CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 513
ENHANCING YOUR LECTURE—
EVERY DAY COUNTS
The term reasonable appears throughout the UCC. With respect to the right of rejection, the UCC provides that
the buyer or lessee must reject goods within a “reasonable” time. The UCC makes it clear, however, that parties who
desire more certainty can include a provision in their contract specifying the time period for rejection. UCC 1–204(1)
states that “whenever this act requires any action to be taken within a reasonable time, any time which is not
manifestly unreasonable may be fixed by agreement.” Suppose, though, that a contract states that the buyer’s right to
reject the goods is limited to ten days. Even though “ten days” is more specific than “a reasonable time,” there is still
no guarantee that a dispute will not arise over the letter of the law in this instance.
THE BOTTOM LINE
This case underscores the importance of making sure that both parties (1) understand precisely what a certain
contract term means and (2) take each contract term seriously.
a. Northwest Airline, Inc. v. Aeroservice, Inc., 168 F.Supp.2d 1052 (D.Minn. 2001).
2. Revocation of Acceptance
Acceptance can be revoked if a nonconformity substantially impairs the value and—
• Acceptance was based on a reasonable assumption that the nonconformity would be cured, and it has
not been cured within a reasonable period of time [UCC 2–608(1)(a), 2A–517(1)(a)].
3. The Right to Recover Damages for Accepted Goods
A buyer or lessee may keep nonconforming goods and recover damages, if the seller or lessor is notified
within a reasonable time after the defect was or should have been discovered (or within the time specified
514 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
in the contract) [UCC 2–607(3), 2A–516(3)]. The measure of damages is the difference between the value of
the goods as accepted and their value if they had been delivered as promised, plus incidental and
consequential damages [UCC 2–714(2), 2A–519(4)].
ENHANCING YOUR LECTURE—
THE CISG’S APPROACH TO
REVOCATION OF ACCEPTANCE
Under the UCC, a buyer or lessee who has accepted goods may be able to revoke acceptance under the
circumstances just mentioned. Provisions of the United Nations Convention on Contracts for the International Sale of
Goods (CISG) similarly allow buyers to rescind their contracts after they have accepted the goods.
The CISG, however, takes a somewhat different—and more direct—approach to the problem than the UCC does.
In the same circumstances that permit a buyer to revoke acceptance under the UCC, under the CISG the buyer can
FOR CRITICAL ANALYSIS
What is the essential difference between revoking acceptance and bringing a suit for breach of contract?
VII. Additional Provisions Affecting Remedies
A seller and buyer can expressly provide for remedies in addition to, in lieu of, or otherwise different from those
provided in the UCC [UCC 2–719(1), 2A–503(1)].
A. EXCLUSIVE REMEDIES
Any remedy can be made exclusive (at least until it fails in its essential purpose) [UCC 2–719(2), 2A–503(2)].
B. CONSEQUENTIAL DAMAGES
A contract can limit or exclude consequential damages, if that is not unconscionable [UCC 2–719(3), 2A–503(3)].
ENHANCING YOUR LECTURE—
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 515
WHAT CAN YOU DO
WHEN A CONTRACT IS BREACHED?
A contract for the sale of goods has been breached. Can the dispute be settled without a trip to court? The
answer depends on the willingness of the parties to agree on an appropriate remedy.
CONTRACTUAL CLAUSES ON APPLICABLE REMEDIES
Often, the parties to sales and lease contracts agree in advance, in their contracts, on what remedies will be
applicable in the event of a breach. This may take the form of a contract provision restricting or expanding remedies
available under the Uniform Commercial Code [UCC 2–719]. Such clauses help to reduce uncertainty and the necessity
for costly litigation.
WHEN THE CONTRACT IS SILENT ON APPLICABLE REMEDIES
If your agreement does not cover a breach of contract and you are the nonbreaching party, the UCC gives you a
variety of alternatives. What you need to do is analyze the remedies that are available if you choose to go to court, put
these remedies in order of priority, and then predict how successful you might be in pursuing each remedy. Next, look
at the position of the breaching party to determine the basis for negotiating a settlement.
has not yet paid in full, it may be appropriate for you to exercise your rights under UCC 2–717 and not pay in full when
beforehand.
CHECKLIST FOR THE NONBREACHING PARTY TO A CONTRACT
2. If no specific remedy is available, look to the UCC.
4. Analyze the position of the breaching party.
5. Determine whether a negotiated settlement is preferable to a lawsuit, which is best done by consulting your
attorney.
C. LEMON LAWS
Most states have lemon laws, which provide that if an automobile under warranty possesses a defect that
516 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
return of all consideration paid. Some states have established mandatory, government-sponsored arbitration
programs for lemon-law disputes
ADDITIONAL BACKGROUND—
California’s Lemon Law
The lemon laws of Connecticut and California have served as the model for most of the other states’ statutes. The
following is the text of California’s lemon law—California Civil Code Section 1795.8.
CIVIL CODE
DIVISION 3. OBLIGATIONS
TITLE 1.7. CONSUMER WARRANTIES
CHAPTER 1. CONSUMER WARRANTY PROTECTION
ARTICLE 3. SALE WARRANTIES
§ 1795.8. Automotive Consumer Notification Act; disclosure requirement
(a) The Legislature finds and declares that the expansion of state warranty laws covering new and used cars has given
important and valuable protection to consumers; that in states without this valuable warranty protection used and
irreparable motor vehicles are inundating the marketplace; that other states have addressed this problem by requiring
notices on the titles of these vehicles warning consumers that the motor vehicles were repurchased by a dealer or
manufacturer because either the vehicle could not be repaired in a reasonable length of time or the dealer or
manufacturer was not willing to repair the vehicle; that these notices serve the interests of consumers who have a
right to information relevant to their buying decisions; and that the disappearance of these notices upon the transfer
of title from another state to this state encourages the transport of “LEMONS” to this state for sale to the drivers of
this state. Therefore, the Legislature hereby enacts the Automotive Consumer Notification Act.
(b) For purposes of this section, “dealer” means any person engaged in the business of selling, offering for sale, or
negotiating the retail sale of used motor vehicles or selling motor vehicles as a broker or agent for another, including
the officers, agents, and employees of the person and any combination or association of dealers. “Dealer” does not
include a bank or other financial institution, or the state, its agencies, bureaus, boards, commissions, authorities, or any
of its political subdivisions. A person shall be deemed to be engaged in the business of selling used motor vehicles if
the person has sold more than four used motor vehicles in the preceding 12 months.
“THIS MOTOR VEHICLE HAS BEEN RETURNED TO THE DEALER OR MANUFACTURER DUE TO A DEFECT IN THE VEHICLE
PURSUANT TO CONSUMER WARRANTY LAWS.”
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 517
1991 Pocket Part Credit(s)
(Added by Stats.1989, c. 862, § 1.)
518 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
VIII. Dealing with International Contracts
Letters of credit are frequently used to facilitate international business transactions.
A. LETTER–OF-CREDIT TRANSACTIONS
The text explains a simple letter-of-credit transaction. The basic principle is that payment is made against the
documents presented by the beneficiary and not against the facts that the documents purport to reflect. The
issuer does not police the underlying contract; the letter is independent of it.
ANSWER TO VIDEO QUESTION LTR. A
Do banks always require the same documents to be presented in letter-of-credit transactions? If not, who dictates
what documents will be required? No. Letter-of-credit transactions can require a variety of different documents,
including bills of lading, insurance policies, export licenses, and inspection certificates. The bill of lading is almost
always required because the shipping company will not release the goods to anyone who does not have the original bill
ANSWER TO VIDEO QUESTION LTR. B
At what point does the seller receive payment in a letter-of-credit transaction? When the seller has complied with
the terms of the letter of credit by shipping the goods and producing the required documents for the issuing bank, the
seller receives payment.
ANSWER TO VIDEO QUESTION LTR. C
What assurances does a letter of credit provide to the buyer and to the seller involved in the transaction? The
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 519
contract to specify both the currency in which payment is to be made and the method of payment. Additionally, there
may be difficulties in repatriating profits made in businesses in wholly owned subsidiaries or joint ventures abroad.
Any U.S. firm undertaking business transactions abroad must be prepared to deal with one or more other
currencies because all firms want to be paid in the currencies of their respective home countries for goods and services
sold abroad. Consequently, firms engaged in international transactions must rely on the convertibility of currencies.
B. REMEDIES FOR BREACH OF INTERNATIONAL SALES CONTRACTS
The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides international
sellers and buyers with remedies similar to those available under the UCC—damages, including consequential
damages; avoiding obligations under a contract if the other party breaches; and specific performance—although
there are some differences in the application of these remedies in other countries.
TEACHING SUGGESTIONS
1. Some students may find the material in this chapter a bit overwhelming because of the mass of rules.
Nevertheless, the concepts are important and warrant the time required to learn them.
2. In discussing the seller’s duties, point out that it is not delivery that is necessary. It is tender of delivery that is
required. It may also be noted, in discussing the seller’s right to cure, that a seller is only entitled to cure. The seller is
3. In discussing the buyer’s right of inspection, emphasize that it is a right, not a duty, and that a buyer’s failure to
inspect operates as a waiver. Similarly, a poor inspection has the same effect as a thorough inspection—in either case,
the buyer has exercised the right.
4. Students may find it helpful to list the remedies discussed in this chapter and think about what the law is
attempting to do in making these remedies available. Generally, it may be said that the UCC remedies are intended to
put a nonbreaching party is as good a position as he or she would have been in if the other party had fully performed.
5. It may be pointed out that the expense and inefficiency of many of the remedies discussed in this chapter make
them commercially impractical. Thus, before, simultaneous with, or instead of employing legal remedies, parties may
6. To review the remedies available under a contract for a sale of goods, it may help to divide the remedies into those
that are available if a breach of the contract occurs before the buyer accepts the goods and those that are available if a
breach occurs after the buyer’s acceptance.
For example, remedies available to the seller if the buyer breaches before acceptance are (1) withholding delivery,
and (2) recovering the purchase price.
7. International business transactions require students to visualize situations in which several different contractual
parties are involved. It may be helpful to have students engage in role-playing exercises in which they play the parts of
by requiring the contractual parties to use a letter of credit and by having other students represent the issuing, advising
8. Other things to emphasize in your discussion of the material in this chapter include—
• A seller who fails to tender delivery of conforming goods is in breach of contract. Tender is also necessary to
pass the risk of loss.
• It is important to sort out which parties are merchants because different rules may apply when one party is a
merchant, when both parties are merchants, and when no party is a merchant.
Cyberlaw Link
How might electronic payment systems affect the UCC rules governing a buyer’s payment for goods? How might
these systems affect the legal principles governing letter–of-credit transactions? If a contract involves a sale or lease of
DISCUSSION QUESTIONS
1. What does “good faith” mean under the UCC? Good faith means honesty in fact. The obligations of good faith and
2. What are a seller’s and a buyer’s general obligations under a contract within the UCC? Under a contract within the UCC, a
3. What are the exceptions to the perfect tender rule? Agreement of the parties. The parties can agree that, for example,
defective goods will not be rejected if the seller is able to repair or replace them within a reasonable time. Cure. Cure is a
seller’s right to repair, adjust, or replace nonconforming goods. If tender is rejected because goods are nonconforming, a seller
has within the contract time for performance to cure (provided the seller promptly notifies the buyer that he or she intends to
cure) (delivering, for example, red ribbon on March 4, under a contract for delivery of yellow ribbon by March 8, gives the seller
four days to notify the buyer and cure). If the time for performance has expired, a seller still has the right to cure if he or she
reasonably believed that the buyer would accept the nonconforming tender (if, for example, the buyer had accepted reasonable
substitutes before). If a seller offers a price allowance with tender of nonconforming goods (for instance, tendering more
expensive goods at the same price), a presumption may be created that the buyer will accept, and this may extend the time to
cure. A seller’s right to cure substantially restricts a buyer’s right to reject. (Also, if a buyer refuses a tender of goods as
nonconforming without disclosing the nature of the defect to the seller, the buyer cannot later use the defect as a defense if the
4. What is “anticipatory repudiation”? Anticipatory repudiation is when one party, before the time for either party’s
performance, clearly communicates to the other an intent not to perform. The other party can: (1) await performance by the
repudiating party for a commercially reasonable time (retraction of a repudiation can be made by any method that clearly
5. When does a seller have a right to withhold delivery? Generally, sellers can withhold delivery (or discontinue
6. When can a seller reclaim goods? A seller can demand return of goods, if the demand is within ten days of the buyer’s
7. When is a seller entitled to recover damages? A seller can sue for damages if a buyer repudiates a contract or wrongfully
refuses to accept goods. What is the measure of the damages? The measure of the damages is the difference between the
8. When can a buyer cancel a contract? A buyer can cancel a contract when a seller fails to make proper delivery or
9. What damages can a buyer recover on a seller’s nondelivery or repudiation? If a seller fails to deliver goods or repudiates
10. How does a simple letter of credit work? A letter of credit is designed to ensure the performance of international
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 523
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask local merchants or their representatives to discuss with your class their policies regarding goods that they receive
2. Have students research the status of lemon laws in their states. How many opportunities to repair must a buyer give a
seller? To what remedies is a buyer entitled if the seller fails to repair? To what arbitration panel must the buyer complain
before going to court? Is the panel’s decision binding on the seller? Is it binding on the buyer? Is government-sponsored
arbitration required? Is it binding?
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 6: Jorge Jauregui contracted to buy a Kawai RX5 piano—“Serial No. 2392719a”—for $24,282 from Bobb’s
Piano Sales and Service, Inc., in Miami, Florida. The piano was represented to be new, but it had been in storage for almost a
year and had been moved at least six times. The piano was delivered with “unacceptable damage,” according to Jauregui. He
filed a suit in a Florida state court against Bobb’s, claiming breach of contract. The court concluded that Bobb’s was in breach,
but ruled that Jauregui “takes nothing in damages.” Jauregui appealed. In Jauregui v. Bobb’s Piano Sales & Service, Inc., a state
intermediate appellate court awarded Jauregui 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 long as the deviant goods are worth just as much.”
What might a buyer who prevails in a dispute such as the one in this case be awarded in addition to the contract price
with interest? Possibilities include the amount of any sales tax, delivery charges, attorneys’ fees, and court costs, including those
to prosecute the appeal. Also, as occurred in the Jauregui case, the seller could be ordered to repossess the goods at its
expense.
524 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
the card was ungradable. Fitl complained to Strek, who replied that Fitl should have acted within “a typical grace period for the
unconditional return of a card, . . . 7 days to 1 month” of its receipt. ASA Accugrade, Inc., another grading service, agreed that
the card was ungradable. Fitl filed a suit in a Nebraska state court against Strek, seeking damages. The court awarded Fitl
$17,750, plus his court costs. Strek appealed. In Fitl v. Strek, the Nebraska Supreme Court affirmed. In the circumstances of this
case, notice of a defect in the goods two years after their purchase was reasonable. Fitl had reasonably relied on Strek’s
Who has the burden to show a breach, or its absence, in cases involving attempts to recover damages for accepted
goods? Under the UCC, the burden is on the buyer to show a breach with respect to the goods accepted. Was that burden met
in this case? Here, as the state supreme court noted, “Fitl presented evidence that the baseball card was not authentic, as he
had been led to believe by Strek’s representations. Strek did not refute Fitl’s evidence.”
Suppose that Fitl and Strek had included in their deal a clause requiring Fitl to give notice of any defect in the card
within “7 days to 1 month” of its receipt. Would the result have been different? Why or why not? Possibly. The parties to a sale
of lease contract can insert such a provision, which can be enforceable. Of course, in that situation, Fitl might have acted
quicker, and the defect might then have been discovered sooner.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is a seller’s right to cure and how does it affect a buyer’s right to reject? The seller’s right to cure is a right to
2. What is the buyer’s right of cover? The right of cover is the right to buy goods in substitution for those due under a con-
tract. A buyer can obtain cover when the buyer rightfully rejects goods or revokes acceptance, or when a seller repudiates a
contract or fails to deliver goods. In obtaining cover, a buyer must act in good faith without unreasonable delay [UCC 2–712].
After obtaining cover, a buyer can recover from a seller the difference between the cost of cover and the contract price, plus
incidental and consequential damages less expenses (delivery costs, for example) saved as a result of the breach [UCC 2–712, 2–
715]. (Consequential damages include a buyer’s loss that the seller could have foreseen at the time of contracting and any
REVIEWING—
PERFORMANCE AND BREACH
OF SALES AND LEASE CONTRACTS
GFI, Inc., a Hong Kong company, makes audio decoder chips, one of the essential components used in the
manufacture of MP3 players. Egan Electronics contracts with GFI to buy 10,000 chips on an installment 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?
2. Does the substitution of carriers in the third shipment constitute a breach of the contract by GFI? Explain. The UCC
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
526 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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
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 break 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.