1. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Slides developed by Les Wiletzky PowerPoint Slides to Accompany ESSENTIALS OF BUSINESS AND ONLINE COMMERCE LAW 1 st Edition by Henry R. Cheeseman Chapter 11 Sales and Lease Contracts: Performance and Breach Chapter 11 Sales and Lease Contracts: Performance and Breach

2. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 2 Introduction  Obligation  Obligation – An action a party to a sales or lease contract is required by law to carry out  Breach  Breach – Failure of a party to perform an obligation in a sales or lease contract breaches  When one party breaches the lease or sales contract, the UCC provides the injured party with a variety of pre-litigation and litigation remedies

3. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 3 Tender of Delivery Seller’s and Lessor’s Performance: Tender of Delivery  The obligation of the seller to transfer and deliver goods to the buyer or lessee in accordance with the sales or lease contract  Requires the seller or lessor to: 1.put and hold conforming goods at the buyer’s or lessee's disposition, and 2.give the buyer or lessee any notification reasonably necessary to enable the buyer or lessee to take delivery of the goods [UCC 2-503(1), 2A-508(1)]

4. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 4 Place of Delivery Seller’s and Lessor’s Performance: Place of Delivery (1 of 2)  Many sales and lease contracts state where the goods are to be delivered  If the contract does not expressly state where the delivery will take place, the UCC will stipulate place of delivery on the basis of whether a carrier is involved [UCC 2-504, 2-503]

5. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 5 Place of Delivery Seller’s and Lessor’s Performance: Place of Delivery (2 of 2)  Bailee  Bailee – a holder of goods who is not a seller or buyer e.g., a warehouse  Shipment Contract  Shipment Contract – a sales contract that requires the seller to send the goods to the buyer, but not a specifically named destination  Destination Contract  Destination Contract – a sales contract that requires the seller to deliver the goods to the buyer’s place of business or another specified destination

6. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 6 Perfect Tender Rule Seller’s and Lessor’s Performance: Perfect Tender Rule (1 of 2)  The seller or lessor is under a duty to deliver conforming goods  If the goods or tender of delivery fails in any respect to conform to the contract, the buyer or lessee may opt either to: Reject the whole shipment, Accept the whole shipment, or Reject part and accept part of the shipment

7. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 7 Perfect Tender Rule Seller’s and Lessor’s Performance: Perfect Tender Rule (2 of 2)  Exceptions to the perfect tender rule: Agreement of the parties Substitution of carriers  Cure  Installment contracts  Destruction of goods

8. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 8 General Obligations Seller’s and Lessor’s Performance: General Obligations Good Faith Reasonableness Commercial Reasonableness The UCC has adopted several broad principles that govern the performance of sales and lease contracts:

9. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 9 Right of Inspection Buyer’s and Lessee’s Performance: Right of Inspection  Unless otherwise agreed, the buyer or lessee has the right to inspect goods that are tendered, delivered, or identified to the sales contract prior to accepting or paying for them [UCC 2-513(1), 2A- 515(1)]  If the goods conform to the contract, the buyer pays for the inspection  Buyers who agree to C.O.D. (cash on delivery) deliveries are not entitled to inspect the goods before paying for them [UCC 2-513(3)]

10. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 10 Payment Buyer’s and Lessee’s Performance: Payment  Duty to Pay  Duty to Pay – goods that are accepted must be paid for  Unless the parties agree otherwise, payment is due from a buyer when and where the goods are delivered even if the place of delivery is the same as the place of shipment [UCC 2-310, 2A-516(1)]

11. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 11 Acceptance Buyer’s and Lessee’s Performance: Acceptance  Occurs when the buyer or lessee takes any of the following actions after a reasonable opportunity to inspect the goods [UCC 2-606, 2A-515]: Signifies to the seller or lessor in words or by conduct that the goods are conforming or that the buyer or lessee will take or retain the goods despite their nonconformity, or Fails to effectively reject the goods within a reasonable time after their delivery or tender by the seller or lessor

12. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 12 Revocation of Acceptance Buyer’s and Lessee’s Performance: Revocation of Acceptance (1 of 2)  A buyer or lessee who has accepted goods may subsequently revoke acceptance if: 1.The goods are nonconforming, 2.The nonconformity substantially impairs the value of the goods to the buyer or lessee, and

13. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 13 Revocation of Acceptance Buyer’s and Lessee’s Performance: Revocation of Acceptance (2 of 2) 3.One of the following factors is shown: a)The seller’s or lessor’s promise to seasonably remedy the nonconformity is not met, b)The goods were accepted before the nonconformity was discovered and the nonconformity was difficult to discover, or c)The goods were accepted before the nonconformity was discovered and the seller or lessor assured the the buyer or lessee that the goods were conforming [UCC 2-608(1), 2A-517(1)]

14. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 14 Right to Withhold Delivery Seller’s and Lessor’s Remedies: Right to Withhold Delivery withheld  Delivery of the goods may be withheld if the seller or lessor is in possession of them when the buyer or lessee breaches the contract  This remedy is available if the buyer or lessee: Wrongfully rejects or revokes acceptance of the goods, Fails to make payment when due, or Repudiates the contract [UCC 2-703(a), 2A-523(1)(c)]

15. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 15 Right to Stop Delivery of Goods in Transit Seller’s and Lessor’s Remedies: Right to Stop Delivery of Goods in Transit (1 of 2)  In Transit  In Transit – a state in which goods are in the possession of a bailee or carrier and not in the hands of the buyer, seller, lessee, or lessor stop delivery of goods  A seller or lessor may stop delivery of goods in transit if he or she learns of the buyer’s or lessee’s insolvency

16. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 16 Right to Stop Delivery of Goods in Transit Seller’s and Lessor’s Remedies: Right to Stop Delivery of Goods in Transit (2 of 2)  The same remedy is available if the buyer or lessee: Repudiates the contract, Fails to make payment when due, or Otherwise gives the seller or lessor some other right to withhold or reclaim the goods [UCC 2-705(1), 2A-526(1), 2-705(2), 2A-526(2)]

17. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 17 Right to Reclaim Goods Seller’s and Lessor’s Remedies: Right to Reclaim Goods  The right of a seller or lessor to demand the return of goods from the buyer or lessee under specified situations  To exercise the right of reclamation, the seller or lessor must send the buyer or lessee a written notice demanding return of the goods [UCC 2-507(2), 2A-525(2)]

18. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 18 Right to Dispose of Goods Seller’s and Lessor’s Remedies: Right to Dispose of Goods  If the buyer or lessee breaches or repudiates the seller or lease contract before the seller or lessor has delivered the goods, the seller or lessor may resell or release the goods and recover damages from the buyer or lessee  This right also arises if the seller or lessor has reacquired the goods after stopping them in transit [UCC 2-703(d), 2-706(1); UCC 2A- 523(1)(e), 2A-527(1)]

19. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 19 Right to Recover the Purchase Price or Rent Seller’s and Lessor’s Remedies: Right to Recover the Purchase Price or Rent  A seller or lessor may recover the contracted-for purchase price or rent from the buyer or lessee if: The buyer or lessee accepts the goods but fails to pay for them when the price or rent is due The buyer or lessee breaches the contract after the goods have been identified to the contract and the seller or lessor cannot resell or dispose of them The goods are damaged or lost after the risk of loss passes to the buyer or lessee [UCC 2-709(1), 2A-529(1)]

20. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 20 Recovery of Damages Seller’s and Lessor’s Remedies: Recovery of Damages recover damages  A seller or lessor may recover damages measured as the difference between the contract price (or rent) and the market price (or rent) at the time and place the goods were to be delivered, plus incidental damages, from a buyer or lessee who repudiates the contract or wrongfully rejects tendered goods [UCC 2-708(1), 2A-528(1)]

21. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 21 Recovery of Lost Profits Seller’s and Lessor’s Remedies: Recovery of Lost Profits recover lost profits  The seller or lessor may recover lost profits, plus an allowance of overhead and incidental damages, from the buyer or lessee if the recovery of damages would be inadequate to put the seller or lessor in as good a position as if the contract had been fully performed by the buyer or lessee [UCC 2-708(2), 2A-528(2)]

22. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 22 Right to Cancel the Contract Seller’s and Lessor’s Remedies: Right to Cancel the Contract cancel  A seller or lessor may cancel a sales or lease contract if the buyer or lessee: Rejects or revokes acceptance of the goods, Fails to pay for the goods, or Repudiates the contract in part or in whole [UCC 2-703(f), 2A-523(1)(a)]

23. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 23 Summary: Seller’s and Lessor’s Remedies (1 of 2) Possession of Goods at Time of Buyer’s Breach Seller’s or Lessor’s Remedies Goods in the possession of the seller  Withhold delivery of the goods.  Demand payment in cash if the buyer is insolvent.  Resell or re-lease the goods and recover the difference between the contract or lease price and the resale or re-lease price.  Sue for breach of contract and recover damages.  Cancel the contract.

24. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 24 Summary: Seller’s and Lessor’s Remedies (2 of 2) Possession of Goods at Time of Buyer’s Breach Seller’s or Lessor’s Remedies Goods in the possession of a carrier or bailee  Stop goods in transit: Carload, truckload, planeload, or larger shipment if the buyer is solvent. Any size shipment if the buyer is insolvent. Goods in the possession of the buyer  Sue to recover the purchase price or rent.  Reclaim the goods.

25. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 25 Buyer’s and Lessee’s Remedies (1 of 2)  Right to reject nonconforming goods or improperly tendered goods  Right to recover goods from an insolvent seller or lessor  Right to obtain specific performance  Right to cover  Right to replevy goods

26. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 26 Buyer’s and Lessee’s Remedies (2 of 2)  Right to cancel the contract  Right to recover damages for non-delivery or repudiation  Right to recover damages for accepted nonconforming goods

27. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 27 Summary: Buyer’s and Lessee’s Remedies (1 of 2) SituationBuyer’s or Lessee’s Remedy Seller or lessor refuses to deliver the goods or delivers the nonconforming goods that the buyer or lessee does not want.  Reject nonconforming goods  Revoke acceptance of nonconforming goods  Cover  Sue for breach of contract and recover damages  Cancel the contract

28. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 28 Summary: Buyer’s and Lessee’s Remedies (2 of 2) SituationBuyer’s or Lessee’s Remedy Seller or lessor tenders nonconforming goods and the buyer or lessee accepts them.  Sue for ordinary damages  Deduct damages from the unpaid purchase price Seller or lessor refuses to deliver the goods and the buyer or lessee wants them  Sue for specific performance  Replevy the goods  Recover the goods from an insolvent seller or lessor

29. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 29 1. Assurance of Performance 2. Anticipatory Repudiation 3. Statute of Limitations 4. Agreements Affecting Remedies Additional Issues Affecting Performance and Breach

30. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 11 - 30 Unconscionable Contract unconscionability  The UCC Article 2 (Sales) and Article 2A (Leases) have adopted the equity doctrine of unconscionability  To prove unconscionability, there must be proof: that the parties had substantial unequal bargaining power that the dominant party misused its power in contracting, and that it would be manifestly unfair or oppressive to enforce the contract  This doctrine also applies to Web contracts unconscionability  The UCC Article 2 (Sales) and Article 2A (Leases) have adopted the equity doctrine of unconscionability  To prove unconscionability, there must be proof: that the parties had substantial unequal bargaining power that the dominant party misused its power in contracting, and that it would be manifestly unfair or oppressive to enforce the contract  This doctrine also applies to Web contracts