Chapter 22 – Remedies for Breach of Sales Contracts
1. C H A P T E R
Remedies for Breach of
22
Sales Contracts
Every great mistake has a
halfway moment, a split second
when it can be recalled and
perhaps remedied.
Pearl S. Buck, novelist
What America Means to Me
(1943)
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2. Learning Objectives
• Discuss meaning of liquidated
damages and cover, and when
UCC allows enforcement
• List and describe UCC remedies for
an injured buyer or seller
• Describe damages available to
injured buyer, including specific
performance
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3. Agreements as to Remedies
• 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.”
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4. Liquidated Damages
• In a liquidated damages clause, parties
agree on the amount of damages to be
paid to the injured party
– Enforced if reasonable amount and 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
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5. Limitation or Exclusion
• 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
– Attempt to limit consequential damages
for injury to a person by consumer goods is
prima facie unconscionable [2–719(3)]
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6. Star-Shadow Productions, Inc. v. Super
• Facts:
– Star-Shadow rented a camera and bought
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: …
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. . . .”
22-6
7. Star-Shadow Productions, Inc. v. Super
• 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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8. Seller’s Remedies
• 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])
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9. More Seller’s Remedies
• Recover purchase price of goods (must
hold goods for buyer)
• Recover damages for rejection or
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
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10. More Seller’s Remedies
• 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
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11. Duty to Mitigate Damages
• 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
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12. Seller’s Remedies & The CISG
• 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
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13. Buyer’s Remedies
• 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
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14. 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 bought lettuce on
open market & sued KGM for cost differential
– Court found in favor of Fresh Network based
on UCC 2-712
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15. More Buyer’s Remedies
• 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]
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16. More Buyer’s Remedies
• 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]
– See Green Wood Industrial Co. v.
Forceman Int’l Development
Group, Inc.
22-16
17. 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 damages
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18. 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 above
22-18
19. Thought Question
• Assume Naomi 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?
22-19
Notes de l'éditeur
In Baker v. International Record Syndicate, Inc ., the court enforced a liquidated damages clause in a contract. In this case, the decision was easy since a provision in the contract stated: “[r]eimbursement for loss or damage shall be determined by a photograph’s reasonable value which shall be no less than $1,500 per transparency.” The court stated: “The evidence clearly shows that photographs are unique items with many factors bearing on their actual value. Each of the 34 chromes may have had a different value. Proof of this loss is difficult; where damages are real but difficult to prove, injustice will be done the injured party if the court substitutes the requirements of judicial proof for the parties’ own informed agreement as to what is a reasonable measure of damages.”
Hyperlink is to the court’s opinion on the Findlaw.com website. Star-Shadow Productions, Inc., and Bruce J. Haas produce and film low-budget movies. One of their projects, “The Night of the Beast,” was scheduled for filming from March 12 through 18, 1994, at the General Stanton Inn in Charlestown, Rhode Island. In preparation for the filming, Star- Shadow rented a Beaulieu 7008 Pro 8-millimeter camera and bought 108 rolls of Super 8 Sound high-resolution color negative film from Super 8 Sync Sound System. Unfortunately, on the first day of filming, Star-Shadow’s cameraman was unable to use the Super 8 film because of loading and jamming problems. A representative of Super 8, Lisa Mattei, offered advice by phone and subsequently traveled to Charlestown with a replacement camera and Kodak Reverse film. When her trouble shooting efforts proved fruitless, she replaced the Super 8 film with Kodak Reverse film and the camera operated successfully. On March 22, 1994, Star-Shadow returned the camera and Star-Shadow’s account was credited for the unused film. Star-Shadow subsequently sued Super 8 for damages allegedly caused by the Super 8 film’s inability to operate correctly. Super 8 filed a motion for summary judgment arguing that it had complied with all the terms of the contract by replacing the defective film and crediting Star-Shadow’s account for the unused film. Super 8 pointed to the limitation of liability clause contained on price sheets and film boxes provided to Star-Shadow to show that Super 8 could not be subject to any additional liabilities. The limitation of liability clause’s pertinent part reads: “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. . . .”
The trial court granted the motion for summary judgment. The judge found that the limitation of liability clause contained on the Super 8 film package was valid; therefore, Super 8 could not be held liable for damages beyond the value of replacement film. Star-Shadow appealed. Appellate court: “ Star-Shadow maintains that the limitation of liability clause failed its essential purpose—to adequately protect the filmmakers from damages arising from defective film…. We have held in an analogous situation that the purchase price of goods is “not a premium for . . . insurance,” and consequently, limitation of liability clauses are not unconscionable merely because buyers are not fully protected for damages that may arise from the malfunction of their purchased goods or service….filmmaker free to purchase raw stock insurance…. fact that Star-Shadow in this case has no protection other than their bargained-for remedy of replacement film does not make the limitation of liability clause unconscionable…. Star-Shadow received what it bargained for, and the risk of equipment failure properly lay on them, not Super 8….Affirmed.”
A buyer may breach a contract in a number of ways. The most common are: (1) by wrongfully refusing to accept goods, (2) by wrongfully returning goods, (3) by failing to pay for goods when payment is due, and (4) by indicating an unwillingness to go ahead with the contract.
Hyperlink is to the court’s opinion in Jewish Federation of Greater Des Moines v. Cedar Forrest Products Co.: Cedar Forrest Products Company (CFP) manufactures precut building packages for shelters, pavilions, gazebos, and other structures typically utilized in park, camp, and recreational facilities. The Jewish Federation of Greater Des Moines (Jewish Federation) contracted with CFP for the manufacture of a 3,500 square foot building with unique and customized features. With the signing of the Purchase and Sales Agreement, Jewish Federation sent CFP a deposit of $53,605; shortly thereafter it prematurely sent the remaining balance of $160,813 for a total contract price of $214,418. After a series of redesign discussions and change orders, Jewish Federation informed CFP it was rescinding the contract and requesting return of all monies paid. CFP returned $160,530.54, but retained $53,887.46 as lost profits it would have made had Jewish Federation not breached the contract. In anticipation of the building project, CFP purchased cedar paneling, insulation, floor plywood, and cedar timber. It had not begun to assemble the building when Jewish Federation breached the contract. After the breach, CFB was able to sell the purchased items to other customers for the same price as called for in the Jewish Federation contract. Jewish Federation filed an action for the return of the remaining $53,887.46, claiming there had been no meeting of the minds and the agreement was merely a quote based on a preliminary schematic drawing; CFP counterclaimed for breach of contract. The trial court found the agreement was a completely integrated contract which Jewish Federation had breached and determined that CFP was only entitled to retain $13,470.13 for “incidental damages.” CFP appealed. Appellate court: “The primary issue on appeal is the proper measure of damages for a lost volume seller under these particular circumstances. ….As a lost volume seller, CFP is entitled to its lost profits of $53,887.46 pursuant to Section 2–708(2) which includes the incidental damages of $13,470.17 awarded by the district court. Judgment reversed in favor of CFP.”
A seller may breach a contract in a number of ways. The most common are: (1) failing to make an agreed delivery, (2) delivering goods that do not conform to the contract, and (3) indicating that he does not intend to fulfill the obligations under the contract.
KGM Harvesting Co. v. Fresh Network : KGM Harvesting Company, a California lettuce grower and distributor, and Fresh Network, an Ohio lettuce broker, began dealing with each other and over the years the terms of the agreement were modified. As of May 1991, their agreement called for KGM to deliver 14 “loads” of lettuce a week at a price of 9 cents a pound. A load of lettuce consists of 40 bins, each of which weighs 1,000 to 1,200 pounds. At an average bin weight of 1,100 pounds, one load would equal 44,000 pounds, and the 14 loads called for in the contract would weigh 616,000 pounds. At 9 cents per pound, the cost would be approximately $55,440 per week. Fresh Network, in turn, resold all of the lettuce to another broker (Castellani Company) who sold it to Club Chef, a company that chopped and shredded it for the fast food industry (specifically, Burger King, Taco Bell, and Pizza Hut). The transactions between Fresh Network and Castellani, and in turn between Castellani and Club Chef, were on a cost-plus basis. This meant each paid its buyer its actual cost plus a small commission. In May and June 1991, when the price of lettuce went up dramatically, KGM refused to supply Fresh Network with lettuce at the contract price of 9 cents per pound. Instead, it sold the lettuce to others at a profit between $800,000 and $1,100,000. Fresh Network then went out on the open market and purchased lettuce to satisfy its obligations to Castellani Company. Castellani covered all of Fresh Network’s extra expense except for $70,000. Fresh Network then sought to recover from KGM as damages the difference between what it was forced to spend to buy replacement lettuce and the contract price of 9 cents a pound (approximately $700,000). KGM objected on the grounds that Fresh Network had been able to pass some of the increased cost along to Castellani. Appellate court: “In the instant case, buyer “covered” in order to fulfill its own contractual obligations to the Castellani Company. Accordingly, it was awarded the damages called for in cover cases—the difference between the contract price and the cover price. In appeals from judgments rendered pursuant to section 2–712, the dispute typically centers on whether the buyer acted in “good faith,” whether the “goods in substitution” differed substantially from the contracted for goods, whether the buyer unreasonably delayed in purchasing substitute goods in the mistaken belief the price would go down, or whether the buyer paid too much for the substitute goods. …In this case, however, none of these typical issues is in dispute….Instead, seller takes issue with section 2–712 itself, contending that despite the unequivocal language of section 2–712, a buyer who covers should not necessarily recover the difference between the cover price and the contract price…. In this case, the damage formula of section 2– 712 put buyer in the identical position performance would have…Judgment affirmed for Fresh Network (buyer).”
Damages include incidental damages, consequential damages, damages for non-delivery, and damages for defective goods.
Green Wood Industrial Company v. Forceman International Development Group, Inc., involves an award of damages in connection with a contract to sell scrap metal to a buyer in China where the goods were never shipped even though the seller fraudulently represented they had been shipped.
True. True. True.
The correct answer is (d).
Opportunity to discuss ethics in sale of goods. Note that this action may be illegal under state consumer protection laws.