Contracts Class Notes 3/15/04

 

What are the quality tender obligations upon the seller when we’re dealing with Article 2?  We used the example of “Grade A” and “Grade B” tomatoes.

 

Prescott & Co. v. J.B. Powles & Co.

 

Here’s a contract between an Australia seller and a buyer in Seattle for 300 big crates of Australian onions.  The contract is made in 1918 and it calls for the shipment of a boat leaving Australia in March of 1918.  This is during the course of the First World War.  The government commandeers space on the boat, making it impossible for the seller to ship all 300 crates.  IT ends up that they can only ship 240 crates.  But the buyer rejects those 240 crates!  Did the buyer have a special need for 300 crates?  No way!  The contract price was higher than the market price, and the buyer wanted to get out of an unfavorable contract.  The buyer gets away with it in this case, but we would have the same result today?

 

What does the UCC tell you?  It didn’t apply then, but it does now.  § 2-615 says that, among other things, non-delivery in part isn’t a breach of the seller’s contract if it is caused by good faith compliance with government regulation.  The seller is definitely excused under this section if the above facts happened today.  There’s no way that the buyer could get into the seller’s pocket if the buyer had been damaged by the seller’s breach because the seller has an excuse.  The seller has to follow subsections (b) and (c), though.  The seller must do its best and also give the buyer notice that there will be delay or delivery.

 

But will the buyer be in breach if the buyer rejects the “less than everything” delivery?  § 2-616 says no!  The buyer has a choice to accept the 240 crates or reject them all without being in breach.  There is an excuse here because it was essentially impossible for the seller to perform.  But the case stands for the idea that “you can’t tender an excuse”…or rather, you can, but it won’t trigger the other party’s duty to perform.

 

Are we giving the buyer too much of a break?  Consider this hypothetical of an employment contract: an employee has promised to work for two years and the employer has promised to pay a named salary for two years.  Performance proceeds, but after six months the employee is killed, which excuses the employee from working.  The estate of the employee is not subject to liability due to breach of contract to perform for two years.  Can the employee tender the excuse and receive 18 months’ salary during which the employee is dead?  No way!  The employer’s promise was to pay for work.  The employer doesn’t have to pay for non-work during the 18 months that the employee is dead.  If you have an excuse, you won’t be in breach, but your excuse also won’t trigger the other party’s duties.  It will be similar if the employee gets sick.  The employee won’t be in breach for being sick in bed.  But neither will the employer be in breach for not paying the employee while sick.

 

§ 2-616 (2) says that when the buyer doesn’t respond to the justified notice from the seller that the seller’s performance will be delayed or partial within a reasonable time not exceeded 30 days, we’ll act like the buyer is saying “I don’t want it.”

 

Beck & Pauli Lithographing Co. v. Colorado Milling & Elevator Co.

 

In goods contracts, where the goods aren’t up to the quality that the buyer bargained for, we’ll let the buyer thrust them back on the seller.  This disadvantages the seller, but the goods can be resold.  But with services, if the buyer isn’t going to pay, there will typically be nothing that the servicor can take away and resell.

 

But there are some cases where this doesn’t work.  In this case, it’s a sale of goods contract, but the goods are custom-made and would be useless to any other buyer because they say “Colorado Milling & Elevator Co.” right on the stationery.  If the buyer can reject, then the seller would have a huge loss because it would only have value as wastepaper.  In a case like this, the court will try hard to “wiggle off the perfect tender hook” and help out the seller.  The court might try to turn the contract into an installment contract, for example.  The court might also try to argue that it’s not a sale of goods contract but rather a services contract.  Or the court might find that the buyer’s rejection is bad faith under the circumstances under § 1-203.  Or the court could find in the circumstances that it doesn’t make sense to have a perfect tender rule, and instead the court would substitute a substantial performance rule.

 

But this isn’t always the case!  It may be important to the buyer to get the goods precisely on time (consider the wedding dress example, or Christmas cards on December 26th). 

 

Bartus v. Riccardi – “cure”

 

This comes under § 2-508.  § 2-508 (1) is simple enough, but § 2-508 (2) allows an extension of contract time to the seller under certain circumstances.

 

This is a simple case with which to apply this section.  If the seller had good reason to think that his tender would be acceptable, but he is surprised by the buyer’s rejection, we’ll give him a little more time to substitute a conforming tender.  This is a strong case for this.  The contract calls for a Model A-660 hearing aid, but the seller tenders a Model A-665.  The seller had reason to believe that this would be not only acceptable to the buyer, but actually better for the buyer.  But to the seller’s surprise, the buyer wanted the old, unimproved one.  But we’ll give the seller a little more time to cope with the surprise rejection and come up with an unimproved hearing aid.

 

This is a municipal court opinion, and they screw up the remedy.  The remedy for the seller shouldn’t be full price.  The unwanted hearing aid shouldn’t be forced upon the buyer.  The seller should get money damages, measured by the seller’s lost profit.  The seller shouldn’t get the price of the unwanted hearing aid.  The buyer doesn’t want it and couldn’t get any money from reselling it.  However, the application of § 2-508 (2) is fine.

 

But this won’t fit too many circumstances.  It is not often that a seller, having contracted to sell X, tenders Y and reasonably expects that Y will make the buyer happy but then gets a surprise rejection.  This isn’t the most frequent case, though.  Most often, the seller will believe that he is tendering X, but the wrong stuff, Y, is in the box.  Do we give the seller a further reasonable time in those circumstances?  Under § 2-508 (2), we could find that the seller reasonably believed he was tendered precisely what was called for by the contract.  But a counterargument is that this would knock too big a hole in the perfect tender rule and we would give the seller more time too often.  But case law seemed to have answered this question in favor of the seller.

 

Compare this to the proposed new § 2-508…§ 2-508 (1) is similar to the current § 2-508 (1).  But the new § 2-508 (2) removes the “reasonably believes” requirement and talks about good faith instead.  But it also gives protection to the buyer.  The cure must be “appropriate and timely under the circumstances”.  If the buyer’s need for the goods wasn’t that immediate, cure is appropriate, and the seller will have some reasonable time to cure.  But if the buyer needs the thing right now, the seller won’t have the chance to cure.

 

Consider a contract for the purchase and sale of a car from a new car dealer.  They haggle and form a contract, and after the contract has formed, the dealer tenders delivery of the car and the buyer tenders payment.  The buyer gets in the car and drives away.  After 20 miles, the buyer steps on the brakes, and there are no brakes!  The buyer doesn’t get hurt, but the buyer was terrified because there were no brakes!  Can the buyer thrust that car back on the seller and get his money back or get out of his promise to pay in the future?

 

Consider § 2-607: acceptance is significant!  It would be easier to reject the goods.  Has the buyer accepted the goods in the § 2-606 sense?  Did the buyer, in accordance to § 2-606 (1)(a), signify to the dealer that the car conformed to the contract?  Has the buyer had a “reasonable opportunity to inspect” as in § 2-606 (1)(b)?  A significant number of cases will say that the buyer hasn’t had a reasonable opportunity to inspect, and thus the goods haven’t been inspected.  With new cars, you don’t get a reasonable opportunity to inspect until you really get the car out on the road for a while.  The buyer can reject the goods because there is a non-conforming tender because the brakes don’t work.

 

Can you reject if you haven’t yet accepted?  Note that the perfect tender rule is expressly subject to the sections on contractual limitations on remedy.  The case law will vary based on whether the defect is windshield wipers or brakes.  If the windshield wipers don’t work, the dealer should have the chance to cure.  But if the brakes are broke, you should be able to thrust the car back on the seller.

 

Oddo v. General Motors Corp.

 

Once the buyer’s confidence is shaken, a repair is not proper tender of the goods purchase.  This is the so-called “shaken faith” doctrine.  When something seriously shakes the buyer’s faith in the goods, the buyer will be able to reject.  But if you have a dome light that doesn’t work, you won’t get as much sympathy and you can’t reject the car.

 

Worldwide RV Sales & Service v. Brooks

 

Here’s where we find out what a cure is.  To cure, the seller must make the goods into conforming goods.  In this case, that wasn’t done.  It was a half-baked effort to cure, and that’s not going to cut it.

 

Fortin v. Ox-Bow Marina, Inc.

 

This is about revocation of acceptance.  Once you have accepted, it’s too late to reject.  Under § 2-608, you can revoke acceptance, but it’s harder to do than reject.  You can’t revoke unless the good’s value is substantially impaired in its value to you.  Moreover, you must have accepted the good either assuming that the non-conformity would be cured but it wasn’t, or that it would have been time-consuming and expensive to discover the non-conformity.

 

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