978-0077733711 Chapter 22 Lecture Note

Unlock access to all the studying documents.

View Full Document

Chapter 22 – Remedies for Breach of Sales Contracts

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 be

able to:

1. Recall the basic objective of the remedies provided by the Code for a breach of

contract for the sale of goods.

2. Explain what is meant by the term liquidated damages and discuss when the Code

allows the enforcement of a liquidated damages clause in a contract for the sale of

goods.

3. Recall the statute of limitation provided in the Code that is applicable to lawsuits

alleging breach of contract for the sale of goods.

4. List and describe the remedies that the Code makes available to an injured seller.

5. List and describe the remedies that the Code makes available to an aggrieved buyer.

6. Explain what is meant by the term cover in the context of a contract for the sale of

goods.

7. Explain what is meant by the terms incidental damages and consequential damages

and indicate when an injured buyer is able to recover consequential damages.

8. Discuss when an aggrieved buyer has a right to specific performance of a contract for

the sale of goods.

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

22-1

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 22 – Remedies for Breach of Sales Contracts

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.

22-2

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 22 – Remedies for Breach of Sales Contracts

D. The fourth question asks whether the buyer has any options if a seller

proposes to sell 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.

E. The fifth question raises the question as to whether, having made a promise

and a commitment to produce the wedding dress in time for the wedding, it

would be ethical to sell it to someone else who offers more money for it. This

is a moral temptation—a choice between right and wrong—and it is difficult

to construct an argument that it would be ethical on these facts to sell the dress

to someone else.

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 non-feasibility of otherwise

obtaining an adequate remedy.” Code Section 2-718.

Star-Shadow Productions, Inc. v. Super 8 Sync Sound System (page 623). 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 Examples: Problem Cases #1 and 2..

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 #3.

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

22-3

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 22 – Remedies for Breach of Sales Contracts

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.

Example: Problem Cases #4.

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.

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.

Jewish Federation of Greater Des Moines v. Cedar Forrest Products Co. (page

627). Where a buyer repudiates a contract and the seller is a “lost volume seller”

because it had the capacity to produce the goods called for by the contract as well

as any other similar goods that another buyer might seek to obtain, the aggrieved

seller is entitled to recover as a measure of damages the profit that it lost on the

sale together with incidental and other damages.

Points for Discussion. Ask the students why the measure of damages suggested by

the Jewish Federation, namely incidental damages, would not be sufficient to put

Cedar Forrest Products in the same position it would have been in had the contract

not been repudiated.

Examples: Problem Cases # 5 and 6.

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.

7. Discuss the Code Rule on Liquidated Damages.

8. The Global Business Environment: Seller’s Remedies in International

Transactions (page 626): 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

22-4

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 22 – Remedies for Breach of Sales Contracts

chalkboard, one titled “Buyer’s Remedies,” a second titled “Procedure,” a third

titled “Damages Recovered,” and the last titled “Events Invoking the Remedy.”

Beer v. Bennett (page 630). Where a buyer justifiably revoked his acceptance of

a used automobile that had been disassembled by the seller and ultimately found

to not have all the necessary parts to reassemble it, the buyer was entitled to the

return of his purchase price and had the right to hold the goods at the seller’s

disposition for a reasonable time sufficient to permit the seller to remove them.

The court upheld a judgment requiring the return of the purchase price to the

buyer and his making arrangements for return shipping and payment of the same.

Cyberlaw in Action: E-Commerce Aids Buyers (page 630). Point out to students

how e-commerce can facilitate the giving of notice by a buyer or seller.

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.

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.

Green Wood Industrial Company v. Forceman International Development Group,

Inc. (page 632). Where the seller failed to deliver goods and the buyer did not

cover, the buyer was entitled to recover damages based on its lost profits.

However, the court concluded that it was improper for the trial court to allow

recovery as part of its claim for lost profits a claim by a third party against the

buyer for its alleged lost profits. The court said that the plaintiff-buyer would

have to prove to a reasonable certainty that the liability could and would be

enforced against the plaintiff or that the plaintiff otherwise could and would

satisfy the obligation.

Points for Discussion: What concerns did the court have about allowing the third

party’s claim for lost profits to be included in the buyer’s own claim for damages?

What course of action might the buyer follow to protect itself re the third-party

claim in this instance? How significant is/should be the fact that the third-party

claim would arise and be resolved under Chinese law?

4. 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.

Cahaba Disaster Recovery v. Rogers (page 634). Where the buyer order

“absorbent boom” to be used in the response to the Deepwater Horizon drilling

rig fire and explosion and the seller delivered boom that was not in-fact absorbent

boom, the buyer was entitled to recover the difference between the boom as

warranted and the value of the goods received at the time and place of acceptance

(which was zero).

Example: Problem Case #7.

22-5

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 22 – Remedies for Breach of Sales Contracts

Ethics in Action: Should the Buyer get an Honest Answer? (page 606): 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

Example: Problem Case #8.

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 #9.

8. Buyer and Seller Agreements as to Remedies. Review the rules concerning

agreements between buyers and sellers as to remedies.

9. The Global Business Environment: Buyer’s Remedies in International

Transactions (page 607): 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.

22-6

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.