CHAPTER 21

Essentials of Business Law -- 4th Edition© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Quote of the Day“Truth is the most valuable thing we have. Let us economize it.”

Mark Twain, American author


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Good Faith

p Good faith means honesty in fact. p Between merchants, it also means the

use of reasonable commercial standards of fair dealing.

p The Code requires good faith in the performance and enforcement of every contract.


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Seller’s Obligations (and a Few Rights)

p Conforming goods satisfy the contract terms. Non-conforming goods do not.

p The seller must tender the goods, which means to make conforming goods, available to the buyer.

p Perfect Tender Rule• Under the perfect tender rule, the buyer

may reject the goods if they fail in any respect to conform to the contract.


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Restrictions on the Perfect Tender Rule

p Usage of trade: any practice that members of an industry expect to be part of their dealings.

p Course of dealing: previous commercial transactions between the same parties.

p Course of performance: the history of dealings between the parties in this one contract. This assumes it is a contract demanding an ongoing relationship.


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Curep When the buyer rejects non-conforming

goods, the seller has the right to cure, by delivering conforming goods before the contract deadline.

p The seller has the right to cure even after the contract deadline if the seller:• reasonably believed the goods to be

conforming, and • promptly notified the buyer of his intent to

cure within a reasonable time.


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Substantial Impairmentp The Code puts a tighter restriction on

buyers in the following two cases. A buyer who claims goods are non-conforming must show that the defects substantially impair their value if:• the buyer is revoking acceptance of goods,

or • the buyer is rejecting an installment.


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Destruction of Goodsp If identified goods are totally destroyed

before risk passes to the buyer, the contract is void.

p If identified goods are partially destroyed, the buyer may choose whether to accept the goods at a reduced price or void the contract.


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Commercial Impracticabilityp A supervening event excuses

performance of a contract, if the event was not within the parties’ contemplation when they made the agreement.• Sometimes natural disasters such as

tornadoes and earthquakes may relieve a party from performing.


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Buyer’s Obligations (and a Few Rights)

p The buyer must provide adequate facilities to receive the goods.

p Inspection -- The buyer generally has the right to inspect the goods before paying or accepting.

p Partial Acceptance -- The buyer may accept some goods and reject others if the goods can be divided into commercial units.


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Buyer’s Obligations (and a Few Rights) – (cont’d)

p May revoke acceptance only if the nonconformity substantially impairs the value and only if she had a legitimate reason for the initial acceptance.

p May reject non-conforming goods by notifying seller within a reasonable time.

p May reject a non-conforming installment, only if it substantially impairs the value of that installment and cannot be cured.


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Remedies: Assurancep When there are reasonable grounds

for insecurity, a party may:• demand written assurance of

performance from the other party, and • until he receives it, generally may

suspend his own performance.


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Remedies: Repudiation p A party repudiates a contract by

indicating that it will not perform.p When either party repudiates the

contract, the other party may: • for a reasonable time await performance or • resort to any remedy for breach of contract.

p In either case, it may suspend its own performance.


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Seller’s Remediesp Cancel the contractp Stop or refuse deliveryp Identify goods to the contract

• If the seller has not yet identified goods to the contract, he may do so as soon as he learns of the breach.

p Resell goods• The seller may recover difference between

the resale price and contract price, plus incidental damages, minus expenses saved.


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Seller’s Remedies (cont’d)

p Damages for Non-Acceptance• A seller who does not resell, or who resells

unreasonably, may only recover the difference between the contract price and the market value of the goods at the time of delivery.

p Action for the Price• A seller may recover the contract price if:

– the buyer has accepted the goods, or – the seller’s goods are conforming and he is

unable to resell after a reasonable effort.


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Buyer’s Remediesp Cancel the contractp Recover money paidp Cover

• If the seller breaches, the buyer may “cover” by reasonably obtaining substitute goods.

• Buyer may then obtain the difference between the contract price and the cover price, plus incidental and consequential damages, minus expenses saved.


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Buyer’s Remedies (cont’d)

p Non-Delivery• The difference between the market price at

the time the buyer learns of the breach and the contract price, plus incidental and consequential damages minus expenses saved.

p Acceptance of Non-Conforming Goods• Buyer may recover damages for the

difference between the goods as promised and as delivered, plus incidental and consequential damages.


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Buyer’s Remedies (cont’d)

p Incidental and Consequential Damages• An injured buyer is generally entitled to

incidental and consequential damages.p Specific Performance

• Allowed if the contract goods are unique, or the buyer is unable to obtain cover.

p Liquidated Damages• Enforceable, but only in an amount that is

reasonable in light of the harm.


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Damage Limitations and Exclusions

p A court generally will not enforce a limitation that leaves the injured party with no remedy.

p A court will not enforce an unconscionable exclusion of consequential damages.


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“Performance and remedy under the Code reflect

contemporary commercial practices but also demand a satisfactory level of sensible,

ethical behavior.”

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CHAPTER 21

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