Chapter 22: Performance and Breach of sales and lease Contracts

Right to Recover Damages for Accepted Goods

A buyer/lessee who has accepted nonconforming goods may keep the goods and recover damages [UCC 2-714(1), 2A-519(3)]. Seller/lessor of the breach must be notified within a reasonable time after the defect was/should have been discovered

Statute of Limitations

An action for breach of contract under the UCC must be commenced within four years after the cause of action accrues (occurs) [UCC 2-725(1)].

Substitution of Carriers

An agreed-on manner of delivery may become impracticable or unavailable through no fault of either party. If a commercially reasonable substitute is available, this substitute performance is sufficient tender to the buyer and must be used [UCC 2-614(1)]. Seller or lessor is required to arrange for a substitute carrier and is usually responsible for additional shipping costs (unless the contract states otherwise).

Destruction of Identified Goods

An unexpected event may totally destroy the goods through no fault of either party before risk passes to the buyer or lessee If the goods were identified at the time of contract formation, the parties are excused from performance (UCC 2-613, 2A-221) If the goods are partially destroyed, the buyer or lessee can inspect them and either treat the contract as void OR accept the damaged goods with a price reduction

Acceptance

Buyer can accept goods: By words or conduct. If buyer had reasonable amount of time and failed to reject. Buyer performs an act that is inconsistent with the seller's ownership

CISG Article 49:

Buyer can avoid contractual obligations if seller breaches.

Right of Inspection:

Buyer has absolute right to inspection before payment, unless C.O.D. Goods must be conforming before payment. If the goods are not as ordered, the buyer or lessee has no duty to pay. Inspection can take place at any reasonable place/time and in any reasonable manner.

Reasonable Grounds

Even if the contract time for performance has expired, the seller or lessor can still cure if she/he had reasonable grounds to believe that nonconforming tender would be acceptable to the buyer or lessee [UCC 2-508(2), 2A-513(2)]. A price allowance (discount) on the goods can serve as "reasonable grounds."

Commercial Impracticability

Events that were unforeseen by either party may make performance commercially impracticable. When this occurs, seller or lessor must notify the buyer or lessee as soon as practicable that there will be a delay or nondelivery

Agreement of the Parties

Exceptions to the perfect tender rule may be established by agreement.

Transit

Goods are "in transit" when seller has tendered goods to carrier.

Right to Withhold Delivery

If breach by buyer, seller can withhold delivery of all goods [UCC 2-703(a), 2A-523(1)(c)]. The seller or lessor can also refuse to deliver the goods to a buyer or lessee who is insolvent unless the buyer or lessee pays in cash [UCC 2-702(1), 2A-525(1)].

Duty of cooperation

If one party is not cooperating, the other party has the right to suspend performance and hold the first party in breach.

Partial Acceptance

If some of the goods do not conform to the contract, and seller has failed to cure, buyer can make a partial acceptance [UCC 2-601(c), 2A-509(1)]. But buyer cannot accept less a single commercial unit.

The Right to Cancel the Contract

If the buyer or lessee breaches the contract, the seller or lessor can choose to cancel the contract [UCC 2-703(f), 2A-523(1)(a)]. Seller must notify buyer. Buyer is not discharged from remaining obligations.

Revocation of Acceptance

In certain circumstances, a buyer or lessee is permitted to revoke his or her acceptance of the goods. The acceptance of a lot or a commercial unit can be revoked if the nonconformity substantially impairs the value of the lot or unit and if one of the following factors is present: Acceptance was based on the reasonable assumption that the nonconformity would be cured, and it has not been cured within a reasonable period of time

Exclusive Remedies

In sales and lease contracts, an agreed-on remedy is in addition to those provided in the UCC unless the parties expressly agree that it is exclusive of all others

Place of Delivery

Parties can agree on goods tendered at a particular destination for buyer to take possession. If the contract does not specify, then place is the seller's place of business, the seller's residence, or the location of the goods (if both parties know in advance that the goods will be there).

Suspension of Performance Obligations.

Nonbreaching party may suspend performance and treat the AR as material breach and pursue a remedy; or wait a reasonable time.

Anticipatory Repudiation

Occurs when a party communicates intention she/he will not perform when performance due.

Tender of Delivery

Occurs when the seller or lessor makes conforming goods available and gives the buyer or lessee whatever notification is reasonably necessary to enable the buyer or lessee to take delivery

CISG Article 74

Provides for money damages and foreseeable consequential damages. Damages are difference between contract price and market price.

CISG Article 28

Provides for specific performance where a country would normally grant it in its own law.

Installment Contracts

Require or authorize delivery in two or more separate lots to be accepted and paid for separately. A buyer or lessee can reject an installment only if the nonconformity substantially impairs the value of the installment and cannot be cured

CISG 64

Seller can avoid contractual obligations if the buyer breaches

Right to Resell or Dispose of Goods

Seller can resell and keep profits from sale and hold buyer liable for difference. Seller must give the original buyer reasonable notice of the resale, unless goods are perishable/will rapidly decline in value [UCC 2-706(2), (3)]. Unfinished Goods: Seller can (1) cease manufacturing and resell for scrap/salvage or (2) complete manufacture of the goods, sell them, and hold buyer responsible for deficiency.

Effect of Insolvency and Breach

Seller can stop goods in transit if: Buyer is insolvent: Seller can stop entire shipment of goods. Buyer is in breach: Seller may stop a whole truckload or whole container.

Destination Contracts

Seller has duty to: Tender the goods at a reasonable hour. Hold the goods available for a reasonable period of time for the buyer/lessee to take possession Obtain and promptly deliver any documents of title the buyer/lessee needs to take possession of the goods from the carrier. Promptly notify the buyer/lessee that goods are available for her to take delivery.

Commercial Impracticability and Partial Performance

Seller or lessor is required to distribute any remaining goods or deliveries fairly and reasonably among the parties to whom it is contractually obligated The buyer or lessee must receive notice of the allocation and has the right to accept or reject it

When Seller or Lessor Delivers Nonconforming Goods

The Right to Reject Goods: Buyer or lessee can reject all of the goods or any commercial unit of the goods (UCC 2-601, 2A-509). Buyer or lessee may obtain cover or cancel the contract and may seek damages just as if the seller or lessor had refused to deliver the goods Timeliness and a reason for rejection are required. Buyer or lessee must also designate defects that are ascertainable by reasonable inspection.

A Repudiation May Be Retracted

The UCC permits breaching party to "retract" repudiation by any method that clearly indicates their intent. However, no retraction if the nonbreaching party has materially changed their position.

When Seller or Lessor Refuses to Deliver the Goods

The buyer has the right to: Cancel (rescind) the contract. Buyer or lessee is relieved of any further obligations under the contract but retains all rights to other remedies against the seller or lessor [UCC 2-711(1), 2A-508(1)(a)]. Recover goods paid for if seller insolvent—whether partial or full payment. Seller or lessor must have become insolvent within ten days after receiving the first payment and goods must be identified to the contract. Sue to obtain specific performance and recover damages if the goods are unique or the remedy at law (monetary damages) is inadequate Buy other goods (obtain cover) and recover damages from the seller when the seller or lessor repudiates the contract or fails to deliver the goods, or when a buyer or lessee has rightfully rejected goods or revoked acceptance Sue to obtain identified goods held by a third party (replevy goods). Under the UCC, a buyer or lessee can replevy goods identified to the contract if the seller or lessor has repudiated or breached the contract Sue to obtain damages. For the buyer, the measure of recovery is the difference between the contract price and the market price of the goods at the time the buyer learned of the breach For the lessee, the measure is the difference between the lease payments and the lease payments that could be obtained for the goods at the time the lessee learned of the breach

Limits the Right to Reject Goods

The buyer or lessee must inform the seller or lessor of the defect. If the defect is not disclosed, 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.

Letter of Credit Transactions:

The issuer (a bank) agrees to issue a letter of credit and to determine whether the beneficiary (seller or lessor) performs certain acts. In return, the account party (buyer or lessee) promises to reimburse the issuer for the amount paid to the beneficiary

Value of a Letter of Credit

The issuer (bank) does not police the underlying contract. It also protects buyers and sellers

Payment under a Letter of Credit

The issuer is bound to pay the beneficiary (seller or lessor) when the beneficiary has complied with the terms and conditions of the letter of credit.

Cure

The right of the seller or lessor to repair, adjust, or replace defective or nonconforming goods with reasonable grounds

When Goods Are in Possession of Buyer or Lessee:

The seller or lessor can recover the purchase price of the goods or the lease payments due, plus incidental damages [UCC 2-709(1), 2A-529(1)] In some situations, the seller has the right to reclaim the goods In some situations, seller can reclaim goods received by an insolvent buyer if demand made within ten days of receipt. Seller's right to reclaim goods is subject to rights of a good faith purchaser

The Perfect Tender Rule

The seller or lessor has an obligation to ship or tender conforming goods. The buyer or lessee is then obligated to accept and pay for the goods according to the contract terms

Requirements for Stopping Delivery

To stop delivery, the seller or lessor must timely notify the carrier or other bailee that the goods are to be returned or held for the seller or lessor. Seller has the right to stop delivery of the goods until: Buyer receives the goods. Carrier or bailee acknowledges rights of buyer in the goods (reshipment or holding goods for buyer)

Consequential Damages

Under the UCC, parties to a contract can limit or exclude consequential damages, provided the limitation is not unconscionable.

Payment

Unless agreed otherwise, the buyer or lessee must make payment at the time and place the goods are received [UCC 2-310(a), 2A-516(1)]. Credit has to be prearranged. Payment can be made by the means agreed on between the parties or other method generally acceptable in the commercial world.

Shipment Contracts

Unless otherwise agreed, the seller must do the following: Put goods into hands of independent carrier Make contract for transportation that is reasonable according to nature of the goods and their value. Obtain and promptly deliver or tender to the buyer any documents necessary. Promptly notify buyer that shipment has been made. If the seller does not make a reasonable contract for transportation or notify the buyer of the shipment, the buyer can reject the goods if a material loss or a significant delay results.

Right of assurance (in writing):

Until received, the other party has the right to "suspend" performance or delivery.

Important Considerations

Which party has possession of the goods, whether goods are in transit, and whether the buyer has rejected/accepted the goods.

failure of tender of delivery

the buyer has the right to do any of the following (UCC 2-601, 2A-509): Accept the goods. Reject the entire shipment. Accept part and reject part