978-1285860381 Chapter 23 Solution Manual Part 2

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Buyer’s Remedies

If a seller fails to deliver goods, repudiates, or if the buyer rightfully rejects the goods, the buyer is

entitled to cancel the contract. She may also recover money paid to the seller, assuming she has not

received the goods. In addition, she may be entitled to:

• incidental and consequential damages

• specific performance

• cover

• damages for non-delivery,

• accept then on-conforming goods and seek damages, or

• liquidated damages.

Case: Smith v. Penbridge Associates, Inc.1

Facts: Donna and Alan Smith wanted to raise emus, which are flightless Australian birds that look like

ostriches. The creatures reproduce rapidly in almost any terrain and are sold for their meat, which is

high in protein and low in fat, and for their oil, leather, and feathers. The Smiths paid Tomie Clark, the

manager of Penbridge Farms, $4,000 as a down payment for a “proven breeder pair.” Since it is

impossible to discern an emu’s gender by looking, the Smiths asked Clark several times if the two birds

were male and female, and he assured them that the pair had successfully produced chicks the previous

breeding season.

The Smiths placed the prospective lovebirds in the same pen, but the breeding season passed

without a hint of romance. Donna Smith phoned Penbridge Farms, which advised her on a procedure

used to determine gender. Donna performed this task and learned that the emus were both gentlemen.

The would-be breeders asked for their money back but Penbridge refused, so the Smiths flew into

court. The trial judge awarded the couple $105,215, representing lost profits from their anticipated

chicks. Penbridge appealed, arguing that a buyer cannot count her chicks before they have hatched.

Issue: Did the trial court err by awarding lost profits?

Excerpts from Judge Popovich’s Decision: [Penbridge claimed that the] evidence was speculative

and insufficient to support an award of consequential damages, including damages for lost profits.

[Penbridge argued that, since] the breeding of emus is a relatively new business, and there is no

reliable data to project the ultimate success in breeding emus, the [Smiths’] claims for loss of chick

production are entirely speculative and do not meet the “reasonable certainty” requirement of the law

of damages.

The Uniform Commercial Code provides the following circumstances for the recovery of

consequential damages resulting from the breach of the seller: any loss resulting from general or

particular requirements and needs of which the seller at the time of contracting had reason to know and

which could not reasonably be prevented by “cover” or otherwise. [UCC §2-715(2).]

The determination of damages lies with the fact finder, who weighs the evidence and assesses the

credibility of the witnesses. Although the court recognized that emu breeding was a relatively new

commercial business, it determined that the award of consequential damages could be calculated with a

reasonable degree of certainty from the evidence adduced at trial. The court below initially found that

the value of a three-month old chick produced from the [previous] season was $5,000. The lower court

then concluded that [the Smiths] suffered incidental and consequential damages in the amount of

$90,000.00. From our thorough evaluation of the record, we conclude that the evidence was sufficient

for the lower court to measure lost profits with a reasonable degree of certainty. The basis for this rule

is that the breaching party should not be allowed to shift the loss to the injured party when damages,

even if uncertain in amount, were certainly the responsibility of the party in breach.

Order affirmed.

1 440 Pa. Super. 410, 655 A.2d 1015, 1995 Pa. Super. LEXIS 574, Superior Court of Pennsylvania, 1995

Question: What are incidental damages?

Answer: Damages when include costs in advertising for replacements, obtaining new goods, and

shipping new goods.

Question: What are consequential damages?

Answer: Losses caused by a breach, including profits.

Case: Hessler v Crystal Lake Chrysler-Plymouth, Inc.2

Facts: The facts are provided in the chapter opening. The trial court awarded Hessler $29,853,

representing the difference between his contract with Crystal Lake and the sum he ultimately spent

purchasing a new Prowler. Crystal Lake appealed, arguing that Hessler covered unreasonably.

Issue: Did Hessler cover reasonably?

Holding: Judgment for Hessler affirmed. Excerpts from the court’s opinion:

The trial court did not err in finding that defendant’s foregoing actions reasonably indicated to

plaintiff that defendant would not deliver to him a Prowler under the Agreement. Defendant

contracted to deliver a Prowler to plaintiff as soon as possible. It was not against the manifest

weight of the evidence for the trial court to find that defendant [breached] the Agreement when it

repeatedly informed plaintiff that it would not deliver to him the first Prowler it received. Such

actions made it sufficiently clear to plaintiff that defendant would not perform under the

Agreement.

Defendant’s final argument is that the trial court erred in calculating the damages award because

plaintiff effected an inappropriate cover. Defendant contends that plaintiff did not recontact the 38

dealers he had called in September to inquire if they would sell him a Prowler. Instead, on the

same day that Rosenberg refused to sell him a car, plaintiff visited another dealership and

purchased a Prowler for about $40,000 over the list price.

UCC §2-712 provides that the test of proper cover is whether at the time and place the buyer

acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove

that the method of cover used was not the cheapest and most effective. In light of the evidence

concerning Hessler’s dealings with Rosenberg and his attempts to locate the car from another

dealer, we conclude that the court’s determination that plaintiff effected a proper cover was not

against the manifest weight of the evidence.

Question: The UCC’s cover provision requires the plaintiff act in good faith and a reasonable

manner. Why was Hessler’s conduct reasonable?

Answer: After Rosenberg clearly indicated to Hessler on September 22 that he would not sell him

Non-Delivery

In some cases the buyer does not cover, or fails to cover reasonably, leaving it with damages for

non-delivery. The measure of damages for non-delivery is the difference between the market price

at the time the buyer learns of the breach and the contract price, plus incidental and consequential

damages, minus expenses saved.

Acceptance of Non-Conforming Goods

A buyer will sometimes accept non-conforming goods from the seller, either because no alternative

is available or because the buyer expects to obtain some compensation for the defects. Where the

buyer has accepted goods but notified the seller that they are non-conforming, he may recover

2 338 Ill.App.3d 1010, 788 N.E.2d 405, 273 Ill. Dec. 96 Appellate Court of Illinois, 2003

damages for the difference between the goods as promised and as delivered, plus incidental and

consequential damages.

Liquidated Damages

§2-718: Either party may obtain liquidated damages but only in an amount that is reasonable at the

time of the contract.

Multiple Choice Questions

1. CPA QUESTION Cara Fabricating Co. and Taso Corp. agreed orally that Taso would custom

manufacture a compressor for Cara at a price of $120,000. After Taso completed the work at a cost

of $90,000, Cara notified Taso that the compressor was no longer needed. Taso is holding the

compressor and has requested payment from Cara. Taso has been unable to resell the compressor

for any price. Taso incurred storage fees of $2,000. If Cara refuses to pay Taso and Taso sues Cara,

the most Taso will be entitled to recover is:

(a) $92,000

(b) $105,000

(d) $122,000

2. CPA QUESTION On February 15, Mazur Corp. contracted to sell 1,000 bushels of wheat to

Good Bread, Inc., at $6 per bushel with delivery to be made on June 23. On June 1, Good advised

Mazur that it would not accept or pay for the wheat. On June 2, Mazur sold the wheat to another

customer at the market price of $5 per bushel. Mazur had advised Good that it intended to resell the

wheat. Which of the following statements is correct?

(a) Mazur can successfully sue Good for the difference between the resale price and the contract

price.

(b) Mazur can resell the wheat only after June 23.

(d) Good can successfully sue Mazur for specific performance.

3. Under the UCC, to tender delivery, a seller must ____.

(a) make the goods available at a reasonable time,

(b) keep the goods available for a reasonable period

(d) All of the above

(e) None of the above

4. Blackburn FC orders 10,000 soccer jerseys from Alpha Co. to sell in its stadium store. They are to

be delivered on July 10. When they arrive early on July 2, Blackburn is disappointed because the

collars, which are supposed to be white, are blue. Blackburn notifies Alpha of the error. Alpha says

that it wants a chance to “make it right”. If Alpha delivers another shipment of 10,000 conforming

jerseys on July 10, Blackburn ____.

(a) absolutely must accept the new shipment

(b) must accept the new shipment if Alpha offers a reasonable discount

(d) may accept the new shipment, but has the option to reject it

5. Assume that a year has passed, and Blackburn FC once again orders 10,000 soccer jerseys from

Alpha to be delivered on July 10. This time, nonconforming jerseys are delivered on July 10.

Alpha thoroughly inspected the shirts before shipping, and had no reason to spot the error. When

Blackburn notifies Alpha of the problem, Alpha says that it intends to cure the defect. If Blackburn

cannot show that it will suffer any serious harm, does the UCC require Blackburn to give Alpha a

chance to cure this time?

(a) No, because the contract’s deadline has passed.

(b) Yes, it must give Alpha until July 17 to cure.

(d) Yes, it must give Alpha a reasonable amount of time to cure.

Case Questions

1. Mastercraft Boat manufactured boats and often used instrument panels and electrical systems

assembled and/or manufactured by Ace Industries. Typically, Ace would order electrical

instruments and other parts and assemble them to specifications that Mastercraft provided.

Mastercraft decided to work with a different assembler, M & G Electronics, so it terminated its

relationship with Ace. Mastercraft then requested that Ace deliver all of the remaining instruments

and other parts that it had purchased for use in Mastercraft boats. Ace delivered the inventory to

Mastercraft, which inspected it and kept some of the items, but returned others to Ace, stating that

the shipment had been unauthorized. Later, Mastercraft requested that Ace deliver the remaining

parts (which Mastercraft had sent back to Ace) to M & G, which Ace did. Mastercraft then refused

to pay for these parts, claiming that they were non-conforming. Is Ace entitled to its money for the

parts?

Answer: Yes, Ace is entitled to its money because inspection sometimes creates acceptance.

Mastercraft inspected the goods, kept some, and returned others, without stating that they were

2. Lewis River Golf, Inc., grew and sold sod. It bought seed from defendant, O. M. Scott & Sons,

under an express warranty. But the sod grown from the Scott seeds developed weeds, a breach of

Scott’s warranty. Several of Lewis River’s customers sued, unhappy with the weeds in their grass.

Lewis River lost most of its customers, cut back its production from 275 acres to 45 acres, and

destroyed all remaining sod grown from Scott’s seeds. Eventually, Lewis River sold its business at

a large loss. A jury awarded Lewis River $1,026,800, largely for lost profits and loss of goodwill.

Scott appealed, claiming that a plaintiff may not recover for lost profits and goodwill. Comment.

Answer: Scott is wrong. Lost profits and goodwill are both consequential damages, and both are

potentially recoverable. The court can measure lost profits by contracts actually cancelled, by the

3. The AM/PM Franchise association was a group of 150 owners of ARCO Mini-Market franchises in

Pennsylvania and New York. Each owner had an agreement to operate a gas station and

mini-market, obtaining all gasoline, food, and other products, from ARCO. The Association sued,

claiming that ARCO had experimented with its formula for unleaded gasoline, using oxinol, and

that the poor-quality gas had caused serious engine problems and a steep drop in customers. The

Association demanded (1) lost profits for gasoline sales, (2) lost profits for food and other items,

and (3) loss of goodwill. The trial court dismissed the case, ruling that the plaintiff’s claims were

too speculative, and the Association appealed. Please rule.

Answer: Reversed. The Association’s members can potentially recover consequential damages for

lost profits. The losses could represent lost sales of gasoline, lost sales of other items in the

mini-marts, and lost goodwill. Gasoline is a legitimate lost profit because, under the agreement

4.Y ou Be the Judge: WRITING PROBLEM Clark Oil agreed to sell Amerada

Hess several hundred thousand barrels of oil at $24 each by January 31, with the sulfur

content not to exceed 1 percent. On January 26, Clark tendered oil from various ships. Most of the

oil met specifications, but a small amount contained excess sulfur. Hess rejected all of the oil.

Clark recirculated the oil, meaning that it blended the high-sulfur oil with the rest, and notified

Amerada that it could deliver 100 percent of the oil, as specified, by January 31. Hess did not

respond. On January 30, Clark offered to replace the oil with an entirely new shipment, due to

arrive February 1. Hess rejected the offer. On February 6, Clark retendered the original oil, all of

which met contract terms, and Hess rejected it. Clark sold the oil elsewhere for $17.75 per barrel

and filed suit. Is Clark entitled to damages? Argument for Clark: A seller is entitled to cure any

defects. Clark did so in good faith and offered all of the oil by the contract deadline. Clark went

even further, offering an entirely new shipment of oil. Hess acted in bad faith, seeking to obtain

cheaper oil. Clark is entitled to the difference between the contract price and its resale price.

Argument for Hess: Hess was entitled to conforming goods, and Clark failed to deliver. Under the

perfect tender rule, that is the end of the discussion. Hess had the right to reject non-conforming

goods, and it promptly did so. Hess chose not to deal further with Clark because it had lost

confidence in Clark’s ability to perform.

Answer: The court granted Clark’s motion for summary judgment. Clark’s statement that it would

reblend the oil was a legally sufficient offer to cure. Hess responded by offering to pay less, which

was a counteroffer, that is, a rejection of the offer to cure. That entitled Clark to summary

judgment under UCC section 2-508(1). The company is also entitled to summary judgment under

5. In March, Amy contracted for Gino Fashion Tuxedo to outfit her groom on their wedding day. The

contract provided that any cancellation would automatically result in forfeiture of the deposit.

Weeks later, the couple broke up and Amy notified Gino that the October wedding was off. Gino’s

charged Amy’s credit card for the full deposit amount of $804. Amy sued Gino’s, claiming the

liquidated damages clause was an unreasonable penalty. What result?

Answer: Based on Amy Berland v. Gino Fashion Tuxedo, 10 Misc. 3d 139(A) (S. Ct. NY 2005).

Discussion Questions

1. Laura and Bruce Trethewey hired Basement Waterproofing Nationwide, Inc., to waterproof the

walls in their basement for a fee of $2,500. BWNI’s contract stated: “BWNI will service any

seepage in the areas waterproofed at no additional cost to the customer. All labor and materials will

be at the company’s expense. Liability for any damage shall be limited to the total price paid for

this contract.” The material that BWNI used to waterproof the Tretheweys’ walls swelled and

caused large cracks to open in the walls. Water poured into the basement, and the Tretheweys

ultimately spent $38,000 to repair the damage. They sued, claiming negligence and breach of

warranty, but BWNI claimed its liability was limited to $2,500. Please rule.

Answer: The court ruled that regardless of whether the liability limitation was interpreted as a

liquidated damage clause or a limitation of consequential damages, the Trethewey’s won. As a

liquidated damages clause, the court held, the parties had intended it to cover cases in which the

waterproofing did not work as intended, not cases where BWNI did its work negligently. It does

2. ETHICS Based on the facts in Question 1, comment on BWNI’s ethics . BWNI wanted to protect

itself against unlimited damage claims. Is this a legitimate way to do it? If you think BWNI did

behave ethically, what advice would you have for consumers who hire home improvement

companies? If you believe the company did not behave ethically, imagine that you are a BWNI

executive, charged with drafting a standard contract for customers. How would you protect your

company’s interests while still acting in a way you consider moral?

3. Consider the UCC’s exceptions to the perfect tender rule: usage of trade, course of dealing, and

course of performance. Do these all seem reasonable, or are they too lenient on sellers who deliver

nonconforming goods?

4. Are the UCC’s rules related to cure sensible? If a seller ships goods that are not what you ordered,

should you (in many circumstances) be required to give them a chance to make it right?

5. Under the terms of a long-term supply contract, Linde supplied United Aluminum Corporation

(UAC) with nitrogen at $0.23 per unit. Upon expiration, that contract gave UAC the sole option to

renew the agreement for five additional years at the same price. When UAC exercised the option,

Linde refused, arguing that the price of nitrogen had risen by 38 percent over the life of the

contract. UAC sued, seeking to enforce the $0.23 price. Linde claimed commercial impracticability.

Should a court force Linde to abide by the terms of the original deal?

Answer: UNITED ALUMINUM CORPORATION V. LINDE, INC.2009 U.S. DIST. LEXIS 74259.