Quiz 17: Performance and Breach of Sales and Lease Contracts

Business

Answers for the even-numbered questions in this For Review section can be found in Appendix E at the end of this text. What are the respective obligations of the parties under a contract for the sale or lease of goods?

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Every contract relies upon the obligations of good faith and commercial reasonableness. The obligations of the parties- buyer and seller-under a contract for the sale or lease of goods are as below. Obligations of the Seller or Lessor The basic obligation of the seller is to transfer and deliver conforming goods to the buyer. He must give any notice that is reasonably necessary to enable the buyer or lessee to accept the delivery. a) Tender of Delivery: The goods must be delivered at a reasonable hour, in a reasonable manner. Further, the goods must be kept available for a reasonable time. b) Place of Delivery: The contract or the circumstances may indicate the place of delivery, or parties may agree on a particular destination. c) Perfect Tender Rule : The perfect tender rule sates that the seller was obligated to deliver the goods within stipulated time according to the terms of the contract. Any failure to conform to the contract may result in complete or partial rejection of the shipment. Obligations of the Buyer or Lessee The basic obligation of the buyer is to accept the conforming goods, and make the payment for the same and deliver conforming goods to the buyer. He must give any notice that is reasonably necessary to enable the buyer or lessee to accept the delivery. a) Payment: The buyer is required to pay for the conforming goods by any means as agreed upon by the parties. b) Right of Inspection: Before accepting the delivery, the buyer has the right to inspect if the goods are what contracted for. The buyer can reject the delivery if goods are not the same as stated in the contract. c) Acceptance: Given the reasonable opportunity to inspect, if the buyer fails to reject the goods within reasonable time, the delivery is assumed to be accepted.

Q 2

Remedies. Genix, Inc., has contracted to sell Larson five hundred washing machines of a certain model at list price. Genix is to ship the goods on or before December 1. Genix produces one thousand washing machines of this model but has not yet prepared Larson's shipment. On November 1, Larson repudiates the contract. Discuss the remedies avail-able to Genix in this situation.

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Company L repudiates the contract with Company GI. The delivery was due on December 1, while repudiation occurs on November 1. That is, the machines are in the possession of GI. GI can pursue following remedies. a) Cancel the contract: GI can cancel the contract and notify company L about the same. At this point, all the obligations of GI would discharge. b) Withhold delivery: GI can withhold the delivery of machines and discontinue the performance of their obligations under the contract. c) Resell or dispose of the goods: GI can resell the goods and can retain the profits so earned. GI may also hold company L responsible for any loss incurred. However, GI must give reasonable notice to company L regarding resale in case of perishable goods. d) Recover the purchase price or lease payment due: If GI cannot resell the goods, it can sue company L for contract purchase price or lease payment due. e) Recover damages: GI can recover the damages caused due to breach of the contract. The damages can be the loss of profits including some overhead expenses.

Q 3

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. Using the information presented in the chapter, answer the following questions. 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. 3. Suppose that the silicon used for the chips becomes unavailable for a period of time and that GFI cannot 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? 4. Under the UCC, does Egan have a right to reject the fourth shipment? Why or why not?

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(a) , the seller has a legitimate reason to expect that the fourth shipment would be accepted. Since the seller meets the obligation to tender conforming fourth shipment of goods, the buyer is obligated to accept and pay for the goods. (b)If the seller fails to notify the buyer about any change in the shipment contract, and such a change causes a significant delay in delivery or major material loss, the buyer has all rights to reject the shipment. , the substitution of carriers in the third shipment without any notification to the buyer does constitute a breach of the contract as such substitution resulted in destruction of the goods shipped. Had the seller notified the buyer about substituting carrier, the contract would not be said to be breached. (c)The court may release the seller from further performance under the doctrine commercial impracticability. Due to unavailability of raw material, the seller was able to fulfil the contract only partially. Once the goods are delivered to whom they were contractually obligated, the seller is released from further performance. (d) , the buyer does not have the right to reject the fourth shipment. In case of installment contracts, a buyer can reject an installment only if the nonconformity substantially impairs the value of the shipment which cannot be cured. The seller delivered the goods same as first and second shipment that conforms to the contract. Moreover, the buyer did not notify the seller of any such rejection. Thus, the buyer has no right to reject the shipment.

Q 4

The following multiple-choice question is representative of the types of questions available in one of the four sections of ThomsonNOW for Business Law Today. ThomsonNOW also provides feedback for each response option, whether correct or incorrect, and refers to the location within the chapter where the correct answer can be found. Under the UCC's perfect tender rule, when a seller delivers nonconforming goods, a buyer A) must accept all of the goods. B) can accept all, part, or none of the goods. C) must reject all of the goods. D) can accept the goods only after informing the neatest chamber of commerce of the breach.

Multiple Choice

Q 5

Answers for the even-numbered questions in this For Review section can be found in Appendix E at the end of this text. What is the perfect tender rule? What are some important exceptions to this rule that apply to sales and lease contracts?

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Q 6

Hypothetical Question with Sample Answer. Cummings ordered two model X Super Fidelity speakers from Jamestown Wholesale Electronics, Inc. Jamestown shipped the speakers via United Parcel Service, C.O.D. (collect on delivery), although Cummings had not requested or agreed to a C.O.D. shipment of the goods. When the speakers were delivered, Cummings refused to accept them because he would not be able to inspect them before payment. Jamestown claimed that it had shipped conforming goods and that Cummings had breached their -contract. Had Cummings breached the contract? Explain.

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Q 7

Answers for the even-numbered questions in this For Review section can be found in Appendix E at the end of this text. What options are available to the non-breaching party when the other party to a sales or lease contract repudiates the contract prior to the time for performance?

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Q 8

Anticipatory Repudiation. Moore contracted in writing to sell her 2002 Ford Taurus to Hammer for $8,500. Moore agreed to deliver the car on Wednesday, and Hammer promised to pay the $8,500 on the following Friday. On Tuesday, Hammer informed Moore that he-would not be buying the car after all. By Friday, Hammer had changed his mind again and tendered $8,500 to Moore. Moore, although she had not sold the car to another party, refused the tender, and refused to deliver. Hammer claimed that Moore had breached their contract. Moore contended that Hammer's repudiation released her from her duty to perform under the contract. Who is correct, and why?

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Q 9

Answers for the even-numbered questions in this For Review section can be found in Appendix E at the end of this text. What remedies are available to a seller or lessor when the buyer or lessee breaches the contract? What remedies are avail-able to a buyer or lessee if the seller or lessor breaches the contract?

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Q 10

Acceptance. In April 19%, Excalibur Oil Croup, Inc., applied for credit and opened an account with Standard Distributors, Inc., to obtain snack foods and other items for Excalibur convenience stores. For three months, Standard delivered the goods and Excalibur paid the invoices. In July, Standard was dissolved, and its assets were distributed to J. F. Walker Co. Walker continued to deliver the goods to Excalibur, which continued to pay the invoices until November, when the firm began to experience financial difficulties. By January 1997, Excalibur owed Walker $54,241.77. Walker then.dealt with Excalibur only on a collect-on-delivery basis until Excalibur's stores closed in 1998. Walker filed a suit in a Pennsylvania state court against Excalibur and its owner to recover amounts due on unpaid invoices. To successfully plead its case, Walker had to show that there was a contract between the parties. One question was whether Excalibur had manifested acceptance of the goods delivered by Walker. How does a buyer manifest acceptance? Was there an acceptance in this case? In whose favor should, the court rule, and why? [I. E. Walker Co. Y. Excalibur Oil Group, Inc., 792 A.2d 1269 (Pa.Super. 2002)]

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Q 11

Answers for the even-numbered questions in this For Review section can be found in Appendix E at the end of this text. In contracts subject to the UCC, are parties free to limit the remedies available to the non-breaching party on a breach of contract? If so, in what ways?

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Q 12

Case Problem with Sample Answer. Eaton Corp. bought four air-conditioning units from Trane-Co., an operating division of American Standard, Inc, in 1998. The contract stated in part, "NEITHER PARTY SHALL BE LIABLIE. FOR... CONSEQUENTIAL DAMAGES" Tranc was responsible for servicing the units: During the last ten days of March 2003, 'crane's employees serviced and inspected the units, changed the filters and belt, and made a material list for repairs: On April 3, a fire occurred at Eaton's facility, extensively damaging the units and the facility, although no one was hurt. Alleging that the fire started in the electric motor of one of the units, and that Trane's faulty servicing of the units caused the fire, Eaton filed a suit in a federal district court against Trane. Eaton asserted breach of contract, among other claims, seeking consequential damages. Trane filed a motion for summary judgment, based on the limitation-of-remedies clause. What are consequential damages? Can these be limited in some circumstances? Is the clause valid in this. case? Explain. [Eaton Corp. v. Twine Carolina Plains, 350 F.Supp.2d 699 (D.S.C. 2004)]

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Q 13

Right of Assurance. Advanced Polymer Sciences, Inc. (APS), based in Ohio, makes polymers and resins for use as protective coatings in industrial applications. APS also owns the technology for equipment used to make certain composite fibers. SAVA gumarska in kemijka industria d.d. (SAVA), based in Slovenia, makes rubber goods. In 1999, SAVA and APS contracted to form SAVA Advanced Polymers proizvodno podjetje d.o.o. (SAVA AP) to make and distribute APS products in Eastern Europe. Their contract provided for, among other things, the alteration of a facility to make the products using specially made equipment to be sold by APS to SAVA. Disputes arose between the parties, and in August 2000, SAVA stopped work on the new facility. APS then notified SAVA that it was stopping the manufacture of the equipment and "insist[ed] on knowing what is SAVA's intention towards this venture." In October, SAVA told APS that it was canceling their contract. In subsequent litigation, SAVA claimed that APS had repudiated the contract when it stopped making the equipment. What might APS assert in its defense? How should the court rule? Explain. [SAVA gumarska in kemijka industria d.d. v. Advanced Polymer Sciences, Inc., 1.28 S.W.3c1 304 (Tex.App.-Dallas 2004)]

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Q 14

Spotlight on Revocation of Acceptance-Remedies of the Buyer. L.V.R.V., Inc., sells recreational vehicles (RVs) in Las Vegas, Nevada, as Wheeler's Las Vegas RV. In September 1997, Wheeler's sold a Santara RV made by Coachmen Recreational Vehicle Co. to Arthur and Roswitha Waddell. The Waddells hoped to spend two or three years driving around the country, but almost immediately-and repeatedly- they experienced problems with the RV. Its entry door popped open. Its cooling and heating systems did not work properly. Its batteries did not maintain a charge. Most significantly, its engine overheated when ascending a moderate grade. The Waddells brought it to Wheeler's service department for repairs. Over the next year and a half, the RV spent more than seven months at Wheeler's. In March 1999, the Waddells filed a complaint in a Nevada state court against the dealer to revoke their acceptance of the RV. What are the requirements for a buyer's revocation of acceptance? Were the requirements met in this case? In whose favor should the court rule? Why? [Waddell v. L.V.R.V., Inc., 122 Nev. 15, 125 P.3d 1160 (2006)]

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Q 15

Business Case Problem with Sample Answer: Nonconforming Goods. Padma Paper Mills, Ltd., converts waste paper into usable paper. In 2007, Padma entered into a contract with Universal Exports, Inc., under which Universal Exports certified that it would ship white envelope cuttings, and Padma paid $131,000 for the paper. When the shipment arrived, however, Padma discovered that Universal Exports had sent multicolored paper plates and other brightly colored paper products. Padma accepted the goods but notified Universal Exports that they did not conform to the contract. Can Padma recover even though it accepted the goods knowing that they were nonconforming? If so, how? [Padma Paper Mills, Ltd. v. Universal Exports, Inc., 34 Misc.3d 1236(A) (N.Y.Sup. 2012)] (See page 430.)

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Q 16

Critical Legal Thinking. Under what circumstances should courts not allow fully informed contracting parties to agree to limit remedies?

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Q 17

Critical Thinking and Writing Assignment for Business. Suppose that you are a collector of antique cars and you need to purchase spare parts for a 1938 engine. These parts are not made any more and are scarce. You discover that Beem has the spare parts that you need. To get the contract with Beem, you agree to pay 50 percent of the purchase price in advance. You send the payment on May 1, and Beem receives it on May 2. On May 3, Beem, having found another buyer willing to pay substantially more for the part% informs you that he will not deliver as contracted. That same day, you learn that Beem is insolvent. Discuss fully any possible remedies that would enable you to take possession of these parts.

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Quiz 17: Performance and Breach of Sales and Lease Contracts

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