499
Chapter 21
Performance and Breach
of Sales and Lease Contracts
See Separate Lecture Outline System
INTRODUCTION
This chapter considers the general requirement of good faith and the basic performance obligations of a buyer and
seller under a sales contract. To understand the performance that is required of a seller and a buyer under a sales contract, your
students need to know the contractual duties and obligations each assumes. Contractual duties and obligations include those
specified by the agreement, custom, and the UCC.
500 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
goods accepted and the value the goods would have had if they had been conforming. In either case, recovery is the cost of the
cover. Sometimes, a buyer may be able to recover incidental or consequential damages, and equitable remedies may be
available.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
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 observance of
reasonable commercial standards of fair dealing in the trade [UCC 2–103(1)(b)].
B. GOOD FAITH AND CONTRACT PERFORMANCE
A seller or lessor is obligated to tender conforming goods, and a buyer or lessee is obligated to accept and pay for
them [UCC 2–301, 2A–516(1)]. The parties’ agreement controls performance
ADDITIONAL BACKGROUND—
UCC 1–203, Comment
The Official Comments to the UCC help to interpret UCC provisions. In every comment, there is a list of prior
uniform statutory provisions that relate to the UCC provision, there is an explanation of the purposes of the section,
and there are cross-references to relevant definitions and to related UCC sections. The most important reason for
turning to the Official Comments is that, although the states did not enact the comments when they enacted the UCC,
courts make frequent use of them.
The following is the text of the Official Comment accompanying Uniform Commercial Code Section 1–203 (“Every
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 501
Official Comment
Prior Uniform Statutory Provision: None.
Purposes:
This section sets forth a basic principle running throughout this Act. The principle involved is that in commercial
transactions good faith is required in the performance and enforcement of all agreements or duties. Particular
applications of this general principle appear in specific provisions of the Act such as the option to accelerate at will
(Section 1-208), the right to cure a defective delivery of goods (Section 2-508), the duty of a merchant buyer who has
rejected goods to effect salvage operations (Section 2-603), substituted performance (Section 2-614), and failure of
presupposed conditions (Section 2-615). The concept, however, is broader than any of these illustrations and applies
generally, as stated in this section, to the performance or enforcement of every contact or duty within this Act. It is
further implemented by Section 1-205 on course of dealing and usage of trade.
II. Obligations of the Seller or Lessor
A. TENDER OF DELIVERY
Tender must be at a reasonable time and in a reasonable manner [UCC 2–503(1)(a)]. The seller or lessor must
give the buyer or lessee notice [UCC 2–503(1), 2A–58(1)]. Goods must be tendered in a single delivery unless the
parties agree otherwise [UCC 2–612, 2A–510] or the circumstances are such 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 identified goods, and
C. DELIVERY VIA CARRIER
1. Shipment Contracts
502 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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.
ADDITIONAL BACKGROUND—
UCC 2–504, Comments 2, 3, and 5
Under UCC 2–504(a), a seller must contract with a carrier for transportation of the goods. The contract must “be
reasonable having regard to the nature of the goods and other circumstances of the case.” Under UCC 2–504(c), the
seller must promptly notify the buyer of the shipment. The final sentence of UCC 2–504 states that failure to do so is
ground for rejection if material loss or delay ensues. Explaining these duties further is the following—UCC 2–504,
Comments 2, 3, and 5.
Official Comment
Prior Uniform Statutory Provision: Section 46, Uniform Sales Act.
* * * *
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 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,
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.
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.
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].
E. EXCEPTIONS TO THE PERFECT TENDER RULE
1. Agreement of the Parties
2. Cure
A seller or lessor may repair, adjust, or replace nonconforming goods [UCC 2–508, 2A–513], providing he or
she tells the buyer and cures within the contract time for performance.
* * * *
UCC 2–508, Comment 2
Under UCC 2–508(2), even if the time for performance has expired, a seller can exercise the right to cure if he or
Purposes:
* * * *
2. Subsection (2) seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer. However, the
seller is not protected unless he had “reasonable grounds to believe” that the tender would be acceptable. Such
reasonable grounds can lie in prior course of dealing, course of performance or usage of trade as well as in the
3. Substitution of Carriers
4. Installment Contracts
A buyer or lessee can reject an installment only if a nonconformity substantially impairs the value of the
5. Commercial Impracticability
When events unforeseen at the time of contracting make performance commercially impracticable, the rule
to successfully renegotiate the terms of its contracts with the other parties.
Case 21.1: Maple Farms, Inc. v. City School District of Elmira
Maple Farms, Inc., agreed to supply the City School District of Elmira with all of the milk the district needed for the
school year. The parties agreed to a fixed price—the June market price. By December, the market price was 23
percent higher than the contract price. Because it had similar contracts with other school districts, Maple Farms stood
to lose a great deal of money. When the Elmira district would not agree to release Maple Farms from the contract,
Maple Farms brought an action in a New York state court for a declaratory judgment, contending that performance
was commercially impracticable because of the increase in the price of milk.
itself.
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.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 21.1
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
506 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent 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).
• 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).
a. Reasonable v. Unreasonable Contingencies
The doctrine does not extend to problems that could have been foreseen, such as cost increases due
to inflation.
b. Partial Performance
If a seller can fulfill obligations only partially, the part performance must be fairly allocated among
buyers (who must receive notice, and who may accept or reject the performance).
6. Destruction of Identified Goods
7. Assurance and Cooperation
a. The Right of Assurance
If a party has reasonable grounds to believe that another will not perform, he or she may demand in
writing an assurance of performance. While waiting for a response, the party may suspend his or her
III. Obligations of the Buyer or Lessee
A. PAYMENT
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 507
When a sale is on credit, a buyer must pay according to the terms, not when the goods are received [UCC 2–310].
Payment can be by any method generally acceptable in the commercial world].
CASE SYNOPSIS—
Case 21.2: Romero v. Scoggin-Dickey Chevrolet Buick, Inc.
Jessie Romero offered to deliver two trade-in vehicles—a 2003 Mitsubishi Montero SP and a 2002 Chevrolet
Silverado pickup—to Scoggin-Dickey Chevrolet Buick, Inc., in exchange for a 2006 Silverado pickup. Scoggin-Dickey
agreed. The parties negotiated a price, including a value for the trade-in vehicles, plus cash. Romero paid the cash and
took the new Silverado. On inspecting the trade-in vehicles, however, Scoggin-Dickey found that they had little value.
The dealer repossessed the Silverado. Romero filed a suit in a Texas state court. The court issued a judgment in
Scoggin-Dickey’s favor. Romero appealed.
………………………………………………………………………………………………………………………………..
Notes and Questions
If the trade-in vehicles had conformed to the parties’ expectations but the new Silverado had been defective, could
Romero have exercised a right of rejection? Yes, assuming Romero had not possessed and driven the new vehicle for
goods. If Romero would have been held to accept the truck, he might still have been able to revoke his acceptance. Or
ANSWERS TO QUESTIONS AT THE END OF CASE 21.2
1. Why didn’t the “contract order” signed by the parties constitute a binding contract for the sale of goods? No
vehicles that conformed to their description in the contract order. When Scoggin-Dickey rejected the trade-in vehicles
rebates, two trade-in vehicles, and cash) was thus never fully accepted by the dealership. The court concluded that the
2. According to the court, “Romero and Scoggin–Dickey were both buyers and sellers.” What did the court mean by
this statement? The court commented that when the purchase price in a sale of goods is payable in whole or in part in
goods, each party is a seller of the goods that the party is to transfer. In this case, Romero was a seller because he was
selling his two trade-in vehicles to Scoggin-Dickey (the buyer). Scoggin-Dickey was also a seller because it was selling
the 2006 Silverado pickup to Romero (the buyer).
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)] or by failing to reject within a reasonable time after an opportunity to inspect [UCC 2–606(1)(b), 2–
602(1), 2A–515(1)(b)]. A buyer can also accept by performing any act inconsistent with the seller’s ownership
[UCC 2–606(1)(c)]].
IV. Anticipatory Repudiation
A. SUSPENSION OF PERFORMANCE OBLIGATIONS
In a case of anticipatory repudiation, the other party can, for a commercially reasonable time, await performance
by the repudiating party [UCC 2–610, 2A–402], or resort to any remedy for breach. In either case, the party can
suspend his or her own performance.
B. A REPUDIATION MAY BE RETRACTED
V. Remedies of the Seller or Lessor
A. WHEN THE GOODS ARE IN THE POSSESSION OF THE SELLER OR LESSOR
Before goods are delivered to the buyer or lessee, the seller or lessor has the following remedies.
1. The Right to Cancel the Contract
2. The Right to Withhold Delivery
This remedy is available when a buyer or lessee wrongfully rejects or revokes acceptance of the goods, fails
3. The Right to Resell or Dispose of the Goods
CHAPTER 21: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 509
The seller or lessor can hold the buyer or lessee liable for any loss [UCC 2–703(d), 2–706(1), 2A–523(1)(e),
2A–527(1)]. The seller must timely notify the buyer unless the goods are perishable or will rapidly decline in
value [UCC 2–706(2), (3)].
a. Unfinished Goods
If the goods are unfinished at the time of the breach, the seller or lessor can either stop or complete
their manufacture before reselling (or re-leasing) them.
4. The Right to Recover the Purchase Price or Lease Payments Due
5. The Right to Recover Damages for the Buyer’s Nonacceptance
If a buyer or lessee repudiates a contract or wrongfully refuses to accept the goods, the amount of damages
is usually the difference between the contract price or lease payments and the market price (at the time and
place of tender), plus incidental damages [UCC 2–708(1), 2A–528(1)]. If the difference is too small to place
the seller or lessor in the position he or she would have been in on full performance, damages may include
lost profits [UCC 2–708(2), 2A–528(2)].
B. WHEN THE GOODS ARE IN TRANSIT
If a seller or lessor learns that a buyer or lessee is insolvent, the seller or lessor can stop the carrier or bailee from
delivering the goods. If the buyer or lessee is in breach but not insolvent, the seller or lessor can stop the goods in
C. WHEN THE GOODS ARE IN THE POSSESSION OF THE BUYER OR LESSEE
• A seller or lessor has the right to recover the purchase price or the payments due under the lease contract,
plus incidental damages, if the buyer or lessee has accepted the goods but refuses to pay for them [UCC 2–
709(1), 2A–529(1)].
VI. Remedies of the Buyer or Lessee
A. WHEN THE SELLER OR LESSOR REFUSES TO DELIVER THE GOODS
1. The Right to Cancel the Contract
2. The Right to Recover the Goods
This remedy is available if a buyer or lessee has paid at least some of the price for goods that have been
3. The Right to Obtain Specific Performance
A buyer or lessee can obtain specific performance when goods are unique or when the remedy at law is
inadequate [UCC 2–716(1), 2A–521(1)].
CASE SYNOPSIS—
Case 21.3: Houseman v. Dare
Doreen Houseman and Eric Dare had a relationship for thirteen years. They bought a house together. They
engaged to marry. And they bought a pedigree dog for $1,500, which they registered with the American Kennel Club as
joint owners. When Dare decided to end the relationship, they agreed that he could pay Houseman for her interest in
the house and she would move out. They also agreed that she could take the dog. She asked him to memorialize the
agreement about the dog in writing, but he told her that she could trust him. She allowed him to take the dog for visits.
After one such visit, Dare did not return the dog. Houseman filed a suit in a New Jersey state court against Dare. In a
summary judgment, the court concluded that specific performance is not available as a remedy for the breach of an
oral agreement about the possession of a dog and awarded Houseman $1,500. She appealed.
……………..…………………………………………………………………………………………………………………
Notes and Questions
Should a stipulation to the monetary value of property between the parties to a dispute over its ownership be seen
as an admission that damages would be an adequate remedy? Why or why not? No. In this case, for example,
Houseman’s “stipulation to the dog’s intrinsic monetary value cannot be viewed as a concession that the stipulated
value was adequate to compensate her for loss of the special value given her efforts to pursue her claim for specific
performance at trial.” In other words, her request for specific performance undercut any argument that damages might
be an adequate remedy.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 21.3
In Dare’s response to Houseman’s complaint, he admitted to orally promising her that she could have the dog.
Suppose that he had not admitted to this promise. On what principle should a trial court base a finding that one of the
512 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
prompt attempt to enforce her interest as evidence of her sincerity.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 21.3
What might the award to Houseman of the value of the dog instead of its possession mean to Dare, and what
might it indicate to others who could be tempted to breach their agreements? The award to Dare of the possession of
4. The Right of Cover
This remedy is available when a seller or lessor repudiates the contract or fails to deliver, or when a buyer or
5. The Right to Replevy Goods
6. The Right to Recover Damages
If a seller or lessor repudiates the sales contract or fails to deliver the goods, the buyer or lessee can recover
B. WHEN THE SELLER OR LESSOR DELIVERS NONCONFORMING GOODS
1. The Right to Reject the Goods
If the goods or tender fail to conform in any respect, the buyer or lessee can reject them, in whole or in part
[UCC 2–601, 2A–509]. The buyer or lessee can then cover or cancel.