Chapter 23 Performance and Obligations Under Sales and Leases Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO23-1: What is the perfect tender rule? • LO23-2: What is the difference between conforming and nonconforming • • • goods? LO23-3: What is the right to cure? LO23-4: What is a revocation of the contract as compared to rejection of nonconforming goods? LO23-5: What is commercial impracticability? 23-2 Chapter 23 Hypothetical Case • Amalgamated Machining, Incorporated ("Amalgamated") purchased an assortment of assembly line parts from Integrated Equipment Company, Inc ("Integrated"), with delivery due from Integrated on August On August 1, Integrated delivered several boxes of assembly line parts to Amalgamated's warehouse Amalgamated's warehouse supervisor signed for the shipment and directed that the boxes be stored for later inspection, as he knew his employees would not have time to inspect the shipment at that time Five days after receipt of shipment, two Amalgamated warehouse employees inspected the boxes, discovering that the assembly line parts were of a different and inferior brand than those their company had ordered from Integrated Further, the shipment was ten units short of the number of parts Amalgamated had requested • In waiting five days to inspect the shipment of assembly line parts from Integrated Equipment Company, Inc., did Amalgamated Machining, Incorporated compromise its right of rejection? If so, might the company have the right to revoke its acceptance of the shipment? 23-3 Chapter 23 Hypothetical Case • According to the perfect tender rule of Uniform Commercial Code (UCC) Section 2-601, if goods or tender of delivery fail in any respect to conform to the contract, the buyer has the legal right to accept the goods, reject the entire shipment, or accept part and reject part Obviously, this is an extremely pro-buyer rule, giving the buyer great flexibility in terms of how to respond to less-than-perfect goods, or a less-than-perfect delivery For example, if the buyer orders ten pink plastic flamingoes to be delivered by the last day of the calendar year, and the seller delivers five pink plastic flamingoes on December 31, the buyer has the following options available under the UCC: 1) The buyer can accept the entire nonconforming shipment; 2) The buyer can reject the entire shipment; or 3) The buyer can accept part and reject part of the shipment • From an ethical standpoint, should the buyer accept that portion of the shipment which conforms to the contract? In the above example (and again, from an ethical perspective), should the buyer accept the five pink plastic flamingoes delivered on December 31? In the fast-paced business world, is perfection too exacting of a standard to impose on a merchant seller? 23-4 The Basic UCC Performance Obligation • Sellers and lessors are obligated to transfer and deliver conforming goods • Buyers and lessees are obligated to accept and pay for conforming goods • in accordance with terms of contract Good faith required in performance and enforcement of every contract 23-5 Good Faith • Definition: Honesty in fact • In transaction between merchants, UCC also imposes obligation of reasonable commercial standards of fair dealing (commercial reasonableness) 23-6 Perfect Tender Rule • States that if goods or tender of delivery fail in any respect to conform to contract, buyer/lessee has right to: • accept the goods; • reject entire shipment; or • accept part and reject part 23-7 Exceptions to Perfect Tender Rule • • • • • • • Industry norms Past dealings between parties Agreement between parties Seller's/lessor's right to cure Excuse from performance when identified goods destroyed through no fault of parties Substantial impairment (as it relates to revocation of acceptance and installment contracts) Commercial impracticability 23-8 Commercial Impracticability Doctrine • Delay in delivery or nondelivery, in whole or in part, does not constitute breach if performance made impracticable because contingency has occurred that was not contemplated when parties reached agreement 23-9 Inspection, Payment, and Acceptance • Buyers/lessees obligated to accept and pay for conforming goods in accordance with • • • • contract Exceptions exist Buyers/lessees typically inspect goods to ensure agreement conformity The concept of reasonableness governs inspection process Post-inspection, buyer has option to accept, partially accept, reject, or revoke acceptance • UCC guidelines govern right to exercise particular options post-inspection 23-10 Chapter 23 Hypothetical Case • Determined to carry on the tradition of placing a number of pink plastic flamingos in another person's yard as a practical joke, and with several co-workers in mind, Dorothy Hayes orders 100 pink plastic flamingos (for a total contract price of $500) from Tropical Novelties of Tampa, Inc The contract specifies delivery of the flamingos to Hayes's home in Poughkeepsie, New York on or before September On August 31, Amalgamated Package Service (APS) delivers five large boxes to Hayes's home With much anticipation, Hayes tears open the boxes, only to find 50 pink plastic flamingos—50 short of the specified contract quantity Disappointed that Tropical Novelties did not satisfy its part of the bargain, and realizing that $500 is a lot to pay for a practical joke, Hayes decides to terminate the contract She calls Tropical Novelties and speaks with a sales representative, notifying the seller that she is canceling the contract due to its nonperformance and stating that she will be returning the 50 flamingos by package delivery service the following day Tropical Novelties demands that she keep the 50 flamingos, notifies her that they will ship the remaining 50 the following day, and assures her that she will be held responsible for paying the $500 contract price • Who wins? 23-11 Chapter 23 Hypothetical Case • Kokomo Leisure Time, a manufacturer of above-ground pools, receives an order for 10,000 pools from a major club warehouse retailer, Mallmart The company manufactures and ships 5,000 of the pools before a tornado severely damages its factory Kokomo Leisure Time notifies Mallmart that it will be unable to fulfill the latter half of the order • Is this an exception to the perfect tender rule? If yes, why is it an exception? Defend your answer 23-12 ... should the buyer accept the five pink plastic flamingoes delivered on December 31? In the fast-paced business world, is perfection too exacting of a standard to impose on a merchant seller? 23-4 The