Formation and Terms of Sales ContractsProduct Liability

Performance of Sales ContractsRemedies for Breach of Sales Contracts

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Remedies for Breach of Sales Contracts

Every great mistake has a halfway moment, a split second when it can be recalled and perhaps remedied.

Pearl S. Buck, novelistWhat America Means to

Me(1943)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Agreements as to remediesSeller’s remediesBuyer’s remedies

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Parties may agree to remedies in the contract Agreed remedy applied in

the event of a breach of contract to reduce risk

Example: “If delivery is not made by September 1, Seller will pay Buyer $1,000 as liquidated damages.”

Agreements as to Remedies

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In a liquidated damages clause, parties agree on the amount of damages to be paid to the injured party Enforced if amount is reasonable and if

actual damages would be difficult to prove Example: Baker v. International Record

Syndicate, Inc. If not enforceable because amount is a

penalty or unconscionable, injured party may recover the actual damages suffered

Liquidated Damages

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In a limitation or exclusion clause, parties agree to limit either the remedies that the law makes available or the damages that can be covered [2–719(1)] Limitations commonly placed on liability for

consequential damages But attempt to limit consequential damages

for injury to a person by consumer goods is prima facie unconscionable [2–719(3)]

Limitation or Exclusion

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Star-Shadow Productions, Inc. v. Super 8 Sync Sound System

Facts: Star-Shadow rented a camera and purchased

film, but neither film nor camera worked until supplier Super 8 finally resolved problem

Star-Shadow sued Super 8 for consequential damages and Super 8 pointed to limitation of liability clause: “Limitation of Liability: This product will be repaired if defective in manufacture or packing. Except for such replacement this product is sold without warranty or liability even though defect, damage, or loss is caused by negligence or other fault. . . .”

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Procedural History and Holding: Trial court found for Super 8 On appeal, Star-Shadow argued the

limitation of liability clause failed to adequately protect them from damages caused by the defective film

Appellate court stated: “…fact that Star-Shadow has no protection other than their bargained-for remedy of replacement film does not make the limitation of liability clause unconscionable… affirmed…”

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Star-Shadow Productions, Inc. v. Super 8 Sync Sound System

If buyer breaches the contract and seller has goods, seller has several remedies: Cancel the contract [2–703(f)] and

withhold delivery of goods [2–703(a)] Resell manufactured goods and

recover damages (difference between resale price and price buyer agreed to pay by contract [2–706])

Seller’s Remedies

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Recover purchase price of goods (must hold goods for buyer)

Recover damages for rejection/repudiation (1) difference between contract price and

current market price for the goods and (2) “profit” that seller lost when buyer did

not go through with the contract [2–708] See Jewish Federation of Greater Des Moines v.

Cedar Forrest Products Co.

Seller’s Remedies - More

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If buyer is insolvent and has the goods, seller may: Recover purchase price Reclaim goods in

possession of buyer If goods are in transit,

seller may stop shipment

Seller’s Remedies - More

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Seller should select alternative that will minimize loss [2–704(2)]

Example: Madsen v. Murrey & Sons Co., Inc. Seller, who did not complete manufacture

of goods on buyer’s repudiation, but rather dismantled and largely scrapped the existing goods, was held not to have acted in a commercially reasonable manner

Duty to Mitigate Damages

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Under the (CISG), aggrieved seller has five potential remedies when a buyer breaches the contract:

(1) suspension of seller’s performance (2) “avoidance” of the contract (3) reclamation of goods in buyer’s

possession (4) an action for the price (5) an action for damages

Seller’s Remedies & The CISG

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If seller breaches the contract, the buyer has several remedies: Buy other goods (cover) and recover

damages from seller based on any additional expense that buyer incurs in obtaining the goods [2–712] Example: KGM Harvesting Co. v. Fresh

Network

Buyer’s Remedies

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KGM Harvesting Co. v. Fresh Network

Facts and Opinion: California lettuce grower (KGM) and food broker

Fresh Network (FN) did business for years Lettuce price skyrocketed and KGM refused to

supply FN at very low contract price, but sold to others at a profit

To satisfy customers, FN purchased lettuce on open market and sued KGM for cost differential

Court found in favor of Fresh Network based on UCC 2-712

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Recover damages based on difference between contract price and current market price of goods [2–713]

Recover damages for any nonconforming goods accepted by buyer based on difference in value between what buyer received and what buyer should have received [2–714]

Buyer’s Remedies - More

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Obtain specific performance of the contract where goods are unique and cannot be obtained elsewhere [2–716]

Recover damages on basis-of-the-bargain calculation for fraud and misrepresentation [2-721] Example: Green Wood Industrial Co.

v. Forceman Int’l Development Group, Inc.

Buyer’s Remedies - More

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Under the (CISG), aggrieved buyer has four potential types of remedies when a seller breaches the contract:

(1) “avoidance” of the contract (2) an adjustment in price (3) specific performance (4) an action for damages

Seller’s Remedies & The CISG

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Test Your Knowledge

True=A, False = B If buyer refuses to accept conforming

goods, seller may recover damages, such as lost profit

If an insolvent buyer has the goods, the seller may reclaim the goods from buyer

If seller breaches the contract by failing to deliver the goods, buyer may “cover” and recover damages22 - 19

Test Your Knowledge

Multiple Choice Widgets agreed to deliver 500 cases of

grommets to ToyCo by Sept. 1. Widgets knew ToyCo needed the grommets to make toys for delivery by Dec. 1. Widgets delivered the order Nov. 29. ToyCo may:(a) buy grommets elsewhere to cover(b) sue for damages(c) obtain specific performance(d) both A and B(e) all of the above22 - 20

Thought Question

Assume Nancy had a car to sell that she knew had been in an accident and repaired. Is it ethical to sell a damaged and repaired car without telling the potential buyer?

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