Chapter 21 – Performance of Sales Contracts

21-1

Performance of Sales Contracts

PA ET RHC 21

Business neglected is business lost.

Daniel Defoe, novelist,The Complete English Tradesman (1726)

21-2

Learning Objectives

• Explain meaning of good faith, course of dealing, and trade usage

• List basic obligations and rights of buyer and seller for delivery of and payment for goods

• Explain when acceptance of goods occurs, the effect of acceptance, and right of revocation

21-3

• UCC is flexible, but general rules apply:– Parties must act in good faith in the

performance of a sales contract [1–203]– If express terms of contract conflict with past

course of dealing between parties, express terms prevail [1–205(4)]• Grace Label, Inc. v. Kliff: court looked to the

course of dealing between the parties to determine the contract terms, stating that the parol evidence rule does not bar evidence of the course of dealing between the parties

General Rules of The UCC

21-4

• Additional general rules:– If express terms of contract conflict with

trade usage, express terms prevail [1–205(4)]

– Consideration not required to support modification of contract, but parties may specify that writing required [2–209]

General Rules of The UCC

21-5

• If first party repeatedly fails to perform as agreed and second party fails to object, second party may have waived rights to cancel contract based on inadequate performance [2–208(3), 2–209(4)]– Second party may retract

waiver by reasonable notice to first party requiring strict performance [2–209(5)]

More General Rules

21-6

• Basic duty of seller is to deliver goods that conform to contract with the buyer and basic duty of buyer is to accept and pay for goods if they conform to contract [2–301]

• Goods are to be delivered at seller’s place of business unless otherwise specified by contract– Within reasonable hours and for a

reasonable period of time, so buyer can take possession of goods [2–503]

Delivery Under The UCC

21-7

• Generally, buyer has right to inspect goods before he accepts or pays for them

• If goods conform to contract, buyer must pay expenses of inspection, but if goods do not conform to contract, buyer may recover inspection expenses from seller [2–513(2); 2–715(1)]

Inspection Under The UCC

21-8

• Buyer and seller may agree that price of goods is to be paid in money or other goods, services, or real property

• Payment may be more difficult in international sales, thus seller often insists on receiving an irrevocable letter of credit (diagram, page 578)– Resolves currency issues and payment assurance

Payment Under The UCC

21-9

• Buyer may revoke acceptance of nonconforming goods where: – Nonconformity substantially impairs value – Buyer accepted goods without knowledge of non-

conformity (discovering nonconformity difficult)– Buyer accepted goods because seller assured

buyer it would cure defect [2–608(1)]– See Waddell v. L.V.R.V. Inc.: repeated attempts

to cure defects failed and buyers revoked acceptance

• Once goods accepted, buyer obligated to pay– Example: Weil v. Murray

Acceptance & Revocation

21-10

Waddell v. L.V.R.V. Inc.

• Buyers (Waddells) sought to revoke acceptance of recreational vehicle

• Notwithstanding Wheeler’s good-faith efforts to repair, Defendants were unable to repair defects in vehicle after seven months

• Conclusion: buyers were entitled to revoke their acceptance

21-11

Weil v. Murray

• Facts: – Weil consigned a Degas painting to Murray

for a private inspection and sale– Weil agreed to full payment of $1 Million

on 12/8, but Murray never paid; Weil sued

• Trial Court:– Undisputed that Murray accepted the

goods, had reasonable time to inspect goods, and even had the painting cleaned

– Summary judgment for Weil

21-12

• If a buyer rejects a delivery of goods, buyer must act within reasonable time after delivery and give seller notice of rejection, preferably in writing [2–602]– Buyer should state all defects on which

rejection is based– Seller may be able to cure nonconformity– See Fitl v. Strek

Rejection Under The UCC

21-13

• If one party has reasonable basis for concern that other party may not perform, concerned party may demand assurance from the other party that the contract will be performed– Koch Materials Co. v. Shore Slurry Seal, Inc.

• If assurances not given within reasonable time (< 30 days), contract repudiated [2–609]– Repudiation may be withdrawn by clear

indication of intention to perform•Must be before other party cancels

Assurance Under The UCC

21-14

Koch Materials Co. v. Shore Slurry Seal, Inc.

• Facts: – Koch bought a manufacturing plant and

license rights to a product from Shore under complex contract covering payments and materials supply

– Owner of Shore notified Koch of impending sale of company and Koch requested assurance of performance, but Shore’s response prompted Koch to file suit claiming lack of adequate assurances equated to repudiation of contract

21-15

• Legal Reasoning: – Judge reviewed state’s UCC law

• A party with reasonable grounds for concern may demand assurance and failure to provide assurance is repudiation

– Applied law to facts• Relevant agreements and lack of sale details

were reasonable grounds for concern• Shore’s letters failed to provide Koch

adequate assurance, thus repudiated contract

Koch Materials Co. v. Shore Slurry Seal, Inc.

21-16

• Convention on Contracts for the International Sale of Goods Art. 71: party may suspend performance if it becomes apparent that other party will not perform substantial part of obligations due to: (a) a serious deficiency in ability to perform or credit-worthiness; or (b) his conduct in preparing to perform or in performing the contact – Suspending performance requires immediate

notice to other party and must continue with performance if other party provides assurances

Assurances & International Contracts

21-17

• Code rules for determining when a party is excused from performing similar to general contract rules– Test of impossibility

• In most situations, however, Code uses the test of commercial impracticability – Performance highly impracticable,

unreasonably expensive, or little value to promisee [UCC 2–615]

Excuse for Non-Performance

21-18

Test Your Knowledge

• True=A, False = B– Goods are to be delivered at buyer’s

place of business unless otherwise specified by contract

– If goods delivered conform to the contract, the buyer must pay any expenses of inspection.

– Buyer may revoke its acceptance of goods not conforming to the contract if the nonconformity substantially impairs the value of the goods

21-19

• Multiple Choice– Jersey Steel contracted to deliver 50 M12

metric threaded rods to HomeCo each week for nine months. Four months later, Jersey Steel erected a new sign at their site with the name “United Steel.” HomeCo may:

a) Cancel the contractb) Demand assurances of performance from

Jersey Steel c) Stop any payments until all nine months of

deliveries have been received d) None of the above

Test Your Knowledge

21-20

Thought Question

• If you contracted with another party for a long-term sale of goods contract, such as cement for a construction project, what kind of activities would prompt you to demand assurances of performance?