Chapter 20 - Remedies for Breach of Sales and Lease Contracts

Case 20.1 Acceptance of Goods: Accent Commercial Furniture, Inc. v. P. Schneider & Associates, PLLC

- 110 A.D.3d 1415 (2013) - Issue a. Does Schneider owe Accent the remaining balance? - Decision a. The court held that Schneider owed Accent the remaining balance of the purchase price. Accent installed wall panels for Schneider and used nonconforming goods (which were later replaced). Schneider never paid Accent, arguing contract was breached due to nonconforming goods. Schneider never rejected them, so he accepted them and had to pay

Parties to a sales or lease contract owe

- A duty to perform the obligations specified in their agreement

Example of the Perfect Tender Rule

- A sales contract requires the Lawn Mower Company to deliver 100 lawn mowers to Outdoor Store - When the buyer inspects the delivered goods, it is discovered that 80 lawn mowers conform to the contract and that 20 lawn mowers do not conform - Pursuant to the perfect tender rule, the buyer Outdoor Store may reject the entire shipment of lawn mowers. In the alternative, the buyer Outdoor Store can accept the 80 conforming lawn mowers and reject the 20 nonconforming lawn mowers. As another alternative, the buyer Outdoor Store may accept the whole shipment, both the conforming and the nonconforming lawn mowers, and seek remedies from the seller Lawn Mower Company for the 20 nonconforming lawn mowers

Lost Volume Seller

- A seller who can recover lost profits from a defaulting buyer even though the seller sold the item to another buyer, where the seller has other similar items and would have made two sales had the original buyer not defaulted - Second buyer would've bought something else, hence the seller lost out on profit since the first buyer did not pay for the goods

Acceptance

- 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 - 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 - Fails to effectively reject the goods within a reasonable time after their delivery or tender by the seller - Acceptance also occurs if a buyer acts inconsistently with the seller's ownership rights in the goods (if the buyer resells the goods delivered by the seller) - Buyers and lessees may only accept delivery of a commercial unit: a unit of goods that commercial usage deems is a single whole for purpose of sale. Acceptance of a part of any commercial unit is acceptance of the entire unit - Example: A commercial unit may be a single article (e.g., a machine), a set of articles (e.g., a suite of furniture or an assortment of sizes), a quantity (e.g., a bale, a gross, or a carload), or any other unit treated in use or in the relevant market as a single whole

Obligation

- Action a party to a sales or lease contract is required by law to carry out

Revocation of Acceptance

- Buyer can revoke acceptance if a. Goods are nonconforming b. Nonconformity substantially impairs value of goods to the buyer or lessee AND - One of the following a. Seller's promise to timely cure of the nonconformity is 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 buyer that goods were conforming - Acceptance is revoked after the buyer already accepted goods - 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 (e.g., before perishable goods spoil)

Right of Inspection

- Buyer has the right to inspect goods that are tendered, delivered, or identified in a sales or lease contract before accepting or paying for them - Buyer may reject nonconforming goods, in which case the cost of inspection can be recovered from the seller - Parties may agree to time, place, and manner of inspection - If a contract is silent, inspection must occur at reasonable time and place, in a reasonable manner - Reasonableness depends on the circumstances of the case, common usage of trade, prior course of dealing between the parties, and similar conditions. If the goods conform to the contract, the buyer pays for the inspection - Inspection needs to be within 30 days

Liquidated Damages

- Damages that will be paid upon a breach of the contract that are established in advance a. Preestablished damages b. 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 - Same thing as in common law

Payment

- Due from buyer when and where goods are delivered, even if the place of delivery is the same as the place of shipment - Goods can be paid in any manner acceptable in ordinary course of business (e.g., check, credit card) unless the seller demands payment in cash or unless the contract names a specific form of payment - 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 - Buyers often purchase goods on credit extended by the seller. Unless the parties agree to other terms, the credit period begins to run from the time the goods are shipped. A lessee must pay lease payments in accordance with the lease contract

Unconscionability

- Equity doctrine where a court may determine as a matter of law that a contract is an unconscionable contract - To prove unconscionability, there must be proof that the parties had substantially unequal bargaining power, that the dominant party misused its power in contracting, and that it would be manifestly unfair or oppressive to enforce the contract - This sometimes happens where a dominant party uses a preprinted form contract and the terms of the contract are unfair or oppressive - 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 - Unconscionability is sometimes found in a consumer lease if the consumer has been induced by unconscionable conduct to enter into the lease - The doctrine of unconscionability applies to online contracts as well as traditional contracts - Same thing as the common law version

Breach

- Failure of a party to perform an obligation in a sales or lease contract

Right to Cancel a Contract

- If a seller fails to deliver conforming goods or repudiates the contract, the buyer may cancel the sales or lease contract - The buyer or lessee can also cancel a sales or lease contract if the buyer or lessee rightfully rejects the goods or justifiably revokes acceptance of the goods - 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 Recover Damages for Nondelivery or Repudiation

- If a seller or lessor fails to deliver the goods or repudiates the sales of lease contract, the buyer or lessee has the right to recover damages - 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: Fresh Foods Company contracts to purchase 10,000 bushels of soybeans from Sunshine Farms for $14 per bushel. Delivery is to occur on August 1. On August 1, the market price of soybeans is $24 per bushel. Sunshine Farms does not deliver the soybeans to Fresh Foods. Fresh Foods decides not to cover and to do without the soybeans. Fresh Foods sues Sunshine for market value minus the contract price damages. It can recover $100,000 ($24 market price − $14 contract price = $10 × 10,000 bushels) plus incidental damages less expenses saved because of Sunshine's breach. Fresh Foods cannot recover consequential damages because it did not attempt to cover

Destruction of Goods

- If goods identified in a sales or lease contract are totally destroyed without fault of either party before the risk of loss passes to either party, 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 treat the contract as void or to accept the goods at a reduced purchase price or rent to compensate for damages - Example: A buyer contracts to purchase a sofa from a seller. The seller agrees to deliver the sofa to the buyer's home. The truck delivering the sofa is hit by an automobile, and the sofa is totally destroyed. Because the risk of loss has not passed to the buyer, the contract is voided, and the buyer does not have to pay for the sofa

Right to Cancel a Contract

- 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

Perfect Tender Rule

- If the goods or tender of a delivery fail in any respect to conform to the contract, the buyer may opt to a. Reject the entire shipment b. Accept the whole shipment c. Reject part and accept part of the shipment - If a buyer accepts nonconforming goods, the buyer may seek remedies against the seller - Differs from common law where material and minor breach exists

Right to Recover Damages for Accepted Nonconforming Goods

- Must notify the seller within a reasonable time after discovery (or after it should've been discovered) - Failure to do so bars the buyer or lessee from any recovery - A buyer or lessee may accept nonconforming goods from a seller or lessor. Even with acceptance, the buyer or lessee still has the right to recover damages for accepted nonconforming goods and any loss resulting from the seller's or lessor's breach. Incidental and consequential damages may also be recovered. 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 - Example: Retail Clothing contracts to purchase 1,000 designer dresses for $500 per dress from Manhattan Loft, a women's clothes designer and manufacturer. Retail Clothing pays for the dresses prior to delivery. After the dresses are delivered, Retail Clothing discovers that 200 of the dresses have flaws in them. Retail Clothing may accept these nonconforming dresses and sue Manhattan Loft for reasonable damages resulting from the nonconformity

Tender of Delivery

- Obligation of a seller to transfer and deliver goods to the buyer or lessee in accordance with a sales or lease contract a. Put and hold conforming goods at the buyer's or lessee's disposition b. Give the buyer or lessee any notification reasonably necessary to enable delivery of goods - Seller's or lessor's basic obligation is the tender of delivery - The parties may agree as to the time, place, and manner of delivery. If there is no special agreement, tender must be made at a reasonable hour, and the goods must be kept available for a reasonable period of time - Example: The seller cannot telephone the buyer at 12:01 a.m. and say that the buyer has 15 minutes to accept delivery

Agreements Affecting Remedies

- Parties may agree to remedies in addition to (or in substitution for) those available under the UCC, or agree to limit remedies - 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

Adequate Assurance of Performance

- Party with grounds to believe that the other party will not perform may demand adequate assurance of performance - Adequate assurance of performance: adequate assurance of performance in writing 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 - Example: A buyer contracts to purchase 1,000 bushels of wheat from a farmer. The contract requires delivery on September 1. In July, the buyer learns that floods have caused substantial crop loss in the area of the seller's farm. The farmer receives the buyer's written demand for adequate assurance on July 15. The farmer fails to give adequate assurance of performance. The buyer may suspend performance and treat the sales contract as having been repudiated

Right to Replevy (recover) Goods

- Replevin: an action by a buyer or lessor to recover scarce goods wrongfully withheld by a seller or lessor - 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 - Replevin actions are available only as to goods identified in a sales or lease contract, a form of specific performance

Installment Contracts

- Requires or authorizes goods to be delivered and accepted in separate lots - Entire contract can be rejected only if the nonconformity or default with respect to any installment or installments substantially impairs the value of the entire contract - Example: A contract in which the buyer orders 1,000 widgets to be delivered in four equal installments is an installment contract. Can't reject entire lot because 1 installment was nonconforming

Right to Reject Nonconforming Goods or Improperly Tendered Goods

- Right of a buyer to reject goods that do not conform to a contract in any way - 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 (with a reason why). The buyer or lessee must hold any rightfully rejected goods with reasonable care for a reasonable time - 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

- 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 - 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. Often referred to as capture - Better than collecting money through bankruptcy or having another seller start the production process from scratch

Shipment Contract

- Sales contract that requires the seller to send the goods to the buyer but not to a specifically named destination - Requires seller to ship the goods to the buyer via a common carrier - 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

Right to Reclaim Goods

- Right of a seller or lessor to demand the return of goods from the buyer or lessee under specified situations - In a sale transaction, the seller or lessor has the right to reclaim goods in two situations a. 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 b. If the buyer misrepresented solvency in writing within 3 months before delivery or paid for goods in a cash sale with a check that bounces, the seller may reclaim the goods at any time. A lessor may reclaim goods in the possession of the lessee if the lessee is in default of the contract - Better than trying to collect reduced payment through bankruptcy. After getting the goods back, you can sell them to a different buyer for full value-much better option

Right to Dispose of Goods

- Right of a seller to dispose of goods in a good faith and commercially reasonable manner - If a buyer or lessee breaches or repudiates a sales or lease contract before the seller or lessor has delivered the goods, the seller or lessor may resell or release the goods and recover damages from the buyer or lessee - The right to dispose of goods also arises if the seller or lessor has reacquired the goods after stopping them in transit - The seller or lessor may recover any damages incurred on the disposition of the goods. In the case of a sales contract, damages are defined as the difference between the disposition price and the original contract price. In the case of a lease contract, damages are the difference between the disposition price and the rent the original lessee would have paid. Any profit made on the resale or release of the goods does not revert to the original buyer or lessee if the seller or lessor disposes of the goods at a higher price than the buyer or lessee contracted to pay - 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

Right to Recover Damages for Breach of Contract

- 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 a. Any damages not previously mentioned b. Any damages additionally incurred - 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 any lost profits that would have resulted from the full performance of the contract plus an allowance for reasonable overhead and incidental damages

Right to Recover the Purchase Price or Rent

- Right of a seller to recover the contracted-for purchase price or rent from the buyer a. If the buyer fails to pay for accepted goods b. If the buyer breaches the contract after goods were identified and the seller cannot dispose of the goods c. 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 Withhold Delivery

- 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 - Available if the buyer or lessee wrongfully rejects or revokes acceptance of the goods, fails to make a payment when due, or 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

- 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 - In these circumstances, the delivery can be stopped only if it constitutes a carload, a truckload, a planeload, or a larger express or freight shipment. 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

Cover

- Right of the buyer to find substitute goods somewhere else when the seller breaches the contract - If you cover, you can recover damages that may have occurred from the difference between the new price and the original price

Remedies that Buyers and Sellers Share

- Right to cancel a contract - Right to collect monetary damages - Claiming goods when the other party is insolvent

Buyer/Lessee 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 (recover) goods - Right to cancel a contract - Right to recover damages for nondelivery or repudiation - Right to recover damages for accepted nonconforming goods

Seller/Lessor 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

UCC Statute of Limitations

- Rule that provides that an action for breach of any written or oral sales or lease contract must commence within four years after the cause of action accrues - Parties may reduce time to one year - Parties cannot extend the time beyond four years - Example: A buyer contracts to purchase cattle from a seller with a delivery date of July 1, 2017. The seller breaches the contract and does not deliver the cattle on July 1, 2017. Under the UCC four-year statute of limitations, the buyer has until July 1, 2021, to bring a lawsuit against the seller for breach of contract. If the buyer waits until after this date has passed then the buyer loses the right to sue the seller. The parties could have included a provision in their contract to reduce the limitations period to one year, or July 1, 2018

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

Unfinished Goods

- Seller may choose to cease manufacturing the goods and resell them for scrap or salvage value OR complete manufacturing and resell, release, or otherwise dispose of them to another party - Sometimes a sales or lease contract is breached or repudiated before the goods are finished - The seller or lessor may recover damages from the breaching buyer or lessee

Right to Obtain Specific Performance

- Specific performance: decree of the court that orders a seller or lessor to perform his or her obligations under the contract - If goods are unique or the remedy at law is inadequate. Specific performance is usually used to obtain possession of works of art, antiques, rare coins, and other unique items - Example: A buyer enters into a sales contract to purchase a specific Rembrandt painting from a seller for $25 million. When the buyer tenders payment, the seller refuses to sell the painting to the buyer. The buyer may bring an equity action to obtain a decree of specific performance from the court, which orders the seller to sell the painting to the buyer

More on Perfect Tender Rule

- 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 - UCC limits the ability to declare immediate breach. If goods are nonconforming, innocent party can declare breach on due date - The seller has the right to attempt to cure a nonconformity where it can be shown that the seller/lessor had reasonable grounds to be believe that what they tendered was consistent with the requirements of the contract - Parties can change perfect tender, create a "margin of error" for conforming goods

Place of Delivery

- The UCC stipulates place of delivery based on the following rules a. Noncarrier cases b. Carrier cases 1. Shipment contract 2. Destination contract - The place where goods subject to a sales or lease contract are to be delivered to the buyer or lessee - These are used when the contract doesn't expressly state the place of delivery

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 - These remedies are designed to place the injured party in as good a position as if the breaching party's contractual obligations were fully performed - The best remedy depends on the circumstances of the case.

Good Faith and Reasonableness

- 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: good faith and reasonableness - Good faith: honesty in the conduct or transaction concerned - Reasonableness: a word used throughout the UCC to establish the duties of performance by the parties to sales and lease contracts - "Every contract or duty within this act imposes an obligation of good faith in its performance or enforcement." Thus, both parties owe a duty of good faith to perform a sales or lease contract. Merchants are held to a higher standard of good faith than nonmerchants - Commercial reasonableness: a term used in the UCC that applies to merchants in the performance of their duties under sales and lease contracts - The concepts of good faith and reasonableness extend to the "spirit" of a contract as well as the contract terms

Capture

- The right of a buyer of lessee to purchase or rent substitute goods if the 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 OR - The right to retain already purchased goods from an insolvent seller (seems like the correct definition)

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 - Example: If parties contract regarding the sale of wheat that is located in a silo, the silo is the place of delivery