REMEDIES (Chapter 6)

Goal is to place aggrieved party in as good a position as if the other party had fully performed (405)

2-712 (cover) and 2-713(mkt price)

- “Cover” damages under 2-712 allow buyer to purchase replacement goods and seek difference (plus inc & cons damages under 2-715) in actual price from breaching seller.

- “Market price” damages under 2-713 allow buyer to seek difference between K price and market price at time (ie does not require buyer to seek replacement goods), plus inc & cons damages under 2-715. More in line with common law, but price of replacement goods can be indicative of market price.

Merkel case (406)

-Seller complained that buyer’s “cover” damages were too high because, according to seller, buyer paid too much for replacement goods; in part because buyer did not buy replacements all at once and price was rising.- BUT 2-712 does not require B to be “perfect” obtaining replacement, only to seek cover “in good faith without any unreasonable delay.”

2-715 Incidental and Consequential Damages

These types of damages often not awarded at common law, so if K is silent UCC 2-715 is imposed on a K for sale of goods. This is why Sellers often include waivers of incidental and consequential damages in their form Ks.

Problem 93 (411)

Issues to consider in determining proper “cover” damages:1) Did the buyer “designate” specific purchases as

“cover?” Some jurisdictions require designating, some do not.

2) WHICH goods were used for “cover” (particularly if not designated)? Goods in inventory or goods bought right after? No “right” answer under UCC but could depend on jurisdiction. For exam purposes, note all alternatives (spot the issue).

CSR case (412)

When opting for market price damages under 2-713, go to 2-723 for assistance in determining market price.

Case shows difficulty in determining market price; experts, timing, etc. See also Hess case (416): if seller commits anticipatory repudiation, are buyer’s damages measured by mkt price at time of repudiation or at time seller should have performed? Authority goes both ways depending on state; so for exam purposes note the alternatives (spot the issue).

Problem 94 (415)

Student counsel for buyer and seller: Assuming B entitled to SOME damages, argue over amount, using 2-711, 2-712, 2-713, 2-715, 2-723, etc.

Prep at same time as student counsel for prob 96 (slide 11).

Problem 95 (415)

2-713 Comment 5: market price damages available only when & to extent buyer has not covered).

What if buyer had reasonably covered but market price was lower than cover price? Can seller force buyer to accept market price as measure of damages? See 2-712.

Buyer’s right to goods

Note 2-502 (xref to 2-501 for “identification”) and 2-716.2-502 gives buyer right to goods IF buyer has prepaid and other requirements met.2-716 gives right to replevy goods if goods are “unique” or in “other proper circumstances.” So it’s easier for buyer to replevy goods under UCC than it was at common law (but still not easy).

Buyer’s Right to Goods

Sedmak (421)– plaintiffs entitled to replevy goods under “other proper circumstance” under 2-716. Even though car was not unique, it was a limited edition Porsche, one of only 6000. Thus, a replacement could not be obtained absent “considerable expense, trouble or loss, which cannot be estimated in advance.” Thus, Bs had no adequate remedy at law. See also Sherwin (425) low stock supplies also can make goods “unique” in commercial setting.

Problem 96

• Problem 96 – student counsel to represent buyer and advise buyer on remedies during consultation.

• Are goods unique?• Are there “other proper circumstances” giving

buyer right to goods (as opposed to just $$).

Seller’s Remedies 2-703

2-703 lays out Seller’s options: a) withhold delivery; b) stop delivery by bailee per 2-705; c) proceed under 2-704 (identified goods); d) resell and recover damages per 2-706; e) recover damages for non-acceptance (2-708) or in a proper case the price (2-709)

(2-702 also gives seller options “on Discovery of Buyer’s insolvency”)

Problem 97 (428) (Proper resale under 2-706?)

Resale must be 1) in good faith and 2) made in a commercially reasonable manner in every aspect (eg method, manner, time, place and terms). 2-706. If so, S can recover difference in sale price, plus incidentals (2-710), less any expenses SAVED. S must also give B reasonable notice of his intention to sell in private sale. See 2-706(3). (Sometimes S must give B notice of public sale as well. See 2-706(4).

Mkt price higher than price in second sale; Notice given to B per 2-706(3)? Did S save expenses or not? What about $10K B already paid. See 2-718(2)(b) ($10K-$500)

Problem 97 (cont)

If Random cannot get “resale” damages under 2-706, it can seek damages under 2-708: Difference b/w K price and market price at time and place of tender. “Place of tender” can be different if shipment K (Seattle) vs. Destination K (Chicago).

S also gets consequentials per 2-710.

Problem 98 (429)

B improperly rejects 48,000 barrels of oil, so S sends those barrels to another buyer (X) for more $$. S sells an ADDITIONAL 48,000 barrels of oil to another buyer (Y) for less (B’s counsel did a good job in getting info in discovery).

Does anything in 2-706 (resale damages) require S to resell the SAME goods? What about mkt price under 2-708?

Problem 99 (430) Seller’s Lost Profit

Market price and resale price are both the same price as S would have sold to B ($28K). So how can S get damages? See 2-708(2) (lost profits + incidentals under 2-710).

This is the theory of the “lost volume seller,” ie seller would have sold one additional unit but for buyer’s breach. Thus, at least theoretically, recovery of lost profits puts S is in same position S would have been had B not breached.

Kenco case (430)

2-708(2) (lost profits) comes into play when 2-708(1) (diff b/w market price and sale price) is inadequate. Three ways 2-708(1) can be inadequate: 1) S does not order goods after B’s (anticipatory) breach; 2) S has goods but they are obsolete or otherwise no market for their resale; or 3) S has the goods and resells but would have sold one more (to the breaching B); lost volume seller

Precision case (435) S’s action for the price

S got the “price” under 2-709(1)(b) (S unable to resell after reasonable effort OR “circumstances reasonably indicate that such effort will be unavailing”). But S must also hold the goods for B once B actually pays the price. 2-709(2).

2-714(2) B’s damages for breach [of warranty] re: accepted goods

If S has breached a warranty and B accepts, B’s damages are difference b/w value of actual goods and value of goods had they conformed to the warranty in the K. 2-714(2).

Typically value of conforming goods is the sale price, but sometimes value of conforming goods can be higher (maybe S discounted because goods did not conform).

Problem 100 (439)

Value of what goods would have been had they conformed to warranty under 2-714(2) is the value “at time and place of acceptance.” Goods not “accepted” until Missouri. So what is $$ value of the coal for calculating B’s damages?

What about the fact that K price was only for $100/ton? . . .

Problem 100 (439) cont

Even though sale price was only $100/ton, that is only EVIDENCE of the value the goods would have been had they conformed to the warranty. Since the ACTUAL value was $170/ton in Missouri, B gets to use higher amount (170) for its damage calculation under 2-714(2).

See also Holden case (440): Repair costs are EVIDENCE of value goods should have held if they had not breached warranty. However, relation of repairs to value is important (display car v. working equipment). Also, repair costs may not be good evidence if goods totaled.

Problem 101 (443)

Goods conform (do not breach any warranty) but are LATE, causing B damages. B nevertheless accepts goods (coal) upon arrival.

Since no breach of warranty, is 2-714(1) applicable or is 2-714(2) applicable? . . .

Problem 101 (443) cont

No breach of warranty at issue, so 2-714(1) applies (not 2-714(2)).

Under 2-714(1), damages to B “determined in any manner which is reasonable.”

2-714(3) – incidentals and consequentials also recoverable.

Don’t forget about 2-607 notice . . .

Problem 101 (443) cont

2-607(3)(a): Where tenders has been accepted by B, B must w/i reasonable time after he discovers or should have discovered breach, NOTIFY SELLER of breach or be barred from recovery.

Siemens case (443)

Under 2-709(1)(b), S must try to resell BUT

Court holds that 2-709(1)(a) applied because B accepted goods. Under 2-709(1)(a), no requirement to try to resell.

But what if B had wrongfully rejected goods, rather than accepting them and sending them back later? See problem 102 . . .

Problem 102 (445)

B wrongfully rejected the goods; goods conformed to K and were on time.

However, B’s rejection was legally “effective” because B followed proper UCC procedures.

So B did not “accept” goods under 2-709(1)(a), so S cannot maintain action for price. S can still sue for damages under 2-706 or 2-708.

Problem 103 (445)

In contrast to Problem 102, B received non-conforming goods but “accepted” them because B failed to make a legally effective “rejection” under UCC. See 2-607(3)(a).

So S CAN seek the price under 2-709(1)(a)

B can nevertheless seek damages or offset for breach of warranty under 2-714.

Problem 104 (446)

FCA St. Louis means that Risk of Loss shifted to B when S, located in St. Louis, gave the goods to carrier in St. Louis. So if goods destroyed in transit, does 2-709(1)(a) permit S to seek the price? . . .

Does the answer change under 2-709(1)(a) if goods did not conform? . . .

2-709(1)

(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

• (a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and

• (b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

Problem 105 (446)

B wrongfully (but effectively) rejects goods and S takes them backs and stores them, and then goods are destroyed in fire in S’s warehouse.

Did Risk of loss pass to buyer? Were goods conforming? If yes and yes, does it matter that S now has goods back? See 2-709(1)(a) previous slide.

Problem 105 (446) cont

Assume now that S kept goods in warehouse for 5 months after B’s wrongful (but effective) rejection. What is B’s argument? See italics 2-709(1)(a) two slides ago.

Reclamation of Goods by Sellers

Typically not permitted UNLESS seller takes a security interest under Article 9. 2 Exceptions:-2-702(2): Where the seller discovers that the buyer has received goods on credit while insolvent, the seller may reclaim the goods upon demand made ten days after the receipt. . . ( see 1-201(23) for “insolvency” definition).- 2-507(2) and Comment 3: Cash seller can reclaim if payment not made when due; check is considered “cash” payment (as opposed to credit) so bounced check falls under 2-507(2)

Problem 107 (450)

Before subpart “a” of the question, S has a decent argument to reclaim b/c elements of 2-702(2 & 3) may be met. But . . .a) Is Vulture a “buyer in ordinary course” under 2-

702(3)? What about the check from Vulture; does 2-702 extend to proceeds?

b) Does bank qualify as “other good faith purchaser” in 2-702(3) (as defined in 2-403)? Case law says YES so secured party (Art 9) trumps seller under 2-702(3).

Problem 107 (450) cont

In order for seller to reclaim goods under 2-702(2), seller must be able IDENTIFY goods.

c) Crude mixed in with other identical crude is identifiable, even if S cannot identify specific “molecules,” but . . . d) Altering goods makes them non-identifiable

Questions after 107 (451)

1. Seller reclaiming goods loses all other remedies. See 2-703(3). But see problem 108 and questions after: cash seller reclaiming DOES NOT lose other remedies; also not subject to 10-day deadline.

2. Don’t forget about demanding adequate assurances under 2-609. Otherwise follow steps under 2-705 to STOP DELIVERY. Careful, 2-705(2) says when it is too late to stop delivery.

2-715 Buyer’s Incidental and Consequential Damages

Wells case (452) illustrates consequential damages buyer can get. Buyer’s credit rating damaged because buyer stopped paying bank (which loaned buyer $$ to buy goods), because goods were defective and buyer properly revoked acceptance. Bank’s reporting to credit agencies of B’s failure to pay was FORSEEABLE to seller.

Problems 109 & 110 (455-56)

109: Just note that if other 2-715 requirements met, lost profits are recoverable if B can prove them “to a reasonable certainty.” For a new business, B can use profits of a similar business.

110: Just note that if other 2-715 requirements met, B can also recover damages for expenditures IN RELIANCE on S’s expected (proper) performance under K.

Indiana Glass case (456)

In accordance with the American Rule, attorneys’ fees, incurred by B in suit against S, ARE GENERALLY NOT recoverable as incidental or consequential damages.

However, B may be able to recover attorneys’ fees B has expended in a suit with a 3d party resulting from S’s breach.

Seller’s Incidental Damages 2-710 (S not entitled to consequentials)

Nina case (460) shows consequentials S is NOT ENTITLED TO (e.g. $18M in lost profits, lost revenue, lost business opportunity are consequentials and thus are NOT recoverable by seller). Florida Recycling case (462) shows incidental damages to which S IS ENTITLED under 2-710. Refitting goods (machine) to conform to substitute buyer’s use is recoverable.

Problem 112: diff b/w incidentals, which are recoverable by S, and consequentials: Incidentals are extra expenses subsequent to B’s breach and resulting therefrom incurred by S in dealing with the contracted goods. By process of elimination then, consequentials include all other losses.

So what about $10K re-do, $500 to fly jet to new buyer; $1500 in sales commissions for second sale; $2,000 in finance charges; $1K insurance; $15K lost profits from future service to Buyer.

2-718 Liquidated Damages and Deposits

Liquidated damage clauses allowable if: 1) reasonable in light of “anticipated or actual harm” (back door for consequentials for S?); 2) difficulty in proving loss; 3) inconvenience or non-feasibility of otherwise obtaining an adequate remedy.

Kvassay case (467) how did case come out under these 3 factors? If clause had said S gets $5/case or lost profits, whichever is greater, clause is probably a “penalty” and not permitted.

Damages in Leases (Art 2A)

- Similar to damages in sales (Art 2) cases, but not exactly the same. For example, consider that two leases for the same goods nevertheless might have varying provisions (eg maintenance requirements, length of lease, etc), so “covering” the loss of one lease with another is not as straightforward as “covering” in a sale.- Also, what about present value? if lessee has to “cover” the loss of a 3-year lease, and the replacement lease will cost $200/month more, should lessee get $7,200 NOW?

Problem 114 (470)

- On 11/1, Lessor (Def) repudiates lease of computers that would have cost Lessee (Pltf) $100/mo per unit for 3 years. Lessee had paid one month rent in advance ($20k total). Lessee finds replacement lease that costs Lessee $140/mo per unit for 3 years.

- On 11/1 market rent for same computer was $125/mo in Chicago and $120/mo in Seattle.

- On 11/9, market rent for same computer was $135/mo in Chicago and $130/mo in Seattle.

Problem 114 (470) cont

Does replacement lease ($140/mo) qualify as “cover” entitling Lessee to recover difference (140-100) per computer? 4 factors 2A-508(2):

1) Cover must be through a lease (not a sale); 2) cover lease must be “substantially similar to original lease agreement;” 3) cover lease must be made in good faith; 4) cover lease must be made in a commercially reasonable manner.

Problem 114 (470) cont

Most difficult factor to address is often #2, replacement lease “substantially similar to original lease agreement.” How can it be “substantially similar” if new lease is for $40 more per computer per month?

TEST: Does replacement lease provide a valid measure of lessee’s damages? Does it allow lessee to compare “apples to apples” to determine lessee’s damages? Toughest to answer this when length of term is different, or when new lease includes additional favorable consideration to lessee (eg option to purchase for cheap at end of lease).

Problem 114 (470) cont

If replacement lease is substantially similar to qualify as cover, what are lessee’s damages? Lessee will need to pay $28k/mo instead of $20k/mo for three years. So $8k difference per month.

So should Lessee get $288K ($8k x 36 mo)? What about the fact that Lessee does not pay full amount of lease now, but does so over 36 months? See 2A-518(2) (present value).

Problem 114 (470) cont

If Lessee CANNOT get cover damages (ie if cover lease not substantially similar to original lease), is Lessee out of luck? How to measure Lessee’s damages?

See 2A-519: similar to sales, Lessee can get difference between Lease ($100/mo/computer) and market rate “as of the date of default” of 11/1, and at “place of tender.” So damages will differ if place of tender is Chicago vs. Seattle. Check FOB or other K terms. ALSO need to discount for present value.

Problem 114 (470) cont

Don’t forget about $20K Lessee prepaid. Lessee can get this back. 2A-508(1, 1(b)) (lessee can “recover so much of the rent and security as has been paid and is just under the circumstances.”

FINALLY, don’t forget that Lessee gets incidentals and consequentials, if any. 2A-520.

Problem 115 (471)

Lessee decides to accept and keep non-conforming goods. What damages? See 2A-519(4): Except as otherwise agreed, the measure of damages for breach of warranty is the present value at the time and place of acceptance of the difference between the value of the use of the goods accepted and the value if they had been as warranted for the lease term, unless special circumstances show proximate damages of a different amount, together with incidental and consequential damages, less expenses saved in consequence of the lessor's default or breach of warranty . . .

Problem 115 (471) cont

So, it’s the $5K it needed to repair.

ALSO, to recover its damages, Lesee can reduce its lease payments by $5K, see 2A-508(6), as long as Lessee notifies Lessor of its intention to do so.

FINALLY, note that Lessee gave notice of the problems with the goods even though Lessee accepted them. 2A-516(3) (otherwise, Lessee is “barred from remedy”).

Problem 116 (474): Lessor’s Remedies

Lessee refuses to take delivery and Lessor finds a substitute lease but for less $$. Lessor’s damages are difference between the lease amounts, discounted to present value AS LONG AS NEW LEASE IS “SUBSTANTIALLY SIMILAR.” See 2A-527(2).

Alternatively, if Lessor cannot get “cover” damages (ie if the replacement lease is not “substantially similar”) Lessor can recover difference between market rent and lease amount with breaching Lessee.

Problem 116 (474) cont

Lessor ALSO gets incidentals under 2A-530, less any expenses saved, but NOT consequentials (similar to Art 2 seller).

2A-525 Lessor’s Right to Repossess

- Lessor’s rights are stronger here than a seller in Art 2 because Lessor is still the owner and Lessee’s right to possession depends on paying.

- Lessor can repossess if Lessee commits a default described under 2A-523(1) (wrongfully rejects, wrongfully revokes acceptance, fails to pay when due, ETC.) or a default under 2A-523(3) (some other default that substantially impairs value of lease to Lessor).

- Lease also can have written provision for repo under other circumstances.