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1
Chapter 22
Performance and Breach
of Sales and Lease Contracts
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.
2 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
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
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—
Good Faith
Uniform Commercial Code Section 1–203 states, “Every contract or duty within this Act imposes an
obligation of good faith in its performance or enforcement.” Below is the text of the Official Comment
accompanying UCC 1–203.
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
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
CHAPTER 22: 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.
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
CASE SYNOPSIS—
Case 22.1: Garziano v Louisiana Log Home Co.
Richard and Nancy Garziano contracted with Louisiana Log Home Co. (LLH) for a log-cabin kit to be
delivered to them in Mississippi. The contract required three installment payments with the final payment due
at delivery to include the cost of transportation. Two days before delivery, LLH told the buyers that the
transportation cost would be $2,625.60. The Garzianos replied that they thought the shipping cost would be
lower, and refused to pay more. The Garzianos filed a claim in a federal district court against LLH, alleging
..................................................................................................................................................
Notes and Questions
What is the formula for determining the amount of LLH’s actual damages? Does it seem likely that
the Garzianos will receive a return of any of the funds they paid on the contract? Under UCC 2–708,
4 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
According to the UCC, what are a buyer’s options if the goods do not conform to the contract?
Does a buyer have those same options if the goods conform in every respect? If goods or their tender
of delivery fails in any respect to conform to a contract, the buyer has the right to accept the goods, reject the
B. PLACE OF DELIVERY
• Seller’s business—When a contract does not specify a place of delivery, and the buyer is to pick up
the goods [UCC 2–308].
C. DELIVERY VIA CARRIER
1. Shipment Contracts
Under a shipment contract, a seller must—
• Put goods into the hands of a carrier.
• Contract for their transport.
ADDITIONAL BACKGROUND—
Carrier Contracts
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.
CHAPTER 22: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 5
Changes: Rewritten.
* * * *
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
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
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)
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
6 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
2. Destination Contracts
Under a destination contract, a seller must tender goods at a reasonable hour and hold them at the
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.
a. Reasonable Grounds
If the time has run out, a seller or lessor can cure if he or she reasonably believed that the
buyer or lessee would accept the nonconforming tender.
b. Limits on the Right to Reject Goods
If a buyer or lessee refuses goods as nonconforming, he or she must disclose the nature of
ADDITIONAL BACKGROUND—
Right to Cure
Under UCC 2–508(2), even if the time for performance has expired, a seller can exercise the right to cure
if he or she had reasonable grounds to believe that the nonconforming tender would be acceptable to the
buyer. Explaining this point further is the following—UCC 2–508, Comment 2.
Official Comment
Prior Uniform Statutory Provision: None.
Purposes:
* * * *
2. Subsection (2) seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer.
CHAPTER 22: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 7
3. Substitution of Carriers
If an agreed manner of delivery becomes impracticable or unavailable through no fault of either
4. Installment Contracts
A buyer or lessee can reject an installment only if a nonconformity substantially impairs the value of
5. Commercial Impracticability
• When events unforeseen at the time of contracting make performance commercially imprac-
6. Commercial Impracticability and 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).
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Commercial Impracticability
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).
8 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
7. Destruction of Identified Goods
• When goods are destroyed through 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].
8. Assurance and Cooperation
• 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 own performance. If an assurance is not given within thirty days, this can
be considered repudiation of the contract [UCC 2–609, 2A–401].
• This same rule applies if cooperation is needed and not given [UCC 2–311(3)(b)].].
III. Obligations of the Buyer or Lessee
A. PAYMENT
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].
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
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)].
• Failing to reject within a reasonable time after an opportunity to inspect [UCC 2–606(1)(b), 2–
602(1), 2A–515(1)(b)].
• Performing any act inconsistent with the seller’s ownership [UCC 2–606(1)(c)].
D. PARTIAL ACCEPTANCE
IV. Anticipatory Repudiation
A. SUSPENSION OF PERFORMANCE OBLIGATIONS
CHAPTER 22: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 9
B. A REPUDIATION MAY BE RETRACTED
The breaching party may retract his or her repudiation if the innocent party has not canceled the
contract, materially changed position, or otherwise indicated that the repudiation is final [UCC 2–611,
2A–403].
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
After the seller or lessor has notified the buyer or lessee of the cancellation, the seller or lessor’s
2. The Right to Withhold Delivery
This remedy is available when a buyer or lessee wrongfully rejects or revokes acceptance of the
3. The Right to Resell or Dispose of the Goods
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)].
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
10 UNIT FOUR: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS
B. WHEN THE GOODS ARE IN TRANSIT
1. Effect of Insolvency and Breach
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
2. Requirements for Stopping Delivery
The seller or lessor must timely notify the carrier and pay any additional costs [UCC 2–705(3), 2A–
526(3)]. This right is lost if—
• The buyer or lessee has the goods.
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)].
• A seller has the right to reclaim the goods when the buyer is insolvent and has not paid for them.
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 Obtain the Goods on Insolvency
This remedy is available if a buyer or lessee has paid at least some of the price for goods that have
3. The Right to Obtain Specific Performance
CHAPTER 22: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 11
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 lessee rightfully rejects or revokes acceptance. The buyer or lessee can then recover from
the seller or lessor—
• The difference between the cost of cover and the contract price.
• Incidental damages.
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
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.
a. Timeliness and Reason for Rejection Required
Rejection must be within a reasonable time, and the seller or lessor must be notified and told
of the defect [UCC 2–602(1), 2–605, 2A–509(2), 2A–514].
b. Duties of Merchant Buyers and Lessees When Goods Are Rejected
If the buyer or lessee is a merchant, he or she must follow the instructions of the seller or
ENHANCING YOUR LECTURE—
THE RIGHT OF REJECTION
The term reasonable appears throughout the UCC. With respect to the right of rejection, the UCC
