Remedies for Breach of Sales and Lease Contracts

Contractual Provisions Affecting Remedies

Parties to a contract can vary their rights and duties that preempt UCC provisions. Parties can stipulate whether contractual provisions are “exclusive”. However, provisions limiting consumer rights may be unconscionable.

Lemon Laws

Automobile under warranty possesses significant defect that affects vehicles use or value that cannot be fixed within statutory period.
Buyer’s remedies include:

• A new car;
• Replacement of defective parts;
• Or full refund

Remedies for Breach of International Sales

CISG provides remedies similar to the UCC:

• Monetary damages that are foreseeable, consequential damages.
• Damages are difference between contract price and market price.

Parties can agree to what law they will use.

Seller- Goods in Seller’s Possession

Seller may withhold delivery of the goods:

• If material breach by Buyer, Seller can withhold delivery of all goods.
• If non-material breach, Seller can withhold delivery of this installment. Seller can withhold delivery of all goods if Buyer is insolvent.
• Seller may rescind the contract.
• Seller may identify the goods to the contract.
• Seller may sell raw materials for scrap or finish production.
• Seller may resell the goods; and Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages - expenses saved.
• If No Damages, Seller can sue for lost profits.
• Case 22.1: Brandeis Machinery v. Capital Crane Rental (2002).
• Seller may sue Buyer for breach of contract.
• Recover Damages = the market price at the time & place of tender + incidental damages.
• If there are no damages, Seller can sue for lost profits.

Seller-Goods in Transit

Goods are “in transit” when Seller has tendered goods to Carrier.
Goods are in transit until:

• Buyer is given negotiable document of title to goods.
• Buyer is given non-negotiable document of title or Bailee has acknowledged
Buyer’s right to have the goods.
• Buyer has had a reasonable time to pick up the goods.
Seller has the right to stop the 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.

Seller-Goods in Buyer’s Possession

• Seller may sue for the purchase price.
• Seller may also sue Buyer if goods were “specially-made” which Seller cannot resell.
• Seller may also sue for the purchase price if the goods were destroyed and the risk had already passed to the Buyer.
• Seller can reclaim goods received by an insolvent Buyer if demand made within 10 days of receipt.

Buyer-Goods in Seller’s Possession

Buyer Wants Goods
• Specific performance or replevin
• Recover goods from Seller if Seller becomes insolvent within 10 days after receiving first payment.
Buyer Does Not Want Goods
• Rescind contract.
• Cover or do not cover and sue for breach of contract.
Case 22.2: KGM Harvesting v. Fresh Network (1995).

Buyer-Seller Delivers Nonconforming Goods

If Seller does not make perfect tender Buyer has the right to reject all or part of goods.
• Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions.
• Buyer is entitled to commission for selling perishable goods.
• Buyer may store the goods and retain a security interest in the goods for his costs.
If Buyer has accepted non-conforming goods, she may:
• Sue for breach of warranty.
• Sue for ordinary damages.
• Deduct damages from purchase price.
Case 22.3: China National Metal Products v. Apex Digital (2001).

Contractual Provisions Affecting Remedies

• Limitation of Damages.
• Limitation of Remedies.
• Waiver of Defenses.

Lemon Law

The majority of the states have enacted lemon laws in regard to automobile sales.
Seller’s limitations were too “good.”

Buyer must:
• Give notice.
• Seller gets four chances to fix.
• Arbitration: decision binding on manufacturer, not on Buyer.

Remedies for Breach of International Sales Contracts

CISG provides remedies similar to the UCC.
Article 74 provides for money damages, foreseeable consequential damages.
Damages are difference between contract price and market price.
Article 28 provides for specific performance where a country would normally grant it in their own law.
Parties can agree to what law they will use.

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Performance of Sales and Lease Contracts

• Seller must transfer and deliver conforming goods.
• Buyer must accept and pay for conforming goods.
• In the absence of an agreement between Seller and Buyer, UCC Article 2 controls as set out below.

Good Faith Requirement

Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.
Merchants are held to a higher standard of care than non-merchants.

Seller-Lessor Obligations

Seller has a duty to “tender” delivery of “conforming goods.”
Tender means “delivery” to agreed place: With reasonable notice, At a reasonable hour, In a reasonable manner.
Exactly, unless otherwise agreed, Place of Delivery-Non-Carriers.
Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence.
If both parties know the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

Place of Delivery—Carriers

Shipment contracts.
Seller has a duty to:

• Put goods into hands of independent carrier.
• Make contract for transportation.
• Obtain and promptly deliver or tender to the Buyer any documents necessary.
• Promptly notify Buyer that shipment has been made.
• Destination contracts. Seller has duty to:
• Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule

If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to:

• Accept the goods;
• Reject the entire shipment; or
• Accept part and reject part.
• Exceptions to the Perfect Tender Rule

Agreement of the Parties.

• Cure, Substitution of Carriers.
• Installment contracts.
• Commercial Impracticability.
• Destruction of Identified goods.
• Partial Performance, Proceede

Buyer-Lessee Obligations

• Furnish facilities reasonably suited for receipt of the goods.
• Make payment at the time and place the Buyer receives the goods.
• Credit has to be prearranged.
• Credit period begins on the date of shipment.
• Pay with cash, credit card, and check.
• But if Seller asks for cash, Seller has to give Buyer time to get cash.

Buyer’s Obligations.

• Buyer has right to inspection before paying:
• Costs of inspection borne by Buyer.
• However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

Acceptance

Buyer can accept goods:

• By words or conduct.
• If Buyer had reasonable amount of time and failed to reject.
• Buyer performs an act which indicates he thinks he is the owner.
• Partial Acceptance.
• Revocation of Acceptance
• Notify Seller of breach.
• Revoke only if substantial nonconformity; and
• Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.

Anticipatory Repudiation Party communicates he will not perform by time of contract performance. No breaching party may suspend performance and: Treat the A.R. as material breach and pursue a remedy; or Wait a reasonable time.
Case 21.3: Banco International v. Goody’s Family Clothing (1999).

International Contracts and Letters of Credit Parties.

• Account: Buyer.
• Issuer: : Bank.
• Beneficiary: : Seller.

Issuer is bound to pay the beneficiary who has complied with the terms and conditions of the letter of credit, usually requiring a bill of lading to the issuer to prove shipment has been made.

Agreement of the Parties

Parties agree that some defective goods will be acceptable.
Parties agree that defective goods can be replaced or repaired within a certain time.

Seller’s Cure

Seller has the right to “Cure” (ship conforming goods to Buyer) if: Agreed time of performance has not yet expired; or If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

Substitution of Carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

Commercial Impracticability

Occurrence of an unforeseen contingency that makes performance impracticable.
Nonoccurrence was a basic assumption on which the contract was made.
If only partial impracticability, Seller must allocate what he/she has.
Case 21.1: Maple Farms v. City School District of Elmira (1974).

Installment Contracts

Installment Contracts can be rejected if:

• Installment is substantially non-conforming and can’t be cured.
• Non-conforming installment substantially impairs the entire contract.
Destruction of Goods
• If no fault of either party and it occurs,
• Before risk passes to Buyer then,
• Both Seller and Buyer are excused from performance.

Partial Performance

Sometimes unforeseen event only partially affects Seller’s capacity to perform.
In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance.
Buyer has the right to reject.
Case 21.2: Kock Materials Co. v. Shore Slurry Seal, Inc. (2002).

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Formation of Sales and Lease Contracts

The UCC
Facilitates commercial transactions.
UCC Article 2: Sale of Goods.

• Modifies common law of contracts of some areas.
• UCC 2 preempts common law.
• Where UCC2 is silent, common law governs.

The Scope of UCC 2

Does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC2 does not apply.
Generally contracts for services are not governed by UCC2. What if Goods and Services combined?
Case 19.1: Micro Data Base v. Dharma Systems (1998).
UCC2 applies to the “sale of goods.”

• A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc).
• “Goods” are tangible and movable.
• A “merchant” has special business expertise and is not a casual buyer/seller.

Case 19.2: Ready Trucking Inc v. BP Exploration & Oil Co. (2001).

Scope of UCC 2A-Leases

• Contract for lease of personal goods between a lessor and a lessee.
• Consumer Leases (total payments less than $25,000)
• Finance Leases (involves a 3rd party-supplier).

Formation of Sales and Lease Contracts

At common law once a valid offer is unequivocally accepted, a binding contract is formed. UCC is more flexible, and allows for open pricing, payment, and delivery terms.

Offer-Open Terms

UCC 2-204: even if terms of are undetermined, a contract may still exist.

• Open Terms: “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.
• Open Quantity: generally courts will not impose a quantity. UCC2-306. Exceptions
• Requirements Contract: buyer agrees to purchase what the buyer needs or requires.
• Output Contract: buyer agrees to buy all of seller’s production or output.

Merchant’s Firm Offer

At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration.
At UCC, offer made by merchant in a signed writing is irrevocable for reasonable period of time. No consideration necessary.

Acceptance

Any reasonable means of acceptance under the circumstances is permissible.
Promise to ship or prompt shipment is acceptance.

• Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).

Acceptance: Additional Terms

If either party is a non-merchant, the contract is formed according to original terms of the offer. If both parties are merchants, contract incorporates new terms unless:

1. original offer expressly limits terms, or
2. material change, or
3. offeror objects within reasonable time.

Consideration

UCC requires consideration and modifications must be made in good faith.
Modification must be in writing if required by Statute of Frauds.

Statute of Frauds

• Sale of goods over $500 must have a signed writing to be enforceable.,/li>
• Exceptions to this rule:
  • Specially manufactured goods.
  • Admissions by breaching party.
  • Partial performance.
  • Merchant doesn’t object within 10 days.
• Oral agreement enforceable after written confirmation between merchants.

Parol Evidence

Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements.
Exceptions: consistent terms, course of dealing and trade.
Case 19:3: Puget Sound Financial LLC v. Unisearch Inc. (1976).

Unconscionability

Contract is one that is so unfair and one-sided it is unreasonable to enforce it.
Court can: set it aside, refuse to enforce the unconscionable provision, limit the contract.
Case 19:4: Jones v. Star Credit Corp. (1969).

International Sales

Applicability of the CISG.
Comparison of CISG and UCC.

• Mirror Image Rule.c
• Irrevocable Offers.
• Statute of Frauds.
• Necessity of a Price Term.
• Time of Contract Formation.

Special Provisions in International Contracts

Language and legal differences create special difficulties. Parties should agree to:

• Choice of Language.
• Choice of Forum (country).
• Choice of Law.
• Force Majeure Clause.

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