CHAPTER 22
REMEDIES FOR BREACH OF SALES CONTRACTS
I. OBJECTIVES:
This chapter is intended to acquaint the student with the remedies available to an injured party, the Code rules that govern buyer‑seller agreements as to remedies, and the Code's statute of limitations. After reading the chapter and attending class, the student should:
A. Understand that the purpose of the Article 2 remedies is to put the injured party in the same position as if the contract had been performed.
B. Know the seller's remedies for breach and when those remedies are available.
C. Know the buyer's remedies for breach and when those remedies are available.
D. Understand the extent to which buyers and sellers may agree as to the remedies to be applied in the event one of them defaults.
E. Understand how the 4-year statute of limitations is applied.
II. ANSWER TO INTRODUCTORY PROBLEM
A. The first question following the hypothetical situation that appears at the beginning of the
chapter asks what options are open to a seller that is in the process of manufacturing a custom-made item when the customer tells the seller she no longer wishes to acquire the item. If the seller is in the process of manufacturing the goods, it has two choices: it may complete manufacture of the goods, or it may stop manufacture and sell the uncompleted goods for their scrap or salvage value. In choosing between these alternatives, the seller should select the alternative that will minimize the loss.
B. The second question asks for the options open to an aggrieved seller if the buyer refuses to
accept the item that was the subject of the contract between them. The seller has several options: (1) try to resell the goods in good faith and in a commercially responsible manner— and then either recover the difference between the contract price and the price it received on the resale or to recover the purchase price if the effort to resell is unavailing; or (2) recover damages based on the difference between the contract price and the current market price at the time of the breach or, alternatively, damages based on the “profit” the seller lost when the sale was not completed
C. The third questions asks for the options open to an aggrieved buyer when the seller indicates
that it will not be able to provide a time-sensitive custom-manufactured item on the agreed-
upon schedule. In this situation the buyer has the right to “cover” and obtain damages based on the difference between the cost of cover and the contract price plus incidental damages or to recover damages based on the difference between the contract price and the current market price of the item.
D. The fourth question asks whether the buyer has any options if a seller proposes to sell a a-kind item to someone else in violation of the agreement to sell it to the buyer. If the goods are unique and not otherwise obtainable, the buyer would have the right to have specific
performance of the contract—i.e. the right to obtain the dress that was specially manufactured for her.
III. SUGGESTIONS FOR LECTURE PREPARATION:
A. Introduction
1. Remedies Generally. Note the purpose of the Code remedy provisions: to place the injured party in the same position as if the contract had been performed. This purpose explains why usually only active damages and not consequential or penal damages are recoverable by the harmed party.
2. Agreements Concerning Remedies. State the restrictions on the parties' ability to set, limit or eliminate the amount of damages. Essentially the law will not interfere with the parties' agreement concerning remedies. The Code will not enforce the parties' agreement when it is unconscionable; the amount must be "reasonable in the light of 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." Code Section 2‑718.
Baker v. International Record Syndicate, Inc. (page 485): A liquidated damages clause providing that the minimum value of any lost or damaged photograph was to be $1,500, but a higher reasonable value might be established, was enforceable because (1) the harm caused by the breach was incapable of estimation and (2) the liquidated damages were reasonable with respect to the anticipated or actual harm. The court noted the evidence that had been produced to show the difficulty of estimating damages and why the contract formula should be viewed as reasonable as of the time the contract was executed.
Points for Discussion: Note that IRS was given an opportunity to try to prove what the actual damages were, in which case the liquidated damages clause would not have been enforced, but that the court was not persuaded by the evidence IRS offered.
Note that the limitation of consequential damages for injury to a person caused by consumer goods is prima facie unconscionable. Limitations of consequential damages for injury to property caused by consumer goods may be valid.
Star-Shadow Productions, Inc. v. Super 8 Sync Sound System (page 486). Where price sheets and the boxes containing film contained a limitation of liability clause limiting the seller’s liability for defective film to replacing the film, the clause was effective in limiting the seller’s liability. The court rejected the buyer’s contention that the limitation of liability failed its essential purpose and held that the buyer had gotten what it bargained for.
Points for discussion: What could the buyer have done to better protect itself in this case against the problems it experienced?
Additional Example: Problem Case #1.
3. Note the statute of limitations is 4 years and explain when it begins to run. Discuss how the statute applies to warranties for future performance.
Example: Problem Case #2.
B. Seller's Remedies.
1. List on the chalkboard the remedies available to a seller when the buyer breaches or is about to breach the sales contract. Refer to the materials on anticipatory breach in Chapter 21. Note when the seller may invoke each remedy. A good way to convey the remedies is to have four columns on the chalkboard, one titled "Seller's Remedies," a second titled "Procedure" a third titled "Damages Recovered," and the last titled "Events Invoking the Remedy." As you explain each remedy, the columns should be completed. With this presentation the students will be able to discern when the seller has what rights.
2. Cancellation and Withholding of Delivery. Note that when the buyer breaches the contract, the seller has the right to cancel the contract and withhold delivery. Point out the seller's special duty to mitigate his damages when the buyer breaches the contract while the seller is in the process of manufacturing the goods.
Madsen v. Murray (page 488). Where the seller had largely completed assembly of 100 specially ordered pool tables when buyer repudiated the contract, seller did not proceed in a commercially reasonable manner when it dismantled the pool tables, used salvageable materials to make other tables, and used much of the material for firewood.
Points for Discussion: Note that while a court will give the manufacturer of specially manufactured goods some room to make what it believes to be a reasonable effort to mitigate damages, here the court found that the seller's actions were outside the bounds of reasonableness. Suppose in this case that the manufacturer had prepared the component parts (including the specially designed components) but had not initiated assembly so that it simply discarded the specially designed components and used the others to manufacture other pool tables, would its actions have appeared more reasonable to the court?
Example: Problem Case #3.
3. Resale. Note that where the seller sets aside goods intended for the contract or completes their manufacture, he is not required to try to resell them. However, where he does make a commercially reasonable resale in good faith, he is entitled to recover damages based on the difference between the contract price and the resale price plus incidental damages. This is a good time to illustrate various kinds of damages that might fall into the "incidental" category.
Example: Problem Case #4.
4. Recovery of Purchase Price. Discuss the limited circumstances under which the seller is entitled to recover the full purchase price from the buyer.
5. Damages for Rejection on Repudiation. Discuss the two measures that are used to compute these damages‑‑(1) the difference between the contract price and the market price and (2) the lost profit (including overhead)‑‑and when each may be used. Work through the troll examples in the book, showing how these measures are applied.
6. Right to Reclaim. Give special treatment to the rights of the reclaiming seller, relating the seller's rights to those of buyers of the goods. Note the purpose for permitting the seller to reclaim goods from an insolvent buyer: to prevent the buyer from profiting from his deceit of the seller.
Example: Problem Case #5.
7. Discuss the Code Rule on Liquidated Damages.
8. The Global Business Environment: Seller’s Remedies in International Transactions (page 490): Discuss the similarities between the remedies available to an aggrieved seller under the UCC and the remedies available under the CISG.
C. Buyer's Remedies
1. List on the chalkboard the buyer's remedies when the seller breaches or is about to breach the contract. Refer to the materials on anticipatory breach in Chapter 21. You may wish to convey these remedies by having four columns on the chalkboard, one titled "Buyer's Remedies," a second titled "Procedure," a third titled "Damages Recovered," and the last titled "Events Invoking the Remedy."
2. Right to Cover. Indicate the buyer has the right, on the seller's default, to purchase substitute goods and to recover as damages the difference between the contract price and the cost of cover.
KGM Harvesting Co. v. Fresh Network (page 493). An aggrieved buyer was entitled to recover from the defaulting seller the difference between the contract price and the buyer's reasonable cost of "cover," even though the buyer was able to recover some of the increased cost from the entity with whom it had contracted to resell the lettuce.
Points for Discussion: Use this case to discuss the differences between the two alternative measures of damages--one based on "cover" and the other based on the difference between the contract price and the market price.
3. Note the special conditions for the buyer to recover consequential damages caused by the seller's breach.
4. Damages for Non-Delivery. Note that a measure of damages available to the buyer is the difference between the contract price and the market price plus incidental damages.
Example: Problem Case #6.
5. Damages for defective goods. Note that the measure of damages for defective goods is the difference between the value of the goods received and the value the goods would have had if they had been as warranted.
Jetpac Group, Ltd. v. Bostek, Inc. (page 495). Where a seller supplied defective goods that did not comply with the contract description and also breached the warranty of merchantability, the buyer was entitled to recover the difference between the value of the goods accepted and the value they would have had if they been as warranted plus incidental damages and consequential damages that could not have been prevented by cover. The court found that the seller was on notice that a defective shipment could jeopardize a larger sale of units and bring about a loss of profits that would be realized on the larger sale.
Example: Problem Case #7.
Ethics in Action: Should the buyer get an honest answer?: This question flags an area where societal expectations and legal obligations are changing. While the prevailing sentiment may have been caveat emptor with the buyer expected to have to be on guard to fully protect his own interests, this is changing. Many people would find that the salesman had not been honest in his answer and that if he were to put himself in the shoes of the buyer he would not thought he had been fairly and honestly dealt with. Increasingly there is seen to be an obligation on the part of the seller to disclose material facts known to him and which he has reason to believe a reasonable buyer would want to know.
6. Consequential damages. Indicate when consequential damages are available
Examples: Problem Cases #8 and #9.
7. Specific performance. Note the circumstances when a buyer can obtain specific performance and require the seller to give the goods called for by the contract.
Example: Problem Case #10.
8. Buyer and Seller Agreements as to Remedies. Review the rules concerning agreements between buyers and sellers as to remedies.
Baker v. Burlington Coat Factory Warehouse (page 498). Where a coat was unmerchantable, the seller was not able to limit the buyer’s remedy to store credit or another coat of equal value. The court held that the store could not refuse to return the customer’s payment, whether made in cash or with a credit card.
9. The Global Business Environment: Buyer’s Remedies in International Transactions (page 497): Discuss the similarities and the differences between the remedies available to an aggrieved buyer under the UCC and the remedies available under the CISG.
IV. RECOMMENDED REFERENCES:
See the references listed in Chapter 19, Formation of Sales Contracts.
V. ANSWERS TO PROBLEMS AND PROBLEM CASES
1. Yes. The court stated that under Section 2‑719 of the UCC, consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Here, no injury to the person of Lobianco is involved, so the limitation is not prima facie unconscionable. At the same time, the loss is not commercial and thus the clause is not presumptively conscionable. In analyzing this situation, the court noted that the alarm company had assumed some responsibility--that of repairing the system so that it would work--and that Lobianco had assumed the risk of loss that the contract had left her with a risk she could cover by insurance. Accordingly, the court found that the limitation of liability was not unconscionable--and enforced it against Lobianco. Lobianco v. Property Protection, Inc., 437 A.2d 417 (Super. Ct. Pa. 1981).