UCC Remedies I. Preliminary Issues - Different Code Terminology A. Common law - termination 1.

UCC - Termination & Cancellation 2-106 B. Common law - rescission 1. UCC - Revocation of acceptance (2-608) & reclamation (2-702) C. UCC rejects doctrine of election of remedies 2-703, comment 1 D. UCC adopts expectation measure & efficient breach theory 1-106 E. Parties may by contract determine remedies,with some limitations. 1. Liquidated Damages - 2-718 (same as Restatatement view) 2. Limit to consequential damages - 2-719(3) 3. Repair or replace - 2-719(2) II. Starting with Buyers remedies A. Before buyer can do anything, there must be a non-conforming tender (breach of warranty or other breach of contract, such as late delivery). B. In hypo, payroll computer is non-conforming. Under perfect tender rule of 2-601, buyer has the options indicated in that section. Definition of commercial unit is in section 2-105. Since the payroll computer operates on its own, it would probably be a commercial unit. Buyer can reject the payroll computer or both computers if it wants to. The perfect tender rule is different from the material breach standard under common law. C. Note that 2-606 allows buyer a reasonable opportunity to inspect the goods. Some use may be allowed before acceptance will be deemed to have occurred, see Zabriskie Chevrolet. However, once buyer decides to reject, it must notify the seller in a seasonable manner. After rejection, buyer is required to hold goods with reasonable care. A merchant buyer rejecting goods may be required to try to sell them if they are perishable or otherwise threaten to decline speedily in value. 2-603. After rejection, should the buyer be allowed to use the goods? There is a split of authority as to whether any use is permitted after rejection. Compare Bowen and McCullough cases. The Code does not expressly provide for any use, but some may be reasonable under the circumstances to prevent loss. D. After a reasonable opportunity to inspect, Buyer will be deemed to have accepted the goods. Failure to reject in a reasonable time constitutes acceptance. 2-606. If we assume that the Buyer has accepted the goods, may the buyer revoke acceptance? Test is substantial impairment to the buyer, more like material breach. Why is the
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standard for revocation higher than it is for rejection? The longer that the buyer has the goods, the more they devalue. After revocation, the buyer has the same duties as if goods rejected. In this case, if we say that one week was too long to reject, Buyer will have to show that the problems with the computer substantially impair its value, it is more like a material breach test. If not, Buyer will have to keep the computer. E. Assuming rejection or revocation, does S have the opportunity to cure? Read 2-508. Note that there are two parts to 2-508. Subsection 1 applies where S still has time under the contract to deliver; it initially delivered before the time set forth in the contract. Subsection 2 applies where the time for performance has come and gone. Under subsection 2, the seller has a further reasonable time to substitute a conforming tender. What is the purpose of 2-508? It keeps deals alive, avoids forfeiture for S. But S does not have a limitless opportunity to cure and the cure must be effective. In Zabriskie Chevy, the seller tried to make a cure by sticking a transmission from another car into the car that had been rejected by the buyer. The court held that the cure was ineffective. In that case, the buyers faith had been shaken in the car, so repair in that case would not work (the so-called shaken faith doctrine). It is really a question of reasonableness; minor repairs should be ok, major problems may require a new item or perhaps no cure will work at all. F. We now come to the question of how Bs damages are figured if it rejects the computer, or revokes acceptance. Section 2-711 is the Bs menu of remedies in this situation. Section 2-712 allows the B to buy a reasonable substitute and recover the price differential. Can you buy a Mercedes if the contract calls for a Volkswagon? No. Again, it is a question of reasonableness, but slack will probably be cut for the injured B. Note also that B is entitled to consequential damages, if any, under 2-715. The rule under 2715 is similar to the Hadley v. Baxendale test we studied before. For the B in our hypo, what kinds of consequential damages would we be talking about? Perhaps some lost profits or additional expenses incurred because of delays in the computer processing. Note that incidental damages are much more narrowly defined, dealing mostly with the rejected goods themselves. G. What if B rejects or revokes and chooses not to buy another computer, or buys a computer that clearly does not constitute cover? Damages are then measured under section 2-713, the difference between the market price at the time the buyer learned of the breach and the contract price, together with consequential or incidental damages. H. What if B winds up keeping the computer? Damages are now measured under section 2-714. Subsection (1) gives the basic rule (keeping in mind the overall policy of Code remedies under 1-106). Subsection (2) provides a specific rule for measuring damages in the event of breach of warranty, but it is not the exclusive measure. In our hypo, we would have to determine the difference between the value of the goods as warranted and the value of the goods as they are at the time of acceptance of the goods. Perhaps a better way would be to award the cost of repair, if that amount isnt too high in proportion to the value of the goods. In addition, B would get incidental and consequential damages.

I. Lets now focus on part (B) of this hypothetical. When goods are delivered over time, we have an installment contract under 2-612. Now the perfect tender rule does not apply. The installment may be rejected only if there is a substantial impairment in value which cannot be cured. The contract may be canceled only if the defect substantially impairs the value of the whole contract. Most commentators view substantial impairment as being the equivalent of material breach. Perhaps the initial computer could be rejected if the problems with it are substantial, but S must be given a chance to cure. If the second computer operates independently from the first one, it is unlikely that B could cancel the contract just because the first computer doesnt work as expected. If the second computer works together with the first one, then B might be able to argue substantial impairment, depending on the nature of the defect. Again, if S can cure, it should be given a chance to do so. Why do you think the Code makes it more difficult for a party to cancel an installment contract? There is a desire to prevent forfeiture and keep long term contracts alive. J. How are damages measured when there is a repudiation? The problem here is that the Code is not clear. Section 2-713 talks about measuring at the time the buyer learns of the breach. Section 2-723 talk about measuring at the time of repudiation if the case comes to trial before the time of performance. Section 2-610 allows B to wait a commercially reasonable time for performance. The common law rule is that we await the time for performance to measure damages (remember the Bachewitz case involving the high rise in Chicago). So three different views have evolved: 1) Always measure at the time of repudiation; 2) Measure a commercially reasonable time after repudiation, unless 2-723 applies; 3) Measure at the time for performance, unless 2-723 applies. The Oloffson case took approach number 2, and held that since B could immediately cover, the time of repudiation was the commercially reasonable time. Which do you think is best? The proposed amendments to Article 2 adopt the second measure for both buyers and sellers. III. Sellers Remedies A. Sellers remedies roughly parallel Bs remedies. Here we have a failure to pay when due. This justifies cancellation under 2-703 [read it]. Note that if the goods have already been delivered, a seller has limited rights to reclaim (rescind). If B was insolvent when the goods were delivered, 2-702 might permit reclamation. Likewise, if B paid with a bounced check, S might have limited rights to reclaim under 2-507 (comment 2). Why do you think it is that S generally cannot reclaim? Once goods are in the stream of commerce, the law does not like secret liens to attach to them. These concepts are explored in more detail in advanced UCC courses on secured transactions and I dont hold you responsible for them. B. How do we calculate damages? Similar to buyers remedies, the Code allows a seller to cover by reselling the goods in question and recover the difference in price between the contract price and the resale and also allows the seller to recover the difference between the contract price and the market price. Read from relevant provisions of 2-706 pertaining to notice of sale and commercial reasonableness. One issue that exists is whether a seller can sue for the contract market differential even if the goods have been resold. In this hypo, it would be advantageous for the seller to do that since the goods
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were resold above market. With respect to buyers remedies, the Code is clear about the fact that the buyer cannot sue for contract market if it has covered. The Code is not so clear with respect to sellers remedies. Remember that the Code expressly rejects the doctrine of election. But can an argument be made that the seller should not be allowed to do this? If we keep the policy of 1-106 in mind, the seller should not be made better off as a result of the breach. Under this policy, if the seller sells for better than the market price the seller should be stuck with the cover remedy. Another remedy available for sellers in some cases is the lost profits measure under 2708(2). This provision is relevant mostly when the seller is what is called a lost volume seller, meaning that when the buyer breaches the seller has lost two sales rather than one. When the good in question is resold, it isnt really cover and the contract market differential will also not make the seller whole. The measure of damages here is normally the difference between the price the breaching buyer agreed to pay and the wholesale price of the good. The Lake Erie Boat Sales case is an example of a seller arguing for lost profits, but losing. Why did the seller lose? Because the salesperson told the buyer that the boat in question was the last one (havent we all heard that one before?). If, however, the boat seller could have made two sales rather than one, it should have been entitled to the 2-708(2) measure. Can the seller ever sue for specific performance? The relevant section is 2-709. Specific performance is available if goods cannot be resold or if the buyer has accepted the goods and refuses to pay. It is similar to the concept of specific performance in common law; when the goods cannot be resold, the legal remedy is inadequate. Can a seller recover consequential damages? The answer is no. Section 2-710 relating to incidental damages is much more limited than 2-715. Why do you think this is so? Because ordinarily a seller can resell goods on the market and the loss of one sale will not otherwise upset the sellers business. In some cases, however, this may not be true. If the sale is a major one, the sellers entire business could go down because of breach. Revised Article 2 allows for recovery of consequential damages for a seller in appropriate cases. C. How does the analysis change if the contract is one for installments? The test for cancellation of the contract is one of substantial impairment. Did the failure to make the downpayment substantially impair the value of the entire contract? In the Cherwell Ralli case the court held that failure to make payments did substantially impair the value of the entire contract. Ordinarily, one could argue that the seller can just sue for the balance due and can demand adequate assurance before continuing deliveries; cancellation is a harsh remedy. But if the money is needed for the business to keep operating, as it was in Cherwell Ralli, then there may be substantial impairment.