Quiz 14: Performance and Breach of Sales and Lease Contracts
Business
Q 1Q 1
ISSUE SPOTTERS
Country Fruit Stand orders eighty cases of peaches from Down Home Farms. Without stating a reason, Down Home untimely delivers thirty cases instead of eighty. Does Country have the right to reject the shipment? Explain. (See page 323.)
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, the buyer has the right to reject the shipment.
The perfect tender rule sates that the seller was obligated to eighty cases of peaches 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.
Since the seller did not specify the reason for delivering too little too late to take, the buyer has all the rights to reject the shipment.
Moreover, the seller cannot take the advantage of partial performance exception.
Q 2Q 2
Answers to the even-numbered questions in this For Review section can be found in Appendix F 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 3Q 3
The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What are the respective obligations of the parties under a contract for the sale or lease of goods?
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A contract is a promise made by a person (promisor), to do or not do a definite act, to another (promisee). The contract of sales and lease is a contract between buyer and seller for the trading of the goods. Both seller and buyer have obligations in this contract. The obligation of a seller: Seller needs to ensure the delivery of the said goods to the buyer. The delivery need to be at rational time and rational manner, the seller cannot deliver goods at 4 in the morning. If the said goods are to be delivered at specific time, then the time can be acceptable. The goods also need to be in good condition. The obligation of a buyer: The main responsibility of the buyer is to accept the goods and pay for the goods as decided in the sales contract. Payment can be made in card and cash, but if a specific mode is mentioned then payment is done accordingly.
Q 4Q 4
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 available to Genix in this situation. (See page 331.)
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Q 5Q 5
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 even though 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 for 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?
DEBATE THIS If a contract specifies a particular carrier, then the shipper must use that carrier or be in breach of the contract-no exceptions should ever be allowed.
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Q 6Q 6
ISSUE SPOTTERS
Brite Images, Inc. (BI), agrees to sell Catalog Corporation (CC) five thousand posters of celebrities, to be delivered on May 1. On April 1, BI repudiates the contract. CC informs BI that it expects delivery. Can CC sue BI without waiting until May 1? Why or why not? (See pages 330-331.)
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Q 7Q 7
Answers to the even-numbered questions in this For Review section can be found in Appendix F 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 9Q 9
Breach. 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 10Q 10
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What options are available to the nonbreaching 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 11Q 11
The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What options are available to the nonbreaching 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 12Q 12
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. Although Moore had not sold the car to another party, she had refused the tender and 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 13Q 13
Answers to the even-numbered questions in this For Review section can be found in Appendix F 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 available to a buyer or lessee if the seller or lessor breaches the contract?
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Q 14Q 14
What remedies are available to a seller or lessor when the buyer or lessee breaches the contract?
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Q 15Q 15
Acceptance. In April 2007, Stark, Ltd., applied for credit and opened an account with Quality Distributors, Inc., to obtain snack foods and other items for Stark's convenience stores. For three months, Quality delivered the goods and Stark paid the invoices. In July, Quality was dissolved, and its assets were distributed to J. F. Hughes Co. Hughes continued to deliver the goods to Stark, which continued to pay the invoices until November, when Stark began to experience financial difficulties. By January 2008, Stark owed Hughes $54,241.77. Hughes then dealt with Stark only on a collect-on-delivery basis until Stark's stores closed in 2009. Hughes filed a lawsuit in a state court against Stark and its owner to recover amounts due on unpaid invoices. To successfully plead its case, Hughes had to show that there was a contract between the parties. One question was whether Stark had manifested acceptance of the goods delivered by Hughes. How does a buyer manifest acceptance? Was there an acceptance in this case?
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Q 16Q 16
Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
In contracts subject to the UCC, are parties free to limit the remedies available to the nonbreaching party on a breach of contract? If so, in what ways?
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Q 17Q 17
The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
In contracts subject to the UCC, are parties free to limit the remedies available to the nonbreaching party on a breach of contract? If so, in what ways?
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Q 18Q 18
Case Problem with Sample Answer Flint Hills Resources, Li; a crude oil refiner, agreed to buy "approximately 1,000 barrels per day" of Mexican natural gas condensate from JAG Energy Inc., an oil broker. Four months into the contract, Pemex, the only authorized seller of freshly extracted Mexican condensate, warned Flint Hills that some companies might be selling stolen Mexican condensate. Fearing potential criminal liability, Flint Hills refused to accept more deliveries from JAG without proof of the title to its product. JAG promised to forward documents showing its chain of title. When, after several weeks, JAG did not produce the documents, Flint Hills canceled their agreement. JAG filed a suit in a federal district court against Flint Hills, alleging breach. Did Flint Hills have a right to demand assurance of JAG's title to its product? If so, did the buyer act reasonably in exercising that right? Explain. [ Flint Hills Resources , LP v. JAG Energy , Inc., 559 F3d 373 (5th Cir. 2009)]
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Q 19Q 19
Breach and Damages. Before Chad DeRosier could build a house on his undeveloped property, he needed to have some fill dirt dumped onto the land. Utility Systems of America, Inc., was doing roadwork nearby, and DeRosier asked Utility if it would like to dump extra fill dirt onto his property. Utility said it would, and DeRosier got the necessary permits. The permit was for 1,500 cubic yards of fill dirt, which was how much DeRosier needed. DeRosier gave Utility a copy of the permit. Later, DeRosier found a mountain of fill dirt on his land-6,500 cubic yards. So 5,000 cubic yards of fill dirt had to be removed. Utility denied responsibility but said that it would remove the fill dirt for $9,500. DeRosier sued and hired another company to remove the fill dirt and to do certain foundation work. He paid $46,629 to that contractor. The district court held that Utility had breached its contract and ordered it to pay DeRosier $22,829 in general damages, and $8,000 in consequential damages. Utility appealed. Because Utility charged nothing for the fill dirt, was there a breach of contract? If a breach occurred, would the damages be greater than $9,500? Could consequential damages be justified? Discuss. [ DeRosier v. Utility Systems of America , Inc., 780 N.W2d 1 (Minn.App. 2010)]
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Q 20Q 20
Remedies of the Buyer. Woodridge USA Properties, LP, bought eighty-seven commercial truck trailers under a contract with Southeast Trailer Mart (STM), Inc. Southeastern Freight Lines, Inc., owned the lot in Atlanta, Georgia, where the trailers were stored. Gerald McCarty, an independent sales agent who arranged the deal, showed Woodridge the documents of title. They did not indicate that Woodridge was the buyer. Woodridge asked McCarty to hold the documents and sell the trailers for Woodridge. Within three months, all of the trailers had been sold, but McCarty had not given the proceeds to Woodridge. Woodridge-without mentioning the title documents-asked STM to refund the contract price. STM refused. Later, Woodridge filed a suit in a federal district court against STM, claiming that the title documents had been defective and seeking damages. Does Woodridge have a right to recover damages for accepted goods? What would be the measure of the damages? Explain. [ Woodridge USA Properties , L.P v. Southeast Trailer Mart , Inc., ____ F.3d ____ (11th Cir. 2011)]
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Q 21Q 21
A Question of Ethics-Revocation of Acceptance. Scotwood Industries, Inc., sells calcium chloride flake for use in ice melt products. Between July and September 2004, Scotwood delivered thirty-seven shipments of flake to Frank Miller Sons, Inc. After each delivery, Scotwood billed Miller, which paid thirty-five of the invoices and processed 30 to 50 percent of the flake. In August, Miller began complaining about the quality. Scotwood assured Miller that it would remedy the situation. Finally, in October, Miller told Scotwood, "This is totally unacceptable. We are willing to discuss Scotwood picking up the material." Miller claimed that the flake was substantially defective because it was chunked. Calcium chloride maintains its purity for up to five years, but if it is exposed to and absorbs moisture, it chunks, making it unusable. In response to Scotwood's suit to collect payment on the unpaid invoices, Miller filed a counterclaim in a federal district court for breach of contract, seeking to recover based on revocation of acceptance, among other things. [Scotwood Industries, Inc. v. Frank Miller Sons, Inc., 435 F.Supp.2d 1160 (D.Kan. 2006)] (See page 337.)
1. What is revocation of acceptance? How does a buyer effectively exercise this option? Do the facts in this case support this theory as a ground for Miller to recover damages? Why or why not?
2. Is there an ethical basis for allowing a buyer to revoke acceptance of goods and recover damages? If so, is there an ethical limit to this right? Discuss.
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Q 22Q 22
Critical Thinking Legal Question. Under what circumstances should courts not allow fully informed contracting parties to agree to limit remedies?
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Q 23Q 23
FACTS On June 15, 1973, Maple Farms, Inc., formed an agreement with the city school district of Elmira, New York, to supply the school district with milk for the 1973-1974 school year. The agreement was in the form of a requirements contract, under which Maple Farms would sell to the school district all the milk the district required at a fixed price-which was the June market price of milk. By December 1973, the price of raw milk had increased by 23 percent over the price specified in the contract.
This meant that if the terms of the contract were fulfilled, Maple Farms would lose $7,350. Because it had similar contracts with other school districts, Maple Farms stood to lose a great deal if it was held to the price stated in the contracts.
When the school district would not agree to release Maple Farms from its contract, Maple Farms brought an action in a New York state court for a declaratory judgment (a determination of the parties' rights under a contract). Maple Farms contended that the substantial increase in the price of raw milk was an event not contemplated by the parties when the contract was formed and that, given the increased price, performance of the contract was commercially impracticable.
ISSUE Can Maple Farms be released from the contract on the ground of commercial impracticability?
DECISION No. The court ruled that performance in this case was not impracticable.
REASON The court reasoned that commercial impracticability arises when an event occurs that is totally unexpected and unforeseeable by the parties. The increased price of raw milk was not totally unexpected, given that in the previous year, the price of milk had risen 10 percent and that the price of milk had traditionally varied.
Additionally, the general inflation of prices in the United States should have been anticipated. Maple Farms had reason to know these facts and could have included a clause in its contract with the school district to protect itself from its present situation. The court also noted that, for the school district, the primary purpose of the contract was to protect itself (for budgeting purposes) against price fluctuations.
WHAT IF THE FACTS WERE DIFFERENT? Suppose that the court had ruled in the plaintiff's favor. How might that ruling have affected the plaintiff's contracts with other parties?
IMPA CT OF THIS CASE ON TODAY'S LAW This case is a classic illustration of the UCC's commercial impracticability doctrine. Under this doctrine, parties who freely enter into contracts normally will not be excused from their contractual obligations simply because changed circumstances make performance difficult or unprofitable. Rather, to be excused from performance, a party must show that the changed circumstances were unforeseeable at the time the contract was formed. This principle continues to be applied today.
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Q 24Q 24
Romero v. Scoggin-Dickey Chevrolet-Buick, Inc.
Court of Appeals of Texas, Amarillo, ___ S.W.3d ___ (2010).
FACTS Jessie Romero wanted to buy a 2006 Silverado pickup from the Scoggin-Dickey Chevrolet-Buick, Inc., dealership in Lubbock, Texas. In his discussion with a sales representative, Fred Morales, Romero proposed to purchase the pickup by assigning the dealership the factory rebates, supplying two trade-in vehicles, and paying the cash difference. After negotiating a value for the trade-in vehicles-which Romero did not have on the lot at that time-Romero and Morales signed a contract order in which Scoggin-Dickey agreed to sell Romero the 2006 Silverado pickup for $21,888. In return, Romero agreed to trade in the two vehicles (having a negotiated combined net value of $15,000), assign factory rebates totaling $3,000, and pay $4,333.52 in cash. Romero paid the cash, assigned the rebates, and took possession of the 2006 Silverado pickup. At that time, Romero did not deliver the trade-in vehicles to Scoggin-Dickey, nor did Scoggin-Dickey transfer title to the 2006 Silverado pickup to Romero. Subsequently, after inspecting the trade-in vehicles, Scoggin-Dickey determined that the vehicles had very little commercial value. So it took back the pickup and offered to partially refund Romero's down payment. Romero rejected the offer and filed a suit. The trial court held that Scoggin-Dickey had a right to inspect the trade-in vehicles under UCC Section 2-513 and, upon inspection, had validly exercised its right to reject the vehicles tendered by Romero. Romero appealed, arguing that Scoggin-Dickey had no legal right to inspect and/or reject the trade-in vehicles after the contract order had been executed.
ISSUE Did the dealership have a right to inspect Romero's trade-in vehicles even after the sales contract on the truck had been signed?
DECISION Yes. The Texas appellate court affirmed the trial court's judgment. Scoggin-Dickey had a right to inspect Romero's trade-in vehicles and to reject the goods if they did not conform to their description in the contract.
REASON The court indicated that "Unless the parties agree otherwise, a buyer has a right to inspect goods identified to a contract for sale at any reasonable place and time and in any reasonable manner prior to payment or acceptance of the goods. This is an implied condition in all contracts for sale." Further, if the goods are nonconforming, the buyer has an absolute right to reject. In addition, execution of the contract order did not constitute a "sale," because ownership of the 2006 Silverado pickup was not transferred to Romero, nor was ownership of the two trade-in vehicles transferred to the dealership as part of the payment for the Silverado.
FOR CRITICAL ANALYSIS-Legal Consideration Why didn't the "contract order" signed by the parties constitute a binding contract for the sale of goods?
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Q 25Q 25
Les Entreprises Jacques Defour Fils, Inc. v. Dinsick Equipment Corp.
United States District Court, Northern District of Illinois, __ F.Supp.2d __ (2011).
FACTS Les Entreprises Jacques Defour Fils, Inc., is a Canadian corporation in the business of highway construction. Its principal place of business is in Baie-Saint-Paul, Quebec, Canada. Dinsick Equipment Corporation is a U.S. firm that sells new and used industrial equipment from its base of operations in Plainfield, Illinois. Les Entreprises contracted to buy a 30,000-gallon industrial tank from Dinsick and wired the price of $70,000 directly to the seller's bank account. Less than a week later, Dinsick told Les Entreprises that the tank could be picked up in Joplin, Missouri. The buyer paid Xaak Transport, Inc., to pick up the tank, but when Xaak went to Joplin, the tank was not there. Les Entreprises paid Xaak $7,459 for its services and then contacted Dinsick, which agreed to reimburse the $70,000. When Dinsick did not refund the price, however, Les Entreprises filed a suit in a federal district court against the seller.
ISSUE In addition to the contract price, can Les Entreprises (the buyer) recover damages for the amount it paid to a trucking company to pick up goods that Dinsick (the seller) had failed to deliver?
DECISION Yes. The federal district court issued a judgment in favor of Les Entreprises. The judgment included an award of compensatory damages in the amount of $70,000 for the tank and incidental damages of $7,459 for the transport.
REASON To establish a breach of contract, the plaintiff must show (1) an enforceable contract, (2) substantial performance by the nonbreaching party, (3) a breach by the other party, and (4) damages. In this case, Les Entreprises agreed-as evidenced by Dinsick's invoice-to buy an industrial tank. The buyer deposited the funds into the seller's account, which shows substantial performance. Dinsick failed to tender or deliver the tank and later failed to refund the price. These circumstances show that Dinsick breached the contract with Les Entreprises. As for the amount of the damages in addition to the price of the tank, Les Entreprises-on Dinsick's notice that the tank was ready for pickup-paid Xaak to transport it. Because shipping costs were key to the performance of the contract, this was a reasonable expense.
FOR CRITICAL ANALYSIS-Technological Consideration What did the act of wiring the full payment directly to the seller's bankaccount demonstrate? Are there other methods of payment that couldhave accomplished the same purpose? Explain.
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