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CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 19
whole or in part.
whole or in part.
CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 23
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
What is the policy behind the right of assurance? As the court in the Koch case noted, “A good
relationship is built on good communication. . . . [T]hat aphorism is no less true of long-term business dealings than it
is of marriages. . . . The law of contract . . . is designed to increase certainty in our dealings with one another.
Otherwise, few reasonable businesses would be willing to invest in long-term cooperative agreements which, by virtue
of the deal-specific investment, expose each party to significant risks of hold-up by the other. Thus, when one’s
contractual partner has reasonable grounds to fear that the contract will not be performed, one must answer those
fears at the risk of giving the counterparty license to terminate the contract.”
the contract price with interest, the amounts of the sales tax and delivery charge, and attorney’s fees, and ordered
Bobb’s to remove the piano. “[T]he purchaser of non-conforming goods like the offending piano retains the option to
claim either the difference in value or, as plaintiff clearly did in this case, in effect, to cancel the deal and get his
money back. This principle is based on the common sense idea that the purchaser is entitled to receive what he
wanted to buy and pay for and that the seller is not free to supply any non-conforming item [he or] she wishes just so
If the defendant had delivered the piano in new condition and the plaintiff had refused to pay for it
only out of “buyer’s remorse,” what might the court have ruled in this case? In these circumstances, the buyer
would have breached the parties’ contract. If the piano had not been returned and was still in the buyer’s possession,
the seller could sue for the purchase price or reclaim the goods. In either case, the seller might also sue for damages,
which would ordinarily be the difference between the contract price and the market price at the time and place of
REVIEWING—
PERFORMANCE AND BREACH
OF SALES AND LEASE CONTRACTS
GFI, Inc., a Hong Kong company, makes audio decoder chips, an essential component used in the
manufacture of MP3 players. Egan Electronics contracts with GFI to buy 10,000 chips on an installment
whole or in part.
contract, with 2,500 chips to be shipped every three months, F.O.B. Hong Kong via Air Express. At the time
for the first delivery, GFI delivers only 2,400 chips but explains to Egan that while the shipment is less than 5
percent short, the chips are of a higher quality than those specified in the contract and are worth 5 percent
more than the contract price. Egan accepts the shipment and pays GFI the contract price. At the time for the
second shipment, GFI makes a shipment identical to the first. Egan again accepts and pays for the chips. At
the time for the third shipment, GFI ships 2,400 of the same chips, but this time GFI sends them via Hong
Kong Air instead of Air Express. While in transit, the chips are destroyed. When it is time for the fourth
shipment, GFI again sends 2,400 chips, but this time Egan rejects the chips without explanation. Ask your
students to answer the following questions, using the information presented in the chapter.
1. Did GFI have a legitimate reason to expect that Egan would accept the fourth shipment? Why or
why not? Because Egan had accepted the previous shipments, and because they were, like this shipment,
only 5 percent short and of a quality superior to that designated in the parties’ contract, GFI had a legitimate
reason to expect that Egan would accept the fourth shipment.
2. Does the substitution of carriers in the third shipment constitute a breach of the contract by GFI?
Explain. The UCC allows the seller to substitute carriers if the carrier becomes unavailable or impracticable.
Thus, if GFI can show that Air Express was unavailable or impracticable through no fault of either itself or
Egan, the substitution of carriers would not be a breach of the contract.
3. Suppose that the silicon used for the chips becomes unavailable for a period of time.
Consequently, GFI cannot manufacture enough chips to fulfill the contract, but does ship as many as
it can to Egan. Under what doctrine might a court release GFI from further performance of the
contract? The doctrine of commercial impracticability could be used to excuse GFI from further performance
of its contractual obligations. When the performance of a contract becomes extremely difficult due to an
unexpected occurrence, a party may invoke this doctrine to release it from performing an obligation that might
be impossible or financially ruinous. In this situation, because GFI cannot obtain the silicon necessary to
make enough chips to fulfill its obligations under the contract, it can ask the court to release it from further
performance due to commercial impracticability.
4. Under the UCC, does Egan have a right to reject the fourth shipment? Why or why not? The
contract between GFI and Egan is an installment contract. Under the UCC, a buyer or lessee can reject an
installment only if the nonconformity substantially impairs the value of the installment and cannot be cured.
Given the general circumstances described in this problem, a court would most likely determine that the fourth
shipment, which is only 5 percent short in quantity and upgraded in quality, does not constitute a substantial
nonconformity.
DEBATE THIS
If a contract specifies a particular carrier, then the shipper must use that carrier or be in breach
of the contract—no exceptions should ever be allowed. If both parties agree to a specific carrier for the
goods, then of course, if there is a substitution of carriers, the seller is in breach and buyer can not only
refuse the shipment but sue for damages. That’s why we call such pieces of paper agreements—both parties
agreed to the terms in the contract.
To impose such a hard-and-fast rule about never being able to substitute carriers would impose an
undue burden on all sellers of goods that have to be transported. If there are no exceptions, then even a
bona fide reason for the substitution—such as a labor strike—will never prevail. Much economic damage will
result, and for no benefit to society.
whole or in part.
whole or in part.
whole or in part.
whole or in part.
CHAPTER 18: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 23
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
What is the policy behind the right of assurance? As the court in the Koch case noted, “A good
relationship is built on good communication. . . . [T]hat aphorism is no less true of long-term business dealings than it
is of marriages. . . . The law of contract . . . is designed to increase certainty in our dealings with one another.
Otherwise, few reasonable businesses would be willing to invest in long-term cooperative agreements which, by virtue
of the deal-specific investment, expose each party to significant risks of hold-up by the other. Thus, when one’s
contractual partner has reasonable grounds to fear that the contract will not be performed, one must answer those
fears at the risk of giving the counterparty license to terminate the contract.”
the contract price with interest, the amounts of the sales tax and delivery charge, and attorney’s fees, and ordered
Bobb’s to remove the piano. “[T]he purchaser of non-conforming goods like the offending piano retains the option to
claim either the difference in value or, as plaintiff clearly did in this case, in effect, to cancel the deal and get his
money back. This principle is based on the common sense idea that the purchaser is entitled to receive what he
wanted to buy and pay for and that the seller is not free to supply any non-conforming item [he or] she wishes just so
If the defendant had delivered the piano in new condition and the plaintiff had refused to pay for it
only out of “buyer’s remorse,” what might the court have ruled in this case? In these circumstances, the buyer
would have breached the parties’ contract. If the piano had not been returned and was still in the buyer’s possession,
the seller could sue for the purchase price or reclaim the goods. In either case, the seller might also sue for damages,
which would ordinarily be the difference between the contract price and the market price at the time and place of
REVIEWING—
PERFORMANCE AND BREACH
OF SALES AND LEASE CONTRACTS
GFI, Inc., a Hong Kong company, makes audio decoder chips, an essential component used in the
manufacture of MP3 players. Egan Electronics contracts with GFI to buy 10,000 chips on an installment
whole or in part.
contract, with 2,500 chips to be shipped every three months, F.O.B. Hong Kong via Air Express. At the time
for the first delivery, GFI delivers only 2,400 chips but explains to Egan that while the shipment is less than 5
percent short, the chips are of a higher quality than those specified in the contract and are worth 5 percent
more than the contract price. Egan accepts the shipment and pays GFI the contract price. At the time for the
second shipment, GFI makes a shipment identical to the first. Egan again accepts and pays for the chips. At
the time for the third shipment, GFI ships 2,400 of the same chips, but this time GFI sends them via Hong
Kong Air instead of Air Express. While in transit, the chips are destroyed. When it is time for the fourth
shipment, GFI again sends 2,400 chips, but this time Egan rejects the chips without explanation. Ask your
students to answer the following questions, using the information presented in the chapter.
1. Did GFI have a legitimate reason to expect that Egan would accept the fourth shipment? Why or
why not? Because Egan had accepted the previous shipments, and because they were, like this shipment,
only 5 percent short and of a quality superior to that designated in the parties’ contract, GFI had a legitimate
reason to expect that Egan would accept the fourth shipment.
2. Does the substitution of carriers in the third shipment constitute a breach of the contract by GFI?
Explain. The UCC allows the seller to substitute carriers if the carrier becomes unavailable or impracticable.
Thus, if GFI can show that Air Express was unavailable or impracticable through no fault of either itself or
Egan, the substitution of carriers would not be a breach of the contract.
3. Suppose that the silicon used for the chips becomes unavailable for a period of time.
Consequently, GFI cannot manufacture enough chips to fulfill the contract, but does ship as many as
it can to Egan. Under what doctrine might a court release GFI from further performance of the
contract? The doctrine of commercial impracticability could be used to excuse GFI from further performance
of its contractual obligations. When the performance of a contract becomes extremely difficult due to an
unexpected occurrence, a party may invoke this doctrine to release it from performing an obligation that might
be impossible or financially ruinous. In this situation, because GFI cannot obtain the silicon necessary to
make enough chips to fulfill its obligations under the contract, it can ask the court to release it from further
performance due to commercial impracticability.
4. Under the UCC, does Egan have a right to reject the fourth shipment? Why or why not? The
contract between GFI and Egan is an installment contract. Under the UCC, a buyer or lessee can reject an
installment only if the nonconformity substantially impairs the value of the installment and cannot be cured.
Given the general circumstances described in this problem, a court would most likely determine that the fourth
shipment, which is only 5 percent short in quantity and upgraded in quality, does not constitute a substantial
nonconformity.
DEBATE THIS
If a contract specifies a particular carrier, then the shipper must use that carrier or be in breach
of the contract—no exceptions should ever be allowed. If both parties agree to a specific carrier for the
goods, then of course, if there is a substitution of carriers, the seller is in breach and buyer can not only
refuse the shipment but sue for damages. That’s why we call such pieces of paper agreements—both parties
agreed to the terms in the contract.
To impose such a hard-and-fast rule about never being able to substitute carriers would impose an
undue burden on all sellers of goods that have to be transported. If there are no exceptions, then even a
bona fide reason for the substitution—such as a labor strike—will never prevail. Much economic damage will
result, and for no benefit to society.
whole or in part.
whole or in part.
