LEGL-2064 - Chapter 14, Section 4: Sales and lease contracts

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. • The UCC permits the breaching party to "retract" his or her repudiation. 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 [UCC 2-611, 2A-403]

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

• Character • Market value • Use [UCC 2-105(6), 2A-103(1)(c)]

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. 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. Even if the contract time for performance has expired, the seller or lessor can still cure if he or she had reasonable grounds to believe that the nonconforming tender would be acceptable to the buyer or lessee [UCC 2-508(2), 2A-513(2)] The right to cure substantially restricts the buyer's or lessor's right to reject goods. To reject, the buyer or lessee must inform the seller or lessor of the particular defect; otherwise, the buyer or lessee cannot later assert the defect as a defense if the defect is one that the seller or lessor could have cured.

Because of the rigidity of the perfect tender rule,several exceptions to the rule have been created.

1. Exceptions to the perfect tender rule may be established by agreement. An example would be that 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. 2. 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 (unless the contract states otherwise). 3. The seller or lessor has a right to attempt to "cure" (repair, adjust, or replace) a defect when the following are true 4. 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 [UCC 2-615, 2A-405]. Commercial impracticability does not extend to any problems that could have been foreseen at the time the contract was made. An example would be an increase in cost resulting from inflation• If the unforeseen event only partially affects the capacity of the seller or lessor to tender total performance, the seller or lessor is required to distribute any remaining goods or deliveries fairly and reasonably among the parties to whom it is contractually obligated [UCC 2-615(b), 2A-405(b)]. The buyer or lessee must receive notice of the allocation and has the right to accept or reject it [UCC 2-615(c), 2A-405(c)]. 5. If 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 [UCC 2-613, 2A-221]. 6. 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 performance without liability until such assurance is received. 7. 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 or suspend performance without liability and hold the uncooperative party in breach [UCC 2-311(3)]

Under a shipment contract, unless otherwise agreed, the seller must do the following:

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. Examples include certain types of goods that need refrigeration in transit. 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 [UCC 2-504].

After having had a reasonable opportunity to inspect the goods, the buyer or lessee can demonstrate acceptance in any of the following ways:

1. The buyer or lessee indicates (by words or conduct) to the seller or lessor that the goods are conforming or that he or she 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 he or she performs any act inconsistent with the seller's ownership [UCC 2-606(1)(c)].

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)]

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] 3. In either situation, the non-breaching party may suspend performance.

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. A tender of nonconforming goods would automatically constitute a breach of contract. Under the Uniform Commercial Code, the rule has been greatly modified. The UCC preserves the rule by providing that if goods or tender of delivery fails in any respect to conform to the contract, the buyer or lessee may accept the goods, reject the entire shipment, or accept part and reject part [UCC 2-601, 2A-509]. However, if the goods conform to the perfect tender rule in every respect, the buyer or lessee does not have a right to reject the goods.

Conforming goods

Goods that conform to contract specifications.

Partial acceptance

If some of the goods delivered do not conform to the contract and the seller or lessor has failed to cure, the buyer or lessee can make a partial acceptance [UCC 2-601(c), 2A-509(1)]. A buyer or lessee cannot accept less than a single commercial unit, however. 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. Some examples include a machine, a suite of furniture, and a bale.

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.

Place of delivery

The buyer and seller (or lessor and lessee) may agree that the goods will be delivered to a particular destination where the buyer or lessee will take possession.

Obligations of the buyer or lessee

The main obligation of the buyer or lessor under a sale or lease contract is to 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.

Performance obligations in sales and lease contracts

The performance that is required of the parties under a sale or lease contract consists of the duties and obligations each party has under the terms of the contract. The basic obligation of the seller or lessor is to transfer and deliver conforming goods. The basic obligation of the buyer or lessee is to accept and pay for conforming goods in accordance with the contract [UCC 2-301, 2A- 516(1)]. The 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)].

Tender of delivery

Under the Uniform Commercial Code, 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 [UCC 2-503(1), 2A-508(1)].

Delivery via carrier

• In shipment contracts, the seller fulfills the obligation to deliver the goods through either a destination contract or a shipment contract. In a destination contract, the seller agrees to deliver conforming goods to the buyer at a particular destination. Furthermore, the seller must give the buyer appropriate notice and any necessary documents to enable the buyer to obtain delivery from the carrier [UCC 2-503]. • A shipment contract requires or authorizes the seller to ship goods by a carrier, rather than to deliver them at a particular destination [UCC 2-319, 2-509(1)(a)]. • If the seller does not make a reasonable contract for transportation or notify the buyer of the shipment, the buyer can reject the goods, but only if a material loss or a significant delay results.

Payment

• 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)]. • 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].

The goods must be:

• Tendered at a reasonable hour • Held at the buyer's disposal for a reasonable length of time

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

• Tendered for delivery 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 [UCC 2-307, 2-612, 2A- 510]

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. This right allows the buyer or lessee to verify that the goods tendered or delivered conform to the contract. If the goods are not as ordered, the buyer or lessee has no duty to pay [UCC 2-513(1), 2A-515(1)]. • 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 [UCC 2-513(2)].