Chapter 24 Remedies for Breach of Sales and Lease Contracts Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Overview • LO24-1: What constitutes a breach of a sales contract? • LO24-2: What is resale? • LO24-3: What money damages are available for breach? • LO24-4: What are liquidated damages? • LO24-5: What is cover? • LO24-6: When is specific performance of the contract a remedy? 24-2 Chapter 24 Hypothetical Case • Johan Statham, a citizen and resident of Decatur, Illinois, contracted to purchase a rare Egyptian cat statue from Tutankhamen Trading Company ("Tutankhamen Trading"), headquartered in Chicago According to Egyptian antiquities experts, the statute is the only known one of its kind still in existence Last month, the contractually specified date for the transaction came and went, with Tutankhamen Trading maintaining possession of the statue, claiming ownership of it, and reneging on the deal • What cause of action you recommend for Johan Statham if he chooses to pursue breach of contract litigation against Tutankhamen Trading Company? 24-3 Chapter 24 Hypothetical Case • Fred Dare Appliances, Inc sold a $2,000 refrigerator to Harriet Pool Per the terms of the agreement, the buyer was to pick up the appliance on July and pay for it in full before taking possession July came and went, and the buyer did not appear Fred Dare, the owner of the store, is certain that Pool breached the contract Dare has a plan His best friend, Sam Unger, desperately needs a new refrigerator, but he cannot currently afford one at full retail price In fact, Unger only has $200 Fred plans to sell the refrigerator to Unger for $200, and then send a bill for $1,800 to Pool (The $1,800 represents the difference between the price of the refrigerator in Fred Dare Appliances, Inc.'s contract with Pool and the resale price of $200 to Unger.) Fred's reasoning is that Pool breached the contract, and that he is simply exercising his resale right Fred's brother-in-law, an attorney, once told him that if a customer breaks a purchase contract, the seller has the right to resell the good to a substitute buyer and then recover any damages from the original, breaching buyer • What is your legal opinion of Dare's plan? 24-4 The Goal of Contract Remedies • Primary goal of contract remedies: To fulfill expectations and intentions of parties to agreement; give them "benefit of the bargain" negotiated 24-5 Breach, Resale, and Cover • Breach: Failure to honor the contract • Money damages usually recovery of purchase price or lease payments due; sometimes lost profit as well • Resale: Sellers/lessors allowed to sell the goods to another buyer or dispose of the goods when buyer is in breach and goods not delivered • Seller/lessor holds buyer/lessee liable for any loss • Preferred remedy for nonbreaching sellers • Cover: Substitute goods • Must demonstrate good faith, pay a reasonable sum for the substitute, act without delay, and purchase reasonable substitutes 24-6 Remedies Available to Sellers and Lessors Under UCC • When buyer/lessee is in breach, seller/lessor can: • • • • Cancel contract Withhold delivery Sell or otherwise dispose of goods Sue to recover purchase price, lease payments due, or some other measure of damages that give seller/lessor benefit of bargain 24-7 Liquidated Damages • Definition: Damages specified in contract before breach occurs • General rule: Parties free to negotiate, as part of contract, a liquidated damages clause • Courts will enforce liquidated damages clause, provided it is reasonable and not punitive • UCC Section 2-718: Allows nonbreaching seller to claim against breaching buyer twenty percent of purchase price or $500, whichever is less, as liquidated damages 24-8 Remedies Available to Buyers and Lessees Under UCC • When seller/lessor is in breach, buyer/lessee can: • • • • • • • • Cancel contract Obtain cover (substitute goods) Sue to recover damages Recover goods Obtain specific performance Reject nonconforming goods Revoke acceptance of nonconforming goods Accept nonconforming goods and seek damages 24-9 Elements Necessary to Obtain Legal Cover • Buyer must: • Demonstrate good faith in obtaining substitute goods • Pay reasonable amount for substitute goods • Act without unreasonable delay in purchasing substitute goods • Purchase goods that are reasonable substitutes 2410 Modification/Limitations to Remedies Provided by UCC • Parties to sales and lease contracts are allowed to modify/limit remedies • Courts uphold modifications/limitations to remedies unless remedies fail in their essential purpose 2411 Chapter 24 Hypothetical Case • Hale Hatfield is a banjo player Hatfield wants to purchase a new banjo for his appearance at the local Bluegrass in the Park festival scheduled for August 15 On June 1, Hatfield orders a Timber Rattler banjo from Cates Banjo Company The Timber Rattler is custom-made, and the contract specifies a purchase price of $4,000 The contract indicates a delivery date of August 10, allowing ample time for production of the banjo and for Hatfield to make his gig August 10 comes and goes, and Cates Banjo fails to deliver the instrument When Hatfield contacts the owner of Cates Banjo, Richmond Cates, he learns that the non-delivery was due to a backlog of orders Hatfield knows that he can ill afford to wait for his Timber Rattler, so he cancels his contract with Cates Banjo On August 12, Hatfield orders a pre-produced banjo from Babson Instruments, Inc., at a contract price of $6,000 By rush delivery, the Babson banjo arrives at Hatfield's home on August 14, and he is able to make the Bluegrass in the Park festival with banjo in hand By Hatfield's estimation, the Babson instrument is not a true substitute for the Timber Rattler, but he is willing to keep it and is reasonably satisfied with it Hatfield's neighbor is an attorney Hatfield shares the above facts with his neighbor and asks him if he will take the case, suing Cates Banjo for $2,000 (the difference between the price of the Cates banjo and the Babson banjo) plus associated expenses of litigation • Should the attorney take the case? Will Hatfield win? 2412 Chapter 24 Hypothetical Case • Regina Cotswold hired a contractor to remodel her kitchen, but she was dissatisfied with the cabinet makers that her contractor normally worked with Instead, she contracted directly with Billings Cabinet Works to build a custom set of cabinets for her kitchen Cotswold made sure that the contract was very specific, including detailed descriptions of the type of wood and cabinet hardware to be used, the style of the cabinet doors, and that the cabinets were to be three inches lower than standard kitchen cabinets, as all the Cotswold family members were of small stature Billings delivered and installed the cabinets on time, while Cotswold was not home but the general contractor who was handling the kitchen remodel was on site When Cotswold arrived to see the cabinets, she was horrified to see that they were standard height The incorrectly sized cabinets had deep and expensive ramifications on the rest of her kitchen remodel • Is Billings in breach? If so, what types of remedies are available to Cotswold? 2413 ... Pool breached the contract, and that he is simply exercising his resale right Fred's brother-in -law, an attorney, once told him that if a customer breaks a purchase contract, the seller has the