyer/lessee to take delivery [UCC 2–503(1), 2A–508(1)].
  • Goods must be tendered at a reasonable hour.
  • Goods must be kept available for a reasonable time to enable the buyer to take possession [UCC 2–503(1)(a)].
  • Tendered in a single delivery, not in installments [UCC 2–307, 2–612, 2A–510].

Place of Delivery

• The buyer and seller (or lessor and lessee) may agree on a particular delivery destination.
• If the contract doesn’t specify the delivery location, it will be:
  • The seller’s place of business.
  • The seller’s residence if there’s no business location [UCC 2–308(a)].
  • The location of the goods if both parties know they are located elsewhere [UCC 2–308(b)].

Delivery via Carrier

• In carrier contracts, the seller delivers goods through a shipment contract or a destination contract.

Shipment Contracts

• A shipment contract requires the seller to ship goods by a carrier, not deliver them at a particular destination [UCC 2–319, 2–509(1)(a)].
• Unless agreed otherwise, the seller must:
  • Place the goods in the hands of the carrier.
  • Make a reasonable transportation contract according to the nature and value of the goods.
    • Example: Goods needing refrigeration.
  • Obtain and promptly deliver necessary documents for the buyer to obtain possession.
  • Promptly notify the buyer that shipment has been made [UCC 2–504].
• If the seller doesn’t make a reasonable transport contract or notify the buyer, the buyer can reject the goods if a material loss or significant delay results.

Destination Contracts

• In a destination contract, the seller delivers conforming goods to the buyer at a specified destination.
  • The goods must be tendered at a reasonable hour.
  • Held at the buyer’s disposal for a reasonable time.
  • The seller must give the buyer appropriate notice and necessary documents [UCC 2–503].

The Perfect Tender Rule

• Perfect tender rule: A common law rule requiring the seller to deliver goods that perfectly conformed to the contract.
  • A tender of nonconforming goods automatically breached the contract.
• The UCC modifies this rule significantly.
• The UCC allows the buyer/lessee to:
  • Accept the goods.
  • Reject the entire shipment.
  • Accept part or reject part.
• If the goods conform perfectly, the buyer/lessee cannot reject them.

Exceptions to the Perfect Tender Rule

• Several exceptions have been created due to the rigidity of the perfect tender rule.

Agreement of the Parties

• Exceptions can be established by agreement.
  • Example: Defective goods won’t be rejected if the seller can repair/replace them in a reasonable time.

Cure

• Cure: the right of the seller to repair, adjust, or replace defective goods [UCC 2–508, 2A–513].
• The seller can attempt to cure if:
  • A delivery is rejected due to nonconformity.
  • The time for performance hasn’t expired.
  • The seller gives timely notice of intent to cure.
  • The cure can be made within the contract time.
• The seller can cure even after the contract time if they had reasonable grounds to believe the nonconforming tender would be acceptable [UCC 2–508(2), 2A–513(2)].
  • Example: A price allowance.
• The right to cure restricts the buyer’s right to reject.
• To reject, the buyer must inform the seller of the specific defect so the seller can cure it.

Substitution of Carriers

• If an agreed-on carrier is impracticable, and a commercially reasonable substitute is available, the substitute performance is sufficient [UCC 2–614(1)].
• The seller must arrange for a substitute carrier and covers additional shipping costs unless stated otherwise.

Installment Contracts

• Installment contract: A contract requiring delivery in separate lots to be accepted and paid for separately.
• A buyer can reject an installment only if the nonconformity substantially impairs the installment's value and cannot be cured [UCC 2–307, 2–612(2), 2A–510(1)].
• If the buyer accepts a nonconforming installment without notifying the seller of rejection, the contract is reinstated [UCC 2–612(3), 2A–510(2)].
• The entire contract is breached only when one or more nonconforming installments substantially impair the value of the whole contract.

Commercial Impracticability

• When unforeseen events make performance commercially impracticable, the seller must notify the buyer of the delay [UCC 2–615, 2A–405].
• Commercial impracticability doesn’t cover foreseeable problems.
  • Example: Inflation.
• If the unforeseen event partially affects the seller's capacity, the seller must distribute remaining goods fairly [UCC 2–615(b), 2A–405(b)].
• The buyer must receive notice of the allocation and can accept or reject it [UCC 2–615(c), 2A–405(c)].

Destruction of Identified Goods

• If unexpected events destroy goods through no fault of either party before risk passes, and the goods were identified, the parties are excused [UCC 2–613, 2A–221].
• If partially destroyed, the buyer can:
  • Treat the contract as void.
  • Accept the damaged goods with a price reduction.

Assurance and Cooperation

• If one party believes the other won’t perform, they can demand assurance of performance and suspend their own performance.
• If one party’s performance depends on the other’s cooperation, and cooperation is lacking, the first party can:
  • Proceed in any reasonable manner.
  • Suspend performance without liability and hold the uncooperative party in breach [UCC 2–311(3)].

Obligations of the Buyer or Lessee

• The main obligation is to pay for the goods tendered.
• Upon adequate tender, the buyer must accept and pay for the goods per the contract.

Payment

• Unless agreed otherwise, payment is due at the time and place of receipt [UCC 2–310(a), 2A–516(1)].
• For credit sales, payment follows credit terms from the shipment date [UCC 2–310(d)].
• Lessees make lease payments as specified in the contract [UCC 2A–516(1)].
• Payment can be made by agreed means, like cash or other commercially acceptable methods.
• If the seller demands cash, they must allow the buyer reasonable time to obtain it [UCC 2–511].

Right of Inspection

• Unless agreed otherwise or for C.O.D., the buyer can inspect goods before payment.
• This verifies conformity to the contract.
• No duty to pay if goods are not as ordered [UCC 2–513(1), 2A–515(1)].
• Inspection occurs at any reasonable time and place.
• The buyer bears inspection costs but can recover them if the goods are nonconforming [UCC 2–513(2)].

Acceptance

• After a reasonable inspection opportunity, acceptance is demonstrated by:
  • Indicating the goods conform or will be retained despite nonconformity [UCC 2–606(1)(a), 2A–515(1)(a)].
  • Failing to reject within a reasonable time [UCC 2–602(1), 2–606(1)(b), 2A–515(1)(b)].
  • Performing any act inconsistent with the seller’s ownership [UCC 2–606(1)(c)].

Partial Acceptance

• If some goods don’t conform and the seller hasn’t cured, the buyer can make a partial acceptance [UCC 2–601(c), 2A–509(1)].
• The buyer can't accept less than a single commercial unit.
• A commercial unit is viewed as a “single whole” for sale purposes.
  • Examples: A machine, a suite of furniture, a bale.
• A commercial unit cannot be divided without impairing its character, market value, or use [UCC 2–105(6), 2A–103(1)(c)].

Anticipatory Repudiation

• Anticipatory repudiation: a breach where one party communicates an intention not to perform before the performance time.

Suspension of Performance Obligations

• The non-breaching party can:
  • Treat the repudiation as a final breach and pursue a remedy.
  • Wait to see if the repudiating party honors the contract [UCC 2–610, 2A–402].
  • In either case, the non-breaching party can suspend performance.

A Repudiation May Be Retracted

• The breaching party can retract their repudiation unless the other party has:
  • Canceled or materially changed position.
  • Indicated the repudiation is final [UCC 2–611, 2A–403].

Remedies of the Seller or Lessor

• Remedies depend on the circumstances at the time of breach:
  • Which party has possession.
  • Whether the goods are in transit.
  • Whether the buyer has rejected or accepted the goods.

When the Goods Are in the Possession of the Seller or Lessor

• If the buyer breaches before delivery, the seller can:
  • Cancel the contract.
  • Withhold delivery.
  • Resell the goods and sue for damages.
  • Sue for the purchase price or lease payments.
  • Sue for damages for non-acceptance.

The Right to Cancel the Contract

• The seller can cancel if the buyer breaches [UCC 2–703(f), 2A–523(1)(a)].
• The seller must notify the buyer, discharging their remaining obligations.
• The buyer remains in breach, and the seller can pursue UCC remedies.

The Right to Withhold Delivery

• Sellers can withhold delivery when the buyers are in breach [UCC 2–703(a), 2A–523(1)(c)].
  • This applies if the buyer wrongfully rejected goods, failed to pay, repudiated the contract, or is insolvent.
  • Insolvency exception: payment in cash required [UCC 2–702(1), 2A–525(1)].

The Right to Resell or Dispose of the Goods

• The seller can resell or dispose of goods if the buyer breaches while the seller possesses them.

• Resale must be in good faith and commercially reasonable.

• The seller must give the original buyer notice unless the goods are perishable [UCC 2–706(2), (3)].

• The seller can:

  • Retain any profits made as a result of the sale
  • Hold the buyer liable for any loss [UCC 2–703(d), 2–706(1), 2A–523(1)(e), 2A–527(1)].

• In lease transactions, the lessor can lease to another party and recover damages.

  • Damages include unpaid lease payments up to the new lease.
  • The lessor can also recover any deficiency between the original and new lease payments, plus incidental damages [UCC 2A–527(2)].

• For unfinished goods, the seller can:

  • Cease manufacturing and resell for scrap value.
  • Complete manufacture and resell, holding the buyer liable for any deficiency.
  • The seller must use reasonable commercial judgment to mitigate loss [UCC 2–704(2), 2A–524(2)].

The Right to Recover the Purchase Price or Lease Payments Due

• The seller can recover the purchase price or lease payments, plus incidental damages [UCC 2–709(1), 2A–529(1)].
• If the seller can’t resell the goods and sues for the price, the goods must be held for the buyer unless resale is possible.
• If resold before judgment, the net proceeds are credited to the buyer because of the duty to mitigate damages.

The Right to Recover Damages for the Buyer’s Non-acceptance

• If the buyer repudiates or refuses goods, the seller can sue for damages.
  • Damages usually equal the difference between the contract price and the market price at the time and place of tender [UCC 2–708(1), 2A–528(1)].
• If this measure is inadequate, the seller can recover lost profits, including allowances for overhead [UCC 2–708(2), 2A–528(2)].

When the Goods Are in Transit

• Goods are in transit when delivered to a carrier but not yet received by the buyer.

Effect of Insolvency and Breach

• If the seller learns of the buyer’s insolvency, they can stop delivery, regardless of quantity.
• If the buyer is in breach but not insolvent, the seller can stop delivery only for large shipments [UCC 2–705(1), 2A–526(1)].
  • Large shipments defined as at least a carload, truckload, or planeload.

Requirements for Stopping Delivery

• To stop delivery, the seller must timely notify the carrier to return or hold the goods.
• The carrier must hold and deliver per the seller’s instructions if there's sufficient time.
• The seller is liable for additional carrier costs [UCC 2–705(3), 2A–526(3)].
• The seller can stop delivery until:
  • The buyer receives the goods.
  • The carrier acknowledges the buyer’s rights.
  • A negotiable document of title has been transferred to the buyer [UCC 2–705(2)].
• Upon reclaiming the goods, the seller can pursue remedies available when the goods are in their possession.

When the Goods Are in the Possession of the Buyer or Lessee

• When the buyer breaches while possessing the goods, the seller can recover the purchase price or lease payments, plus incidental damages [UCC 2–709(1), 2A–529(1)].
• The seller may reclaim goods if the buyer is insolvent and received goods on credit [UCC 2–702(2)].
  • The demand must be within ten days of receipt.
• In a lease, the lessor may reclaim leased goods if the lessee fails to make payments [UCC 2A–525(2)].

Remedies of the Buyer or Lessee

• Remedies depend on the circumstances:
  • Whether the seller has refused to deliver conforming goods.
  • Whether the seller has delivered nonconforming goods.

When the Seller or Lessor Refuses to Deliver the Goods

• The buyer can:
  • Cancel the contract.
  • Obtain goods if the seller is insolvent.
  • Obtain specific performance for unique goods.
  • Buy substitute goods (cover) and recover damages.
  • Replevy goods held by a third party.
  • Sue for damages.

The Right to Cancel the Contract

• The buyer can cancel if the seller fails to deliver or repudiates the contract.
• The buyer is relieved of obligations but retains rights to other remedies [UCC 2–711(1), 2A–508(1)(a)].

The Right to Obtain Goods upon Insolvency

• If the buyer has paid for goods in the seller’s possession and the seller becomes insolvent, the buyer can obtain the goods if:
  • the seller became insolvent within ten days after receiving the first payment
  • the goods must be identified to the contract
  • The buyer pays any unpaid balance [UCC 2–502, 2A–522].

The Right to Obtain Specific Performance

• Specific performance is available if:
  • The goods are unique (e.g., artwork)
  • Monetary damages are inadequate [UCC 2–716(1), 2A–521(1)].

The Right to Cover

• Cover: A buyer’s purchase of substitute goods when the seller fails to deliver.
• If the cover cost exceeds the contract cost, the buyer can recover the difference, plus incidental and consequential damages [UCC 2–712, 2A–518].
• Available when:
  • The seller repudiates the contract.
  • The buyer rightfully rejects goods.
  • The buyer revokes acceptance

The Right to Replevy Goods

• Replevin: An action to recover specific goods wrongfully withheld.
• The buyer must show they couldn’t cover after a reasonable effort [UCC 2–716(3), 2A–521(3)].

The Right to Recover Damages

• If the seller repudiates or fails to deliver, the buyer can sue for damages.
• The recovery equals the difference between the contract price and the market price at the time the buyer learned of the breach.
  • Market price is determined at the place of delivery.
• The lessee recovers the difference between lease payments and the market lease payments at the time of breach.
  • Market lease payments are determined at the place of delivery.
• The buyer can also recover incidental and consequential damages less saved expenses [UCC 2–713, 2A–519].

When the Seller or Lessor Delivers Nonconforming Goods

• The buyer has remedies under the UCC.

The Right to Reject the Goods

• The buyer can reject all or any commercial unit of nonconforming goods [UCC 2–601, 2A–509].
  • The buyer may obtain cover or cancel the contract when rejecting the goods
  • The buyer may seek damages just as if the seller or lessor had refused to deliver the goods
• The buyer must reject within a reasonable time and notify the seller [UCC 2–602(1), 2A–509(2)].
• The buyer must designate defects that are ascertainable by reasonable inspection
  • Failure to do so precludes the buyer or lessee from using the defects to justify rejection or to establish breach if the seller or lessor could have cured the defects [UCC 2–605, 2A–514].
• If a merchant-buyer rightfully rejects goods and the seller has no agent at the location, the buyer must follow the seller’s reasonable instructions [UCC 2–603, 2A–511].
  • The buyer is entitled to reimbursement for expenses.
  • If no instructions are forthcoming and the goods are perishable or threaten to decline in value quickly, the buyer or lessee can resell the goods.
  • The buyer or lessee can take appropriate reimbursement and a selling commission (not to exceed 10 percent of the gross proceeds) [UCC 2–603 (1), (2); 2 A–511 (1)].
  • If the goods are not perishable, the buyer or lessee may either:
    • Store them for the seller or lessor
    • Reship them to the seller or lessor [UCC 2–604, 2 A–512]

Revocation of Acceptance

• The buyer can revoke acceptance if:
  • The nonconformity substantially impairs the value of the lot or unit and:
    • Acceptance was based on the assumption that the nonconformity would be cured but it has not been [UCC 2–608(1)(a), 2A–517(1)(a)].
    • The buyer's failure to discover the nonconformity was reasonably induced by the difficulty of discovery or by seller assurances [UCC 2–608(1)(b), 2A–517(1)(b)].
• Revocation is effective upon notice, which must occur:
  • Within a reasonable time after discovering grounds for revocation
  • Before the goods undergo substantial change not caused by their own defects [UCC 2–608(2), 2A–517(4)]
  • Once acceptance is revoked, the buyer can pursue remedies as if the goods had been rejected.

The Right to Recover Damages for Accepted Goods

• The buyer can keep nonconforming goods and recover damages [UCC 2–714(1), 2A–519(3)].
• The buyer must notify the seller of the breach within a reasonable time after discovery.
• Failure to provide notice bars the buyer from any remedy [UCC 2–607(3), 2A–516(3)].
• Damages generally equal the difference between the value of goods as accepted and their value as warranted [UCC 2–714(2), 2A–519(4)].
• The buyer is entitled to incidental and consequential damages [UCC 2–714(3), 2A–519].
• With notice, the buyer can deduct damages from payments still due [UCC 2–717, 2A–516(1)].

Additional Provisions Affecting Remedies

• Parties can vary their rights and obligations by contract.
  • i.e. provide for remedies in addition to or in lieu of those provided in the UCC.

Exclusive Remedies

• If a remedy is stated as exclusive, it is the sole remedy.
• When an exclusive remedy fails its essential purpose, the buyer can pursue other UCC remedies [UCC 2–719(2), 2A–503(2)].

Consequential Damages

• Consequential damages: indirect losses from a breach that were reasonably foreseeable (e.g., lost profits).
• The UCC allows parties to limit or exclude consequential damages unless unconscionable.

Statutes of Limitations

• The UCC has statutes of limitations for lawsuits.
• A buyer must file a breach of contract lawsuit within four years after the breach [UCC 2–725(1)].
• For breach of warranty, it’s four years from the delivery date.
• The parties can reduce this to not less than one year, but not extend it beyond four years [UCC 2–725(1), 2A–506(1)].
• The buyer must notify the seller of nonconforming goods within a reasonable time.
• Failure to notify bars any remedy [UCC 2–607(3)(a), 2A–516(3)].

Dealing with International Contracts

• Letters of credit are used to facilitate international business transactions.

Letter-of-Credit Transactions

• The issuer (bank) issues a letter of credit and verifies beneficiary performance.
• The account party (buyer) reimburses the issuer for payments to the beneficiary.

Payment under a Letter of Credit

• The issuer pays the beneficiary when they comply with the letter of credit terms.
• A letter of credit typically requires a bill of lading as proof of shipment.

The Value of a Letter of Credit

• Payment is made against presented documents, not underlying facts.
• Letters of credit protect both buyers and sellers.

Remedies for Breach of International Sales Contracts

• The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides remedies.
• Article 74 provides for money damages, including foreseeable consequential damages, on a contract’s breach.
• The measure of damages normally is the difference between the contract price and the market price of the goods.
• Under Article 79, the buyer is permitted to avoid obligations under the contract if the seller breaches the contract or fails to deliver the goods during the time specified in the contract or later agreed on by the parties.
• Under Article 64, the seller can avoid obligations under the contract if the buyer:
  • Breaches the contract
  • Fails to accept delivery of the goods
  • Fails to pay for the goods
• Article 28 allows for specific performance as a remedy.