978-1285770178 Lecture Note BL ComLaw 1e IM-Ch18 Part 1

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whole or in part.

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

CHAPTER OUTLINE

I. Performance Obligations

A. THE UCC’S GOOD FAITH PROVISION

All parties to every contract under the UCC are subject to the obligations of good faith and commercial

reasonableness [UCC 1–203]. Merchants are held to a higher standard—honesty in fact and the ob–

servance of reasonable commercial standards of fair dealing in the trade [UCC 2–103(1)(b)].

CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 3

Cross References:

Sections 1-201; 1-205; 1-208; 2-103; 2-508; 2-603; 2-614; 2-615.

Definitional Cross References:

“Contract”. Section 1-201.

“Good faith”. Section 1-201; 2-103.

that either party can rightfully request delivery in lots [UCC 2–307].

B. PLACE OF DELIVERY

If a contract does not specify a place of delivery, and the buyer is to pick up the goods, the place is the

seller’s business or, if the seller has none, the seller’s residence [UCC 2–308]. If a contract involves

1. Shipment Contracts

Under a shipment contract, a seller must—

• Put goods into the hands of a carrier.

• Contract for their transport.

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Purposes of Changes: To continue the general policy of the prior uniform statutory provision while in–

corporating certain modifications [including] the necessity of giving notice of the shipment to the buyer, so

that:

* * * *

2. The contract to be made with the carrier under paragraph (a) must conform to all express terms of the

agreement, subject to any substitution necessary because of failure of agreed facilities as provided in the later

provision on substituted performance. However, under the policies of this Article on good faith and

commercial standards and on buyer’s rights on improper delivery, the requirements of explicit provisions must

be read in terms of their commercial and not their literal meaning. This policy is made express with respect to

bills of lading in a set in the provision of this Article on form of bills of lading required in overseas shipment.

3. In the absence of agreement, the provision of this Article on options and cooperation respecting

performance gives the seller the choice of any reasonable carrier, routing and other arrangements. Whether

or not the shipment is at the buyer’s expense the seller must see to any arrangements, reasonable in the

circumstances, such as refrigeration, watering of live stock, protection against cold, the sending along of any

necessary help, selection of specialized cars and the like for paragraph (a) is intended to cover all necessary

arrangements whether made by contract with the carrier or otherwise. There is, however, a proper relaxation

of such requirements if the buyer is himself in a position to make the appropriate arrangements and the seller

gives him reasonable notice of the need to do so. It is an improper contract under paragraph (a) for the seller

to agree with the carrier to a limited valuation below the true value and thus cut off the buyer’s opportunity to

recover from the carrier in the event of loss, when the risk of shipment is placed on the buyer by his contract

with the seller.

* * * *

5. This Article, unlike the prior uniform statutory provision, makes it the seller’s duty to notify the buyer of

shipment in all cases. The consequences of his failure to do so, however, are limited in that the buyer may

reject on this ground only where material delay or loss ensues.

A standard and acceptable manner of notification in open credit shipments is the sending of an invoice

and in the case of documentary contracts is the prompt forwarding of the documents as under paragraph (b)

of this section. It is also usual to send on a straight bill of lading but this is not necessary to the required

notification. However, should such a document prove necessary or convenient to the buyer, as in the case of

loss and claim against the carrier, good faith would require the seller to send it on request.

Frequently the agreement expressly requires prompt notification as by wire or cable. Such a term may be

of the essence and the final clause of paragraph (c) does not prevent the parties from making this a particular

ground for rejection. To have this vital and irreparable effect upon the seller’s duties, such a term should be

part of the “dickered” terms written in any “form,” or should otherwise be called seasonably and sharply to the

seller’s attention.

6. Generally, under the final sentence of the section, rejection by the buyer is justified only when the

seller’s dereliction as to any of the requirements of this section in fact is followed by material delay or

damage. It rests on the seller, so far as concerns matters not within the peculiar knowledge of the buyer, to

establish that his error has not been followed by events which justify rejection.

CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 5

whole or in part.

2. Destination Contracts

Under a destination contract, a seller must tender goods at a reasonable hour and hold them at the

buyer’s disposal for a reasonable length of time, giving appropriate notice. The seller must also give

the buyer any documents of title necessary for the buyer to obtain delivery.

D. THE PERFECT TENDER RULE

A seller or lessor must deliver goods in conformity with a contract in every detail [UCC 2–601, 2A–509].

CASE SYNOPSIS—

Case 18.1: Wilson Sporting Goods Co. v. U.S. Golf & Tennis Centers, Inc.

U.S. Golf & Tennis Centers, Inc., agreed to buy 96,000 golf balls from Wilson Sporting Goods Co. for

$20,000. Wilson stated that U.S. Golf was receiving the lowest price ($5 per two–dozen unit). Wilson shipped

conforming balls, but U.S. Golf did not pay. U.S. Golf claimed that Wilson had sold the same product to

another buyer for $2 per unit and asked for a price reduction. Wilson refused and filed a suit to collect the full

price. The court entered a judgment in Wilson’s favor. U.S. Golf appealed.

A state intermediate appellate court affirmed. When a seller tenders conforming goods, the buyer is

obligated to accept and pay for the goods. Because the balls conformed to the contract, U.S. Golf was

obligated to accept them and pay the contract price. Despite U.S. Golf’s claim, there was no evidence that

Wilson had engaged in misrepresentation.

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Notes and Questions

Does the outcome in this case mean that the other buyer has to pay the same price for its balls

that U.S. Golf was ordered to pay? No. In the facts of this case, neither party’s contract has any bearing or

effect on the other party’s contract.

Suppose that U.S. Golf had presented as evidence a contract between Wilson and another buyer a

month after this shipment was delivered to U.S. Golf. In that contract, Wilson agreed to sell the same

golf balls for $4.00 per unit to a different buyer. Would the court have ruled differently in this dispute?

Why or why not? Most likely, the court would not have ruled differently under this circumstance. The second

contract would have been entered into a month after Wilson averred to U.S. Golf that it was receiving the

lowest price. This would not establish misrepresentation or undercut the price term in Wilson’s contract with

U.S. Golf.

Under what circumstances might Wilson have agreed with U.S. Golf to reduce the contract price?

When a seller tenders conforming goods, the buyer is obligated to accept and pay for the goods. But when a

seller tenders nonconforming goods, the buyer has other options. The buyer can insist that the goods be

replaced with conforming goods, or if that is not possible, the parties may agree to a price reduction or other

change in terms.

goods that conform to the terms of a contract in every detail.

alleged that Wilson had misrepresented the price of the goods. Wilson filed a suit against U.S. Golf to recover

the price (plus interest, attorney’s fees, and other expenses).

goods that conform to the terms of a contract in every detail.

alleged that Wilson had misrepresented the price of the goods. Wilson filed a suit against U.S. Golf to recover

the price (plus interest, attorney’s fees, and other expenses).

Even if the goods are conforming, however, there are circumstances in a seller might agree to a price

reduction. In this case, for example, Wilson might have agreed to the lower price to avoid litigation and its bad

publicity or to retain U.S. Golf as a customer.

whole or in part.

CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 9

whole or in part.

The court ruled in favor of the district. An increase in the price of milk was not unexpected because the

previous year the price had risen 10 percent and the price of milk had traditionally varied. Also, general in-

flation should have been anticipated. Maple Farms had reason to know these facts and could have contracted

with the district to protect itself.

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Notes and Questions

Does the outcome in this case mean that Maple Farms has to fulfill all of its contracts with other

school districts? Apparently, Maple Farms would be required to honor its contracts. Had the court decided

in Maple Farm’ favor, perhaps the company could have renegotiated the terms of its contracts with the other

parties.

In this case, due to severe inflation that was caused by factors beyond the plaintiff’s control, the plaintiff

was unable to meet its contractual obligations without losing a great deal of money. Why were these facts

insufficient to persuade the court that the plaintiff’s performance was commercially impracticable?

The key factor here was that inflation in the market price for milk was foreseeable at the time the contract was

entered into, given the knowledge that was available to the parties.

If the severe inflation would have caused Maple Farms to go bankrupt, would that have been

enough to release it from its obligations under the contract? Why or why not? Maybe. This set of

circumstances would most likely be seen as unforeseeable, because Maple Farms would probably not enter

into a contract if there was a foreseeable risk of total financial ruin. If bankruptcy were imminent, the court

may have considered the continuation of the contract a commercial impracticability.

ANSWER TO THE “WHAT IF THE FACTS WERE DIFFERENT?”

QUESTION IN CASE 18.2

Suppose that the court had ruled in the plaintiff’s favor. How might that ruling have affected the

plaintiff’s contracts with other parties? The actual outcome of the case meant that Maple Farms had to

fulfill all of its contracts with other school districts. Had the court decided in Maple Farm’s favor, however, the

company might have been able to successfully renegotiate the terms of its contracts with the other parties.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Other cases focusing on commercial impracticability include the following:

• Leanin’ Tree, Inc. v. Thiele Technologies, Inc., 43 Fed.Appx. 318 (10th Cir. 2002) (a seller’s performance

of a contract for the design and manufacture of an automated carton-packing machine was not excusable by

reason of impracticability when the manufacturing problems were foreseeable).

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whole or in part.

• Speciality Tires of America, Inc. v. CIT Group/Equipment Financing, Inc., 82 F.Supp.2d 434 (W.D.Pa.

2000) (a seller’s performance of a contract for the delivery of tire presses could be excused by reason of

impracticability when the goods, which were owned by the seller, were in the possession of a third party that

refused to permit the seller to take the presses).

• Clark v. Wallace County Co-operative Equity Exchange, 986 P.2d 391 (Kan.App. 1999) (a seller’s

performance of a contract for the delivery of corn was not excusable by reason of impracticability, despite bad

weather, when the contract did not specify that the corn had to be grown on certain land and a shortage could

have been covered by buying corn from another source).

When goods are destroyed through a casualty that is no fault of either party and before risk passes

to the buyer or lessee, the parties are excused from performance [UCC 2–613, 2A–221]. If goods

are only partially destroyed, the buyer or lessee can treat the contract as void or accept the goods

with a price allowance.

be considered repudiation of the contract [UCC 2–609, 2A–401].

b. The Duty of Cooperation

This same rule applies if cooperation is needed and not given [UCC 2–311(3)(b)].].

B. RIGHT OF INSPECTION

A buyer’s right to inspect the goods is absolute (except for C.O.D. shipments [UCC 2–513(3)]). If the

goods are not what were ordered, there is no duty to pay. Inspection can be at any reasonable place and

time and in any reasonable manner (determined by custom of the trade, past practices of the parties,

and the like].

C. ACCEPTANCE

A buyer or lessee can accept by—

• Expressly accepting a shipment by words or conduct [UCC 2–606(1)(a), 2A–515(1)(a)].