CHAPTER 21
PERFORMANCE OF SALES CONTRACTS
Outline
I.Introduction
This chapter focuses on the legal rules that govern the performance of contracts.
II.General Rules
Article II of the Uniform Commercial Code governs performance of sales contracts.
A.Good Faith
The buyer and seller must act with “honesty in fact” in performing the duties assumed in the contract.
B.Course of Dealing
The courts may look at any performance between the two parties that has already taken place to determine the obligations of the contract.
Example: Grace Label, Inc. v. Kliff: The court found that the prior dealings between the parties may be used to supplement the written contract.
C.Usage of Trade
The customs and practices of the trade are usually assumed by parties to a contract for goods of that type.
D.Waiver
Under the UCC, a party may waive the right to cancel a contract if he or she fails to object to breach; there is also a presumption favoring assignment and delegation of duties under the UCC unless the contract expressly forbids them or there is a good reason for the original party's performance.
E.Assignment
Under the UCC, the duties of either the buyer or seller generally may be delegated, or “assigned”, to someone else.
II. Delivery
A. Basic Obligations
The basic duty of the seller is to deliver the goods, and the buyer is to accept and pay for the goods.
B.Place of delivery
Unless otherwise agreed, the goods are to be delivered at the seller’s place of business.
C.Seller’s Duty of Delivery
If the seller is required to ship the goods, the seller must make a reasonable contract with a carrier and notify the buyer that the goods are shipped.
III.Inspection and Payment
A.Buyer’s Right of Inspection
The buyer has the right to inspect the goods; but under the terms of cash on delivery (COD) the buyer must pay for the goods before inspection unless marked "inspection allowed".
B.Payment
Unless the seller demands cash, the buyer may make payment by personal check or any other method used in the ordinary course of business.
IV. Acceptance, Revocation and Rejection
A. Acceptance
Acceptance occurs if a buyer fails to reject the goods within a reasonable time. To reject, the buyer must notify the seller and specify the defect. Acceptance of part of a commercial unit is usually acceptance of the whole.
Example: Weil v. Murray: Goods that a buyer has in its possession necessarily are accepted or rejected by the time a reasonable time for inspecting those passes.
B. Effect of Acceptance
Once a buyer has accepted goods, he cannot later reject them unless at the time they were accepted, the buyer had reason to believe the nonconformity would be cured.
C. Revocation of Acceptance
A buyer may revoke acceptance of nonconforming goods where the nonconformity substantially impairs the value of the goods and (2) the buyer accepted them without knowledge of the nonconformity or because of assurances by the seller that the nonconformity would be cured. Revocation must be invoked prior to substantial change in the goods.
Example: Waddell v. L.V.R.V. Inc.: The court found that the nonconformity substantially impaired the value of the RV and that the Waddell’s had acted to revoke acceptance within a reasonable period of time.
D.Buyer’s Rights on Improper Delivery
If the goods delivered by the seller do not conform to the contract, the buyer has the right to:
1.reject all of the goods
2.accept all of the goods
3.accept any commercial units and reject the remainder of the goods
E.Rejection
A buyer may reject nonconforming goods but must act within a reasonable time after delivery and notify the seller of rejection.
Example: Fitl v. Strek: The court found that Fitl notified Strek of the defective baseball card within a reasonable time of detecting the nonconformity.
F. Right to Cure
The seller has the right to cure breach by reshipping conforming goods, so long as performance can be completed within time for original performance.
G.Wrongful Rejection
A buyer may only reject nonconforming goods. If the buyer wrongfully rejects goods, he is liable to the seller for breach of contract.
H.Buyer’s Duties after Rejection
After rejection, buyer's duties depend on whether the buyer is a merchant or non-merchant:
1.A non-merchant, must hold the goods with reasonable care, but is not obligated to ship them back to the seller.
2. A merchant must follow reasonable instructions of the seller, and, absent other instructions, must try to resell the goods if they are perishable.
V. Assurance, Repudiation, and Excuse
A. Assurance
A party may demand assurance if there is a reasonable basis for believing the other party may not be able to perform.
Example: Vasaturo Brothers, Inc. v. Alimenta Trading USA, LLC: Vasaturo was entitled to suspend performance until it received adequate assurance. Vasaturo had reasonable grounds for insecurity.
B. Anticipatory Repudiation
If either the buyer or seller notifies the other party before performance is due that they will not fulfill their contractual obligations, an anticipatory repudiation has occurred.
C.Excuse
If unforeseen events make it impossible to fulfill the contract, the parties are excused from performance.
D.Commercial Impracticability
If unforeseen conditions cause a delay or inability to make delivery of the goods, the seller is excused from making delivery.
Example: Rochester Gas and Electric Corporation v. Delta Star, Inc.: The rise in steel prices does not constitute excuse by commercial impracticability.
Learning Objectives
1. You should understand the importance of the doctrine of "good faith" under the UCC, which imposes on every contract for the sale of goods a duty of good faith in its performance. The concept of "good faith" is defined as "honesty in fact," and cannot be disclaimed by the parties. Thus a court may consider "good faith" in determining whether a breach of contract has occurred, and if so, an appropriate remedy.
2.In interpreting sales contracts, you should note that the UCC places great importance on past dealings between contracting parties and on custom and trade practice. Absent express contract language to the contrary, a court will consider these factors in determining breach and appropriate remedies.
3.You should know the basic obligations of the seller regarding delivery.
4.You should be able to describe the buyer's right of inspection and know how the buyer's right of inspection differs in a C.O.D. sale.
5.You should know the legal effect of acceptance of goods and be able to identify conduct on the part of the buyer-indicating acceptance.
6.You should be able to describe the buyer's rights upon improper delivery and should know what is necessary for a valid rejection.
7.You should be able to recognize actions a seller can take when the buyer rejects the goods. You should also be able to describe the buyer's duties concerning rejected goods.
8.You should know the meaning of the term "revocation of acceptance" and what is necessary to make a valid revocation.
9.You should know what a party's rights are when he has justifiable concern about the other party's ability to perform the contract.
10.You should know when a party to a contract is excused from performing his obligations.
Learning Hints
1. The UCC applies to contracts for the sale of goods. In sales contracts, the Code adopts a "strict performance" standard. This standard, however, is softened by Code provisions giving a seller an "opportunity to cure" non-conformity, and a provision requiring prompt rejection and notice by the purchaser.
2.The UCC permits a buyer to "revoke his/her acceptance" under certain circumstances. This provision has been used by consumers in "lemon car" cases and in similar cases to reject goods which are non-conforming, but which the seller continues, unsuccessfully, to attempt to fix in order to "cure" the defects.
3.Buyers normally have the right to inspect before they pay. However, in a C.O.D. (cash on delivery) sale, the buyer must pay before inspection unless there is some glaring defect in the goods that the buyer can perceive without an inspection. The fact that C.O.D. buyers must pay before inspection does not mean that they lose their right to reject, revoke, or bring suit for breach of contract. It simply means that the buyer must take some legal action to reclaim his money.
4.Don't get the terms "acceptance," "rejection," and "revocation" as used in this chapter mixed up with the same terms as they are used in the chapters dealing with creation of contracts. In this chapter, we're talking about a buyer's acceptance or rejection or revocation of acceptance of the seller's performance of his contractual obligation to deliver goods, whereas in the earlier chapters we were talking about acceptance, rejection, or revocation of offers to determine whether a contract was ever created in the first place.
5.When goods are delivered to the buyer, he has a reasonable time to inspect them. If the buyer wants to reject the goods, he must act quickly. He must give the seller notice of rejection in which he describes the defects in the goods. He must be careful not to do anything that would contradict the seller's ownership of the goods (such as continuing to use them after a reasonable period for inspection has elapsed), or he will be considered to have accepted the goods.
6.Note that when there has been a rejection of goods, the seller has a certain amount of time in which he has the right to cure the defect or deliver conforming goods. Therefore, even if the buyer wants out of the contract once he has received defective goods, the seller still has another chance to get it right.
7.A buyer accepts the seller's performance when he indicates that the goods are satisfactory, or when he treats the goods in a way that shows ownership of them (such as using them after a defect is discovered or taking them on vacation with him), or when he merely fails to make a proper rejection. In other words, if the buyer fails to do any of the things required for a valid rejection, he is considered to have accepted. For example, if goods were delivered to you in a defective condition that made them totally worthless and you put them in your basement and did not use them but delayed notifying the seller for a period of time that would be considered unreasonable, you are considered to have accepted the goods.
8.Once the buyer has accepted the goods, he's normally stuck with them. He may still have remedies against the seller for breach of contract, but he no longer has the right to send the goods back unless the circumstances are such that he can revoke his acceptance of the goods.
9.Once the buyer has accepted the seller's performance, he must have a very good reason for revoking or undoing his acceptance of the goods. For one thing, he must be able to show that the defect was serious enough to constitute a substantial impairment of the value of the goods. Second, he must be able to show that he had a good reason for not rejecting the goods in the first place, such as the fact that the defect was difficult to discover earlier or the seller gave assurances that the defect would be cured. Third, the buyer must go through the same steps to make a valid revocation that were necessary for a valid rejection; i.e., notice within a reasonable time. Finally, the condition of the goods must be such that there has not been a substantial change in their condition.
10.Remember: rejection is done instead of acceptance. Revocation is done after acceptance.
11.A buyer's responsibilities toward goods rightfully rejected depends on whether the buyer is a merchant or not. Generally, a non-merchant buyer only has the duty to exercise reasonable care toward the goods and is not required to ship them back to the seller. A merchant buyer, however, must follow the seller's reasonable instructions regarding the goods, and must, in the case of perishable goods, attempt to sell them for the seller absent contrary instructions.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False.
_____1. In all contracts of sale of goods, the buyer and seller must act in good faith.
_____2.Trade practices will always prevail over the express terms in a sales contract.
_____3.A buyer of goods may accept or reject partial commercial units.
_____4.If no agreement is made, goods are to be delivered at the buyer's place of business.
_____5.Under the UCC, the buyer is responsible for making a reasonable contract with a carrier for delivery of the goods if the contract is silent as to delivery.
_____6.A buyer who accepts nonconforming goods does not necessarily forfeit his remedies against the seller.
_____7.To make a proper rejection of goods, the buyer should notify the seller within a reasonable time and state the reasons for the rejection.
_____8.A non-merchant buyer who rejects goods must follow any reasonable instructions the seller gives concerning what to do with the goods.
_____9.Normally, the buyer has the right to inspect the goods before he accepts or pays for them.
_____10.If the delivery date has expired, the seller is never entitled to the right to cure delivery.
Multiple Choice
Circle the best answer.
1.Smith made a contract with Jones to buy ten tons of coal per month for one year. Jones delivered the coal ten days late for six months and Smith did not object. On the seventh month, Smith sought to cancel the contract because of late deliveries. Under these circumstances:
a.Smith can cancel the contract.
b.Jones can cancel the contract.
c.Smith has waived his right to cancel by not objecting to late deliveries.
d.The UCC would require any waiver to be in writing in order to be effective.
2.Which of the following statements is not true?
a.A buyer usually must pay for goods in a C.O.D. sale before inspecting them.
b.Delivery is assumed to take place at the seller’s place of business unless otherwise stated.
c.Clearly expressed contract terms will prevail over course of dealing.
d.The duties of the buyer can never be delegated.
3.If the parties do not otherwise agree:
a.A buyer must pay for goods upon contracting.
b.A buyer must pay for goods upon identification of the goods to the contract.
c.A buyer must pay for goods upon delivery.
d.A buyer may pay for goods on credit.
4.Once a buyer has accepted goods:
a.He cannot later reject them.
b.He can later reject them for nonconformity even if that nonconformity does not affect the value of the goods.
c.He can reject them even if he doesn't give the seller timely notice that the goods are nonconforming.
d.He does not forfeit or waive remedies against the seller for any nonconforming goods.
5.Which of the following is not true of a seller’s duties and rights?
a.The seller cannot demand to be paid in cash.
b. The seller must tender delivery to the buyer.
c. The seller must make a reasonable contract with a carrier for shipping the goods.
d. The seller may have the right to cure beyond the delivery date of the contract if the seller has reason to believe that the buyer would accept nonconforming goods.
6.Carol bought a new car from Motown Motors. Carol soon discovered that the engine has serious problems. She has taken the car to Motown several times during the last month and each time the seller has assured her that the problems would be fixed, but the problems remain. Carol wants the dealer to take the car and return her money. Under these circumstances, Carol:
a.Can reject the car, stating her reasons.
b.Can revoke her acceptance, since there is a substantial nonconformity that Carol did not know about at the time she bought the car.
c.Must keep the car since she already accepted it.
d.None of the above.
7.Scalina Brothers sells produce to Bob’s General Store. On a recent shipment, much of the lettuce was not in good condition. What would be the most reasonable action for Bob’s to take in this situation?
a.Send the lettuce back to Scalina.
b.Throw the lettuce away and take a loss.
c.Hold the lettuce with reasonable care and wait for the seller to take it.
d.Follow the reasonable instructions of the seller.
8.XYZ Manufacturing enters into a contract with Sanders Corp. to sell Sanders 10,000 widgets by July 10th. In late May, the workers at Sanders go on a prolonged strike. XYZ is concerned about Sanders’ ability to perform the contract. What could XYZ do?
a.Demand assurance.
b.If assurance is not given, treat the contract as repudiated.
c.Cancel the contract based upon commercial impracticability.
d.All of the above.
9.Associated Grocers orders 20 train carloads of apples from Simpson. Simpson sends the apples to Associated. Upon inspection, Associated determines that a number of apples in 4 of the train cars do not meet normal standards. Which of the following is not a possible action for Associated?