Remedies - Module 5 of 5

Module 5: Remedies

Sales Contract Damages - Overview

The Code leaves the terms of contracts to the parties along with the conditions that establish breach of contract. The Code does not define breach but provides optional remedies that the parties can use.[1] As with common law contract damages, the Code provides that a non-breaching party is entitled to seek expectation damages, which are those damages that put the non-breaching party in the economic position it would have enjoyed had the contract been performed.[2] The non-breaching party should not be deprived of the benefit of the bargain because of someone else’s breach. 

Expectation damages under the Code include general damages, consequential damages and incidental damages.[3] Ordinarily, punitive damages are not allowed in actions involving sales of goods.  General damages are those damages that are related to the goods in the contract while consequential damages denote additional harm as a result of the breach. Incidental damages are side damages a party incurs as a result of the breach.  These damages are typically necessary to mitigate the harm the non-breaching party suffers, such as storage fees the buyer incurs when the seller ships non-conforming goods.[4]  

For example, assume Acme Home Improvement sells lawn and sporting equipment. Acme orders 100 professional-grade long fishing poles for $300 each from Barnacle’s Fishing Gear.  Acme wanted fast-action rods, which bend at the top of the rod when pressure is applied but instead received slow-action rods where the rod bends more towards its base. A court finds that Acme properly specified the type of fishing rods it wanted, and that Barnacle is in breach for shipping non-conforming goods. Barnacle would be liable to Acme for damages. 

Acme could recover general damages which would measure Acme’s expectancy interest. If Acme had to purchase conforming rods from another source for $2,000 more, recovering that $2,000 would constitute general expectation damages.  If Acme was sponsoring a fishing tournament that had to be cancelled because of Barnacle’s breach, then Acme might make a claim for consequential damages for the lost revenue associated with the fishing tournament.  Acme might also make a claim for shipping costs when buying replacement fishing rods, as incidental damages.

There are three situations where the Code provides for remedies that do not arise from breach of the contract. These damage measures pertain to insolvency.[5]  According to the Code, insolvency occurs when a party cannot pay its bills as they are due or its liabilities exceed its assets, which is the same as the definition under the Bankruptcy Code.[6] In failing to properly manage its affairs, the party is viewed as having potentially caused damages to the other party, thus giving the other party rights in the goods that are the subject of the contract.[7]            

A seller may demand cash payment from an insolvent buyer.[8]  Alternatively, if the goods are in transit, the seller may stop delivery or notify the carrier not to deliver.[9]  If the buyer has already received the goods, the carrier has acknowledged the buyers’ right to the goods or the buyer has a negotiable document of title in the goods, then it is too late for the seller to stop delivery. However, a seller may try to reclaim the goods for a reasonable time after delivery if the sale was on credit, even if it has no security interest in the goods.[10]  

Sellers’ Remedies for Breach 

Upon the buyer’s breach, the seller has different remedies available, depending on the delivery status of the goods. Prior to delivery, the seller can cancel the contract and stop delivery. The seller may then resell the goods.[11]  The seller can then recover the difference between the resale price and the contract price or, alternatively, may recover the difference between the market price and the contract price if the goods are not resold. The seller could alternatively elect to recover lost profits from the sale or, if unable to re-sell, recover the whole contract price.  

Similar to our earlier example, imagine that Acme Home Improvement sells lawn and sporting equipment. Acme orders 100 professional-grade long fishing poles for $300 each from Barnacle’s Fishing Gear.  Acme wanted fast-action rods but received slow-action rods.  This time, a court finds that Acme failed to properly specify the type of rods it wanted and therefore Acme is in breach for withholding payment for the goods.  The contract price was $30,000 and the resale price of the fishing rods to another buyer was $29,000. 

After Barnacle resells the fishing rods for $29,000, it can bring a claim for $1,000 to be put in the economic position it would have been in had the contract been performed. Note that if Barnacle resells at a higher price than the contract price then Barnacle may retain the excess.  So, if the resale price was $36,000, Barnacle could retain the additional profit.[12]

If the seller has delivered the goods, the seller can seek to recover the full contract price.[13] If the buyer has yet to accept the goods, then the seller can try to retrieve them. The seller could also try to reclaim the goods if the buyer’s check was dishonored or the buyer is insolvent (in the case of a credit sale).[14]  Once the seller gets the goods back, he may then pursue any of the same options as though there had never been a delivery.  Note that the seller may only pursue a single course of remedy and not seek to combine remedies to achieve a superior outcome that would have happened had the contract been properly performed.[15] The seller may also recover incidental damages and, where they can be shown with reasonable certainty, consequential damages.[16]  

A breaching buyer may get a refund of monies paid to the seller for goods withheld by the seller. However, the seller may deduct damages agreed to in the contract. If damages are unspecified in the agreement, the Code provides that the seller may deduct twenty percent of the total value of the performance of the contract or $500, whichever is less. The seller may also offset any benefits the buyer received under the contract.[17] 

The seller is not required to try to resell undelivered goods should the buyer breach the contract. However, if the seller does choose to do so then he must adhere to the Code’s provisions that address resale. A seller who resells the undelivered goods in good faith and in a commercially reasonable manner may recover as damages from the buyer the difference between a lower resale price and the original contract price.[18] 

The seller must notify the buyer of his intent to resell in a private sale and, if reselling in a public sale, the seller must additionally inform the buyer of the time and place of the public sale, unless the goods are perishable or susceptible to depreciation. Upon resale, the buyer is protected by the notice requirement so he can monitor the resale price and the resulting damage award to the seller.[19]      

Recall that as an alternative to the resale price, the seller may elect to pursue a general damages award based on the market price of the goods. The measurement of the market price may differ over time and depends on the type of buyer’s breach. If the buyer repudiates the contract, then the measurement of the market price is at a commercially reasonable time after the seller learned of the buyer’s breach but before the time of delivery of the goods.[20]

If the buyer has not repudiated the contract but has committed a breach in some other way, then the measurement of the market price is at the time of delivery of the goods.[21] If the market price is less than the contract price then the seller can show a loss and can recover under this provision for damages. The Code provides a more flexible alternative approach in allowing the measurement of market damages to take place at a “reasonable time.” The Code disallows the admission of market price evidence without proper notice to an adverse party at trial in order to prevent unfair surprise.[22]             

Lost Profits Method of Measuring Damages

If the seller cannot establish either resale of the goods or market price damages as the damage measure best suited to put him the economic position that he would have been in had the contract been properly performed, he may then, and only then, resort to the damage measure of lost profits from the transaction.[23] 

The Code contemplates three situations where damages for lost profits would be warranted.[24] If a buyer repudiates the contract before the seller completes production, he may elect not to complete production because it would be commercially unreasonable to do so.  With no identifiable goods that can be resold and possibly no market for them, then the lost profit measure would be best.[25]  

Another situation warranting the lost profit measure is a middleman whose intermediary role prevents the identification of specific resaleable goods.[26] The middleman often contracts to purchase and sell the same goods at the same time and may make similar transactions with several merchants, making it difficult to identify which goods he was to receive. 

Another more vexing situation is that the lost profit measure involves a buyer breach, but the seller sells the goods to another buyer. The seller would not be able to recover damages because the seller actually sold the goods to another party.  But if the second sale would have occurred anyway, then that sale should not bar the seller from being compensated for lost profits from the buyer’s breach. If not for the breach, the seller could have adequately performed both the original and subsequent sales. This is called a “lost-volume seller.”[27]

For example, imagine Adrian’s Autos contracts to sell Bess an identified red brand-new Chevy Cruze for $18,000. Adrian stood to make $1,500 on the transaction since his invoice price was $16,500. Bess breaches and refuses to go through with the purchase. The next day, Adrian sells that car to Eva for $18,000. Bess claims that Adrian suffered no damages since he was able to “cover” by selling to another purchaser for the same price that Bess would’ve paid.

Adrian, in this case, is a “lost volume seller.” While it’s true that he lost nothing on the particularly identified car, had Bess not reached agreement he could’ve sold the contracted-for car to Bess and a similar car to Eva the next day. Bess’ breach caused him to suffer a $1,500 loss since his dealership was perfectly capable of effecting both transactions had Bess not breached. Therefore, he can recover $1,500 in damages from Bess. 

On the other hand, if Adrian had only one such car left (and could not procure additional ones) or Adrian was not a car dealer but was selling his personal car under the same circumstances, Adrian would not be considered a lost-volume seller. Bess would, therefore, be absolved of liability.

Finally, the seller can recover the entire contracted purchase price under some circumstances. This remedy is appropriate when the buyer has accepted the goods or if they are lost or damaged after the risk of loss has passed to the buyer. Also, the seller may recover the contract price if the seller is unable to resell the goods associated with the contract after exercising reasonable efforts to do so.  A seller may also collect the purchase price from a buyer who wrongfully revokes his acceptance.

The seller may also collect the contract price when the goods may not be resold or when trying to resell them would prove futile.[28] This situation may occur when the goods uniquely address the buyer’s needs and other damages measures would be inadequate. Of course, if the seller resells the goods to another buyer, then the seller must credit the sales proceeds to the buyer.[29]         

Buyers’ Remedies for Breach

The buyer’s damages in a breach of contract by the seller normally involve either recovery of the goods or monetary damages.[30] Under the Code, the buyer may buy substitute goods when the seller does not properly deliver what the buyer ordered. This option is called “cover.”[31] Cover must be used in good faith.[32] A buyer is not required to use cover and may seek alternative damages in its absence, but will be barred from receiving consequential damages that the buyer would have avoided had he covered.[33]  

The substitute goods need not be identical to the goods they are replacing, nor do they need to be the least costly; however, the buyer’s choices in obtaining cover must be commercially reasonable.[34]

For example, Josephine contracted to purchase a commercial lawn mower from Ace for $2,000. Ace ran out of mowers and breached. If Josephine turns around and buys a comparable mower for $2,200, she can recover the $200 price difference from Ace. If she passes up the chance to purchase a comparable mower for $2,200 and consequently loses $1,000 due to her inability to mow her clients’ lawns, she cannot recover the lost profits from Ace, since she had a commercially reasonable “cover” opportunity.

If the buyer is unable to cover or chooses not to, she may recover the difference between the contract price and the market price of the goods.[35] 

Similarly, upon rejection of non-conforming goods, the buyer can recover general damages. If the seller has not yet delivered the goods and is in breach, then the buyer may cancel the contract. Note that the buyer may accept the goods in part but recover for the amount by which the delivery is non-conforming. As with the seller’s remedies the damage amount should put the buyer in the same economic position that she would have occupied had the contract been properly performed as agreed.[36] 

For example, assume Josephine did receive her lawnmower from Ace for $2,000, but the mower was defective. She could simply reject the mower and treat it as a breach. Alternatively, if she spends $400 on parts and labor to fix the defective mower, she can recover that $400 from Ace. If, during the time it took to make the repairs, she lost $500 in lost business, that could constitute consequential damages. Moreover, if she rented a mower to hold her over until the defective one could be fixed, the cost of the rental could also be added as incidential damages.

Non-Standard Remedies

Sometimes, a monetary payment will not suffice to give the buyer the benefit of her bargain. In such case, the buyer may seek a “specific performance” remedy, which means the buyer asks the court to compel the seller to turn over the contracted-for goods. Since monetary damages are the preferred contract remedy, specific performance is only available in the case of “unique” goods, where money does not adequately convey the benefit of the bargain. Examples of cases in which specific performance would be appropriate may therefore include contracts for the sale of unique works of art and custom-made goods that would be difficult to replicate.[37]       

Alternatively, a buyer seeking to recover the goods directly may pursue an action in replevin.[38] Replevin is available to a buyer when the buyer cannot use cover to obtain substitute goods, the goods specific to the contract are identified and the buyer performs all his contractual obligations.[39]

For example, imagine that Ace refuses to sell Josephine her contracted-for lawnmower, and Josephine simply cannot find another comparable available mower in time to service her clients. If she fails these clients, her reputation in the community will take an irreparable hit, aside from any lost profits. While the lawnmower is not unique, monetary damages may not be adequate to give Josephine the benefit of her bargain.

In place of these rules, the parties may simply draft their own damages measures in the contract itself. These damages are called “liquidated damages” and must be commercially reasonable. If excessive, a court can find them to be unenforceable as a “penalty clause.” Moreover, liquidated damages clauses are more likely to be enforced where the damages would ordinarily be difficult to measure. Where damages are straightforward and easy to measure, the Code prefers that its default remedies be applied.[40]

Conclusion

Thank you for participating in LawShelf’s video-course on sales of goods. We hope that you now have a better understanding of the rules provided by Article 2 of the Uniform Commercial Code that governs all aspects of sales of goods transactions. We hope that you will take advantage of our other courses in the areas of commercial and contract law and we encourage you to contact us if you have any questions or feedback.