Final Contract Analysis

Remedies Available to Sellers and Lessors under the UCC

Cancel the Contract

UCC Sections 2-703(f) and 2A-523(1)(a) allow a seller or lessor to cancel the contract if the buyer or lessee is in breach. The UCC requires sellers/lessors to notify buyers/lessees of the cancellation. Then the seller or lessor pursues remedies available under the UCC. Remember, these remedies give the seller/lessor the benefit of the bargain and no more.

Withhold Delivery

Sometimes a buyer breaches the contract or lease before the seller has delivered the goods. For instance, the buyer or lessee might fail to pay according to the terms of the agreement. UCC Sections 2-703(a) and 2A-523(1)(c) allow sellers or lessors to withhold delivery of goods when the buyer or lessee is in breach.

Resell or Dispose of the Goods

Sellers or lessors are also allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. The seller or lessor then holds the buyer or lessee liable for any loss. UCC Section 2-706 allows the seller to recover the difference between the resale price and the contract price, plus incidental damages and minus expenses saved. Although buyers are liable for these damages, the seller gets to keep any profits it makes on the resale. UCC 2A-527(2) outlines a similar rule for lease agreements. The lessor is allowed to lease the goods to another party and recover unpaid lease payments and any deficiency between the lease payments due under the original lease contract and those due under the new contract. The lessor can also seek incidental damages.

Sue to Get the Benefit of the Bargain

In trying to give the seller or lessor the benefit of the bargain, and nothing more, courts often grant damages to recover the purchase price or lease payments due.

Stop Delivery

UCC Sections 2-705(1) and 2A-526(1) allow a seller or lessor to stop delivery of goods that are in transit. In transit means that the seller or lessor has delivered the goods to a carrier or bailee but the carrier or bailee has not yet turned them over to the buyer. Of course, the seller/lessor must give timely notice to the carrier/bailee so that the carrier/bailee is able to stop delivery. Also, the rules are different for insolvent and solvent buyers and lessees. If the buyer/lessee is insolvent, the carrier/bailee can stop delivery regardless of the quantity shipped. If the buyer/ lessee is solvent, however, the carrier/bailee can stop delivery only if the quantity shipped is a large shipment (e.g., a carload or truckload).

Reclaim the Goods

Under UCC Sections 2-709(1) and 2A-529(1), if the buyer or lessee has possession of the goods and is in breach, the seller or lessor can sue for the purchase price of the goods or for the lease payments due, plus incidental damages. In some circumstances, the UCC allows the seller or lessee to reclaim the goods. UCC 2-702(2) allows a seller to reclaim goods when the seller discovers the buyer is insolvent. UCC 2A-525(2) allows a lessor to reclaim goods when the lessee fails to make payments according to the lease terms.

Remedies Available to Buyers and Lessees under the UCC

Cancel the Contract

Sometimes, sellers or lessors fail to deliver the goods or to deliver conforming goods and thus are in breach. UCC Sections 2-711(1) and 2A-508(1)(a) allow buyers and lessees to cancel the contract and then seek remedies that give them the benefit of the bargain.

Obtain Cover

LO 16-8 What is cover and resale?

Under UCC Sections 2-712 and 2A-518, buyers and lessees are allowed to cover, or substitute, goods for those due under the sales or lease agreement.

cover A buyer’s right to substitute goods for those due under a sales or lease agreement when the seller provides nonconforming goods.

The buyer must (1) demonstrate good faith in obtaining the substitute goods, (2) pay a reasonable amount for the substitute goods, (3) act without unreasonable delay in purchasing the substitute goods, and (4) purchase goods that are reasonable substitutes.

Sue to Recover Damages

LO 16-9 When are money damages available?

Buyers and lessees, are entitled to incidental and consequential damages. Consequential damages include damages for lost profits as long as these damages are not too speculative. These monetary damages give the injured buyer or lessee the benefit of the bargain. There is also the availability of liquidated damages and even, under some situations, punitive damages.

consequential damages In a contract, foreseeable damages that result from special facts and circumstances arising outside the contract itself. The damages must be within the contemplation of the parties at the time the breach occurs. Also called special damages.

Liquidated damages are damages identified before the breach occurs. The parties are free to negotiate, as part of the contract, a liquidated-damage clause in which the parties agree in advance what the damages will be for each party if a breach occurs. Generally speaking, a court will enforce a liquidated-damage clause as long as it is not so far out of reasonable range as to be punitive in nature. Liquidated-damage clauses that are deemed punitive in nature are not enforceable. The topic of exactly how to compute damages is one that has eluded specific definition at times. See the following Case Nugget for an excellent step-by-step explanation of such a computation.

liquidated damages Damages specified as a term of the contract, before a breach of contract occurs.

The code provides for liquidated damages if the parties have not expressly negotiated a liquidated-damage clause. UCC Section 2-718 pertains to liquidated damages and allows the nonbreaching seller to claim against a breaching buyer 20 percent of the purchase price or $500, whichever is less, as liquidated damages.

Although the UCC does not mention the availability of punitive damages, other than in its voiding of liquidated damages that are punitive in nature, an issue that remains unsettled is the awarding of punitive damages against a breaching party who intentionally or egregiously breaches the contract. You will remember from tort law that when a tort is committed either intentionally or recklessly, the court may infer legal malice and instruct a jury that it may consider the awarding of punitive damages in addition to compensatory damages. Although this concept is well settled in tort law, it has never been widely applied in contract law. Yet some argue that it should be, especially to deter intentional breaches of contract. See the Point/Counterpoint at the end of this chapter for two perspectives on this issue.

Recover the Goods

UCC Sections 2-502 and 2A-522 allow buyers and lessees to recover the goods identified in the contract if the seller or lessor becomes insolvent within 10 days after receiving the first payment due under the agreement. Buyers or lessees are obligated to pay the remaining balance according to the terms of the agreement.

page 338

Obtain Specific Performance

UCC Sections 2-716(1) and 2A-521(1) allow buyers and lessees to seek the remedy of specific performance when either (1) the goods are unique or (2) a remedy at law is inadequate. Specific performance usually requires the seller or lessor to deliver the particular goods identified in the contract.

specific performance An order of the court requiring a nonbreaching party to fulfill the terms of the contract.