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Purchasing Law: Breach, Repudiation, Excuse
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Purchasing Law: Breach, Repudiation, Excuse

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Covers breach of a contract of for the sale of goods under the UCC and available remedies.

Covers breach of a contract of for the sale of goods under the UCC and available remedies.

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Purchasing Law: Breach, Repudiation, Excuse Purchasing Law: Breach, Repudiation, Excuse Presentation Transcript

  • Purchasing Law: Breach, Repudiation & Excuse Christopher Tompkins Jenner & Block LLP August 6, 2009
    • ©2010 Christopher Tompkins and Jenner & Block LLP. 353 N. Clark St. Chicago, IL 60654-3456. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended to provide legal advice but to provide information on legal matters. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. The attorney responsible for this publication is Christopher Tompkins. Attorney Advertising. Prior results do not guarantee a similar outcome.
  • Contract Tender of Delivery Acceptance Timeline of Typical Sale Day 1 Day 30 Day 31
  • Seller’s Breach
    • Generally a Seller can breach a contract for sale of goods by:
      • Repudiating its obligation to deliver before the delivery date;
      • Failing to deliver the goods;
      • Delivering the goods late or to the wrong location; or
      • Delivering defective or non-conforming goods.
  • Contract Tender of Delivery Acceptance Breach Prior To Delivery Repudiation Day 1 Day 30 Day 31 Day 15
  • Repudiation & Adequate Assurances
    • What is Repudiation?
      • A party repudiates a contract by expressing an intention not to honor his obligations under the contract, or by taking action that makes performance impossible. (UCC § 2-610.)
    • Adequate Assurance of Future Performance.
      • Parties may request adequate assurance if reasonable grounds exist for insecurity regarding performance. (UCC § 2-609(1).)
      • Failure to provide adequate assurance is a repudiation of the contract. (UCC § 2-610(4).)
  • Buyer’s Rights After Repudiation
    • If Seller repudiates, and the loss will substantially impair the value of the contract, the Buyer may:
      • Wait for performance (UCC § 2-610(a)); or
      • Resort to any remedy for breach (UCC § 2-610(b)); and
      • Suspend his own performance (UCC § 2-610(c)).
    • Seller may retract its repudiation by indicating it will perform unless:
      • The buyer has cancelled the agreement; or
      • The buyer has changed his position or stated he considers the repudiation final. (UCC § 2-611(1).)
  • Failure to Deliver
    • Seller may also breach the contract by failing to deliver the goods.
    • The date of delivery will be either:
      • The date specified in the contract; or
      • If no time is specified, within a reasonable time. (UCC § 2-309(1).)
    • The place of delivery will either be:
      • The manner specified in the contract; or
      • If no place is specified, the Buyer’s place of business. (UCC § 2-308.)
  • Installment Contracts
    • A contract which calls for delivery in separate lots to be separately accepted is considered an “Installment Contract.” (UCC § 2-612(1).)
    • A breach with respect to one or more installments is a breach of the whole contract only if the value of the entire contract is substantially impaired. (UCC § 2-612(3).)
    • The entire contract will be reinstated if Buyer pursues a remedy for only the defaulted installments and demands performance of future installments. (UCC § 2-612(3).)
  • Pre-Acceptance Remedies
    • Buyer may cancel the contract (if the breach goes to the whole), recover any portion of the price already paid, and either:
      • “ Cover” by obtaining substitute goods and recover the difference between the cost of substitute goods and the contract price, plus incidental and consequential damages, but less any expenses saved (UCC § 2-712); or
      • Recover the difference between the market price at the time the Buyer learned of the breach and the contract price, plus incidental and consequential damages, but less any expenses saved (UCC § 2-713).
  • Buyer’s Incidental Damages
    • Buyer’s incidental damages are defined as “expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incidental to the delay or other breach.” (UCC § 2-715(1).)
  • Buyer’s Consequential Damages
    • Buyer’s consequential damages are defined as “(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty.” (UCC § 2-715(2).)
  • Buyer’s Recovery of Goods
    • If the Seller fails to deliver the goods by the contract date, or repudiates the contract before then, the Buyer can, under certain circumstances, recover the goods themselves, as an alternative to the “cover” remedy and market price remedies. (UCC § 2-711(2).)
  • Buyer’s Recovery of Goods
    • When the goods are unique or other circumstances justify specific performance. (UCC § 2-716(1)).
    • When the goods have been identified to the contract, and
      • the Seller becomes insolvent with 10 days after receipt of the first installment payment. (UCC § 2-502); or
      • the Buyer is unable to purchase substitute goods or circumstances indicate efforts to do so would be unsuccessful. (UCC § 2-716(3).)
  • Contract Tender of Delivery Acceptance Delivery of Non-Conforming Goods Non-Conforming Goods Day 1 Day 30 Day 31 Day 30
  • Tender of Non-Conforming Goods
    • Where the Seller tenders non-conforming goods, the Buyer may:
      • Reject all the goods;
      • Accept them all; or
      • Accept any “commercially acceptable units” and reject the remainder . (UCC § 2-601.)
  • Seller’s Cure of Non-Conformity
    • Where tender of delivery is rejected because it is non-conforming, but the time for delivery has not yet expired , Seller may notify Buyer of his intention to cure and make conforming delivery within the time provided by the contract. (UCC § 2-508(1).)
    • If Seller had reasonable grounds for believing Buyer would accept non-conformity, Seller is permitted a reasonable time to make conforming tender. (UCC § 2-508(2).)
  • Installment Contracts
    • For installment contracts, the Buyer must accept an installment if the value of the installment is not substantially impaired and the Seller gives adequate assurance that the non-conformity will be cured. (UCC § 2-612(2).)
    • Buyer can only cancel the contract based on a single non-conforming delivery if the breach substantially impairs the value of the entire contract. (UCC § 2-612(3).)
  • Rightful Rejection
    • Buyer must notify the Seller that the goods are rejected within a reasonable time after delivery, or within the time for rejection set forth in the contract. (UCC § 2-602.)
    • Notification should specify the defects, since the Buyer will not be able to recover for unidentified defects if the Seller could have remedied them had he received such notice. (UCC § 2-605.)
    • If both parties are merchants, failure to identify the defects upon request waives all rights to recovery. ( Id .)
  • Buyer’s Duties Upon Rejection
    • If Buyer has possession, he must store the goods for a sufficient time for Seller to reclaim them, at Seller’s expense. (UCC § 2-602.)
    • If Buyer does not receive shipment instructions, Buyer may return the goods at Seller’s expense, or resell them for Seller’s account, offset by Buyer’s expenses for storage and sale. (UCC § 2-604.)
  • Damages Before Acceptance
    • Damages for goods not accepted will be the same as discussed for repudiation and non-delivery: the portion of the contract price paid plus:
      • “ Cover” damages – the cost to purchase substitute goods, plus incidental and consequential damages, but less expenses saved (UCC § 2-712); or
      • The difference between the market price and the contract price, plus incidental and consequential damages, but less expense saved (UCC § 2-713).
  • Contract Tender of Delivery Acceptance Breach Regarding Accepted Goods Non-Conforming Goods Day 1 Day 30 Day 31 Day 32
  • Acceptance of Goods
    • The Buyer “accepts” the goods when the Seller has tendered delivery, the Buyer has had adequate opportunity to inspect them, and the Buyer:
      • Tells the Seller the goods conform to the contract;
      • Tells the Seller the goods will be accepted despite their non-conformity;
      • Fails to reject the goods by notifying the Seller within a reasonable time; or
      • Takes action inconsistent with seller’s ownership of the goods. (UCC § 2-606(1)).
  • Revocation of Acceptance?
    • Buyer can revoke acceptance of goods within a reasonable time after he discovers or should have discovered their non-conformity if:
      • The non-conformity of the goods substantially affects their value, and the Buyer accepted the goods based on a reasonable assumption seller would cure and seller has failed to do so; or
      • When the Buyer had not discovered the non-conformity either due to the difficulties of discovery or seller’s assurances of conformity. (UCC § 2-608(1)-(2).)
    • If acceptance is revoked, the measure of damages will be based on non-delivery.
  • Consequences of Acceptance
    • After accepting the goods, if the acceptance is not properly revoked, the Buyer must pay the contract price. (UCC § 2-607(1).)
    • Acceptance waives any non-conformity Buyer knew about at the time unless the goods were accepted with the reasonable assumption that non-conformity would be cured. (UCC § 2-607(2).)
    • Acceptance gives rise to the duty to notify Seller of any non-conformity within a reasonable time of discovery. (UCC § 2-607(3).)
    • After acceptance, Buyer has the burden of proving breach of warranty. (UCC § 2-607(4).)
  • Breach of Warranty
    • The primary remedy for non-conforming goods after acceptance is breach of warranty.
    • A contract for sale of goods may have several warranties:
      • Express warranties. (UCC § 2-313.)
      • Implied warranty of merchantability. (UCC § 2-314.)
      • Implied warranty of fitness for a particular purpose. (UCC § 2-315.)
      • Warranty of title and against infringement. (UCC § 2-312.)
  • Damages for Breach of Warranty
    • After acceptance, Buyer may recover any damages “resulting in the ordinary course of events from the seller breach as determined in any manner which is reasonable.” (UCC § 2-714(1).)
    • The standard formula for breach of warranty damages is the difference between the value of the goods accepted and the value the goods had they been as warranted, plus, in a proper case (i.e. they were foreseeable), incidental and consequential damages. (UCC § 2-714(2).)
  • Special Circumstances
    • In “special circumstances” a Buyer may establish losses that do not fit within the standard breach of warranty damage formula to ensure full compensation for its losses. (UCC § 2-714(2).)
  • Excuses For Seller’s Non-Performance
    • Prior breach by Buyer .
      • Buyer’s repudiation.
      • Buyer’s failure to accept conforming delivery.
      • Buyer’s failure to make payments .
    • Unexpected difficulties with performance.
      • Casualty to identified goods. (UCC § 2-613.)
      • Commercial impracticability. (UCC § 2-615.)
      • Force majeure clause .
  • Commercial Impracticability
    • Performance as agreed has been made impracticable by the occurrence of a contingency the non‑occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. (UCC § 2-615(a).)
  • Seller’s Bankruptcy
    • Whether goods are part of the seller’s bankruptcy estate depends on whether or not title has been passed :
      • Unless otherwise agreed, title passes Buyer when Seller completes his performance with respect to physical delivery of the goods. (UCC § 2-401(2).)
      • Any reservation of title by seller for goods shipped or delivered to buyer is limited to reservation of a security interest in favor of the Seller. (UCC § 2-401(1).)
  • Seller’s Bankruptcy
    • Goods identified to the contract but in seller’s possession:
      • If goods are identified to a contract at time of Seller’s bankruptcy, buyer possesses a special property right. (UCC § 2-501.)
      • Unless Buyer has successfully exercised its rights to obtain the goods under 2-502 or 2-716, the goods will be part of the Seller’s bankruptcy estate and the automatic stay will limit buyer’s ability to obtain the goods.
      • Unless seller’s retention of possession is not fraudulent or a preference, the buyer should be successful in asserting its rights to obtain the goods over unsecured and lien creditors. (UCC § 2-402.)
  • Seller’s Bankruptcy
    • Executory Contracts.
      • Contracts which are executory (yet to be performed) at the time of bankruptcy will be assumed or rejected by the bankruptcy trustee.
      • Contracts which are favorable are generally assumed. If the contract is assumed, the bankruptcy estate must fulfill all obligations under the contract.
      • Damages for breach of an assumed contract are an administrative expense of the bankruptcy estate.
      • If the contract is rejected, buyer will retain a pre-petition claim damages against the estate.
  • Questions?