978-0077733711 Chapter 21 Lecture Note

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Chapter 21 – Performance of Sales Contracts

CHAPTER 21

PERFORMANCE OF SALES CONTRACTS

I. OBJECTIVES:

This chapter builds on the previous two chapters in which the formation and basic terms

of sales contracts, including warranties, are discussed. This chapter deals with the

performance of contracts, including interpretation, modification, basic duties, rights when

performance is defective, and excuse. After reading the chapter and attending class, a

student should be able to:

1. Explain what is meant by the terms good faith, course of dealing, and usage of trade

as they pertain to the performance of sales contracts.

2. List the basic obligations and rights of the buyer and seller concerning the delivery of

and payment for goods.

3. Explain when acceptance of goods occurs, what the effect of accepting goods is, and

when a buyer who has accepted goods has the right to revoke such acceptance.

4. Discuss the buyer’s rights and duties on improper delivery of goods as well as the

seller’s rights to cure a defective delivery.

5. Indicate when a party to a contract has the right to seek assurances from the other

party that it will perform its obligations.

6. Evaluate when a party will have its performance excused on the grounds of

commercial impracticability.

II. ANSWER TO INTRODUCTORY PROBLEM

A. The first question following the introductory hypothetical asks whether the buyer has

the right to inspect the vehicle that had been shipped to her. The general rule is that

the buyer has the right to inspect the goods before she accepts or pays for them. If the

shipping terms are cash on delivery (C.O.D.)—which they may be in this case—then

the buyer must pay for them before inspecting them unless they are marked

“Inspection allowed.” In this case it would be helpful to know whether there had

been any agreement between the buyer and the seller as to the time, manner and place

in which the buyer would inspect the goods. These terms may have been spelled out

on the seller’s web page.

B. The second question asks whether the buyer would have the right to refuse to accept

the vehicle if she found that it had scratches on it and did not conform to the contract

specifications. Where goods delivered do not conform to the contract, the buyer has

the right to reject the goods if she acts within a reasonable time after delivery and

gives the buyer notice of the rejection.

C. The third question asks whether the buyer would have the right to revoke acceptance

where she originally accepted the vehicle when the dealer offered her a monetary

allowance and—where after discovering subsequent defects, she gave the dealer

repeated opportunities to remedy them. A buyer may revoke or undo acceptance of

non-conforming goods where the nonconformity substantially impairs the value of the

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Chapter 21 – Performance of Sales Contracts

goods and the buyer accepted them without knowledge of the nonconformity or the

buyer accepted the goods because of the seller’s assurances that it would cure the

defect. Revocation must occur prior to any substantial change in the goods. If the

defects here were not discoverable on a reasonable inspection, the buyer would not

have to give the seller unlimited opportunities to remedy the

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Chapter 21 – Performance of Sales Contracts

defects before invoking her right to revoke the acceptance by returning the car to the

dealer and requesting another vehicle or her money back.

D. The fourth question asks whether it would be ethical for a dealer to deliver goods that

the dealer knows do not conform to the contract and have been damaged. This is an

“ethical temptation”—or right-wrong decision–rather than a true ethical dilemma.

The ethical course of action would be to at least let the buyer know the situation about

the goods and see how he would like to proceed rather than just shipping the non-

conforming goods to him—unless he had some basis for believing they would be

acceptable to the buyer. The UCC specifically imposes a duty of good faith on the

parties to a contract.

III. SUGGESTIONS FOR LECTURE PREPARATION:

A. General Rules

1. Explain the general rules of performance of a sales contract, especially the

obligation of good faith, which is a statutory attempt to instill high ethical values

in parties to the contract.

Example: Problem Case #2.

Ethics in Action (page 602): This question raises the concomitant questions of

whether there are circumstances in which a person with either a legal obligation or a

legal right is justified or obligated to proceed otherwise. One question the students

should ask themselves is how would they feel if they were in the other person’s shoes

at that point–i.e. how would they like to be treated? The students should also try to

identify those factors whose presence, perhaps in levels of increasing intensity,

militate for relieving a person of his legal obligation or suggest that a person should

forego a legal right.

2. Note the importance of course of dealing and usage of trade in the interpretation

of contracts.

Grace Label, Inc. v. Kliff (page 603). Where the parties transacted business on

two prior occasions, evidence of the prior course of dealing is admissible

to supplement and explain, but not to contradict, the meaning of the written

contract at issue.

Points for Discussion: Is the result in this case consistent with commercial

expectations? If you were the buyer, what would you do in future

contracts to protect your interests?

3. Relate the sales contract modification rules to the writing requirement of the

Code’s statute of frauds. Recall that the Code’s statute of frauds is covered in

Chapter 15. Which of the following modifications must be in writing to be

enforceable?

a. B agrees in writing to buy from S 200 books for $1 per book. They later

decide the price should be $1.50 per book. (No writing needed)

b. Same as #1, except the new contract price is $3 per book. (Writing needed)

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Chapter 21 – Performance of Sales Contracts

Cyberlaw in Action: The Internet and E-Commerce Facilitate Contract

Modifications (page 605): Note and discuss how the Internet and e-commerce

facilitate contract modifications.

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Chapter 21 – Performance of Sales Contracts

4. Note the consequence of a party’s continual failure to require exact compliance

with the contract (waiver) and the procedure for retracting that waiver.

5. Explain the rule concerning assignment of contract rights and delegation of

contract duties. These are discussed in Chapter 17.

B. Delivery

1. General. Begin the discussion of the rules concerning delivery, inspection,

payment, acceptance, revocation and rejection by noting their purpose: to ensure

that the reasonable expectations of the parties to the contract are fulfilled. For

example, when the buyer does not timely reject a delivery, the seller’s expectation

is that the goods are conforming. Therefore, revocation of acceptance is difficult.

Rather than set the transaction aside, generally the law only permits the buyer to

recover damages due to the nonconformance.

2. Delivery. State the seller’s basic duty of delivery. Note the place of delivery for

the shipment and destination contracts. Refer to the terms of shipment discussed

in Chapter 19 and explain the seller’s duty under each of those terms. Note the

seller’s duty to make a reasonable contract for shipment and to give the buyer

notice of the shipment when there is a shipment contract.

Example: Problem Case #3.

C. Inspection and Payment

1. Point out the buyer’s basic right to inspect the goods before acceptance or

payment. Note the importance of this right of inspection: to quickly and cheaply

(for the buyer) avoid having to pay for defective or otherwise nonconforming

goods. Although acceptance may be revoked, it is costlier and riskier for the

buyer to do so. Note that the right of inspection before acceptance or payment

does not exist for C.O.D. sales.

Example: Problem Case #2

The Global Business Environment: Assurance of Payment (page 607 and Figure 1

on page 608): Discuss the concerns that buyers and sellers have concerning the

when engaging in transnational transactions and discuss the mechanisms that have

been developed to protect both the buyer’s and the seller’s interests in such

transactions.

D. Acceptance, Revocation and Rejection

1. Define when acceptance of a delivery occurs, being sure that students do not

confuse this acceptance with the acceptance of an offer to make a contract. Note

that once the goods have been accepted the buyer cannot later reject them unless

the buyer had a reasonable basis to believe the nonconformity would be cured.

Weil v. Murray (page 608). Where after inspecting a painting, a dealer took it on

consignment, subsequently entered into a written agreement for the sale of the

painting, and had the painting cleaned and repaired by a conservator, the dealer

was considered to have accepted the painting and was liable to the seller for the

agreed-upon purchase price.

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Chapter 21 – Performance of Sales Contracts

Points for discussion: Ask the students to identify the several acts, any one of

which by itself might have been enough to result in “acceptance” of the painting

by Murray.

Additional Examples: Problem Cases # 4, 5 and 6.

2. Discuss the concept of a commercial unit and provide a number of examples.

Note that a commercial unit is the smallest portion of a shipment that a buyer can

reject.

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Chapter 21 – Performance of Sales Contracts

3. Revocation. Distinguish revocation of acceptance from rejection. Explain why it

is more difficult to revoke acceptance than it is to reject the goods. Discuss some

of the critical elements: (1) a nonconformity that substantially impairs the value

of the goods, (2) acceptance without knowledge of the defect because of difficulty

of discovery or sellers’ assurances and (3) revocation before there has been a

substantial change in the goods.

Waddell v. L.V.R.V. Inc. ( p. 610). Where buyers of an R.V. discovered

nonconformities shortly after purchase and allowed the seller opportunity

to cure, revocation would be proper if the nonconformities caused a

substantial impairment of the value of the R.V. to the buyers, and

revocation occurred within a reasonable time. Whether a nonconformity

substantially impairs the value of a good involves two parts: 1) whether the

nonconformity substantially impairs the subjective value of the R.V. to the

buyers; and 2) whether the nonconformity substantially impairs the objective

value of the R.V. given the buyers’ particular needs. Because the buyers

had requested return of the purchase price well before filing suit, and

because the “reasonable time” for revoking acceptance is tolled while allowing

the seller reasonable opportunity to cure, revocation was timely.

Additional Example: Problem Case #7.

4. List the buyer’s options when the seller delivers nonconforming goods. Note what

must be done to effect a timely rejection.

Cyberlaw in Action: Providing Notice (page 612): Note the seller’s right to cure,

that is, to deliver conforming goods, when the buyer initially receives

nonconforming goods.

Fitl v. Strek (page 613). The buyer of a valuable baseball card sought

authentication and valuation 20 months after purchase. The buyer

immediately reported the nonconformities discovered by the valuation to the

seller and requested a refund. The court upheld the lower court’s

determinations that the buyer was entitled to rely upon the representations

of the seller and that the buyer notified the seller of the nonconformities

within a reasonable time of discovering those nonconformities.

5. Discuss the duties the buyer has concerning rejected goods. Distinguish the

situation where perishable goods are involved from the situation where the goods

are not perishable. Detail the consequences of various steps the buyer takes, or

fails to take.

Examples: Problem Cases #8 and 9.

E. Assurance, Repudiation and Excuse

1. Assurance. Discuss the kinds of circumstances under which a party to a contract

is entitled to demand assurances from the other party and indicate that if such

assurances are not provided, the party is deemed to have repudiated the contract.

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Chapter 21 – Performance of Sales Contracts

Example: Problem Case # 10.

The Global Business Environment: Insecurity in International Transactions (page

616): Note how the CISG deals with insecurity and discuss the facts and result in

the case involving the German buyer and Italian shoe manufacturer.

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Chapter 21 – Performance of Sales Contracts

2. Anticipatory Repudiation. Note the alternatives open to a party to a contract

when the other party repudiates the contract. Discuss when repudiation can be

withdrawn. Note the rationale behind the code rules on assurance and

anticipatory repudiation–to give the non-breaching party a chance to make

alternative arrangements to protect itself.

3. Excuse. Distinguish the Code’s concept of commercial impracticability from the

contract doctrine of impossibility. Note that under the Code, performance is

excused when unforeseen conditions cause a delay or inability to make delivery.

Rochester Gas and Electric Corporation v. Delta Star, Inc. (page 617). The

defense of commercial impracticability was not available to a seller where the

price of steel to be used in the equipment it had contracted to manufacture and sell

had increased, but the steel was still available, albeit it at a much higher price.

Accordingly, the seller was not relieved of its obligation to deliver the equipment

called for by the contract at the price that had been agreed to.

IV. RECOMMENDED REFERENCES:

See the references listed in Chapter 19, Formation of Sales Contracts.

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