Module 4: Performance and Breach
Tender and Payment
In every sale covered by the UCC, it is the seller’sobligation to sell and deliver the goods and the buyer’s obligation to acceptand pay for the goods.[1] The Code provides defaultrules that act as gap-fillers that aid in the interpretation of a contract, butthey can be changed by the parties under the Code’s deference to the freedom ofcontract. The Code anticipates thatthere will be one delivery of goods, called “one-shot” delivery,[2] although the seller maydivide the delivery into multiple shipments if it is commercially reasonable todo so.
Delivering the goods is called making a “tender ofdelivery” while making payment is called making a “tender of payment.” Each of these tenders, delivery and payment,are concurrent conditions, which means they are each conditions of the other’sresponsibility. In other words, therecan be no duty of delivery without payment and no duty of payment withoutdelivery.[3] Because it’s impossible tohave a truly simultaneous exchange, the Code establishes default rules for whomust perform when in the course of a sales transaction.
The Code requires that the goods conform to the contract’srequirements, which means they must conform to the time and manner of delivery,as well as the express and implied warranties of quality.[4]The Code further provides default rules forthe place, time and manner aspects of delivery if the contract does not specifythose terms. If the goods are not forthcoming, then the buyer may reject them without incurring a paymentobligation. The Code requires that theseller put the goods at the buyer’s disposition and properly notify the buyerthat the goods are ready for delivery. The Code assumes that tender of deliveryis at the seller’s residence or business at a reasonable hour and for areasonable time to allow the buyer to take possession.[5] The buyer must providereasonable facilities if the seller is delivering the goods.
Often, the parties to a contract for goods will designate acarrier to deliver the goods, such as UPS or FedEx. The Code provides for twotypes of contracts: shipment contracts and destination contracts.[6]In a shipment contract the seller mustmerely provide conforming goods to the carrier, at which time the risk of losspasses to the buyer. In a destination contract, the seller retainsresponsibility for anything that goes wrong until the goods reach thepurchaser. Note that the terminology can be confusing because a “shipment”contract will have a specified destination, but that does not make it a “destination”contract.
While the buyer assumes the risk of loss in a shipment contract,this does not mean the seller has no obligations. Merely delivering the goodsto a carrier is not enough as the Code imposes several obligations on theseller.[7]The seller must arrange for shipment of thegoods and notify the buyer of the shipment. She also must deliver to the buyerany shipping documents that would enable the buyer to take possession of thegoods. Given the widespread use of shipmentcontracts, industry-specific terms and practices can aid in the interpretationof the shipping aspects of a contract under the Code’s gap-filling provisions andcourse of performance, course of dealing and usage of trade. It is also possible for goods to be deliveredwithout physical movement. The sellermay deliver to the buyer a document of title that transfers ownership of thegoods to the buyer while leaving it in its current location. Alternatively, thegoods may be held by a third party, called a “bailee,” pending pickup by thebuyer.[8]
Payment may be made in any manner agreed to by the parties.If not specified, it may be made in any manner consistent with the ordinarycourse of business.[9]The seller must give the buyer reasonabletime to make payment if the seller demands payment in legal tender, which meanscash. If paying by check, the buyer’scontinued claim to any goods is contingent on the buyer’s bank honoring thecheck. If the buyer’s check isdishonored, then the buyer is in breach of the payment obligation of theagreement.
The buyer has the right to refuse to accept or pay fornonconforming goods.[10]Nonconforming goods are goods that do notsatisfy the time and manner of delivery or violate an express or impliedwarranty under the contract. To assistthe buyer with making that determination, the Code entitles the buyer toinspect the goods. Unless otherwiseagreed, the buyer may inspect the goods at a reasonable place or time in areasonable manner. Once the buyer hasinspected the goods, payment is then due. If a buyer agrees to what is called“payment against title,” then the buyer must pay before inspecting the goods.[11]This provision does not, though, waive thebuyer’s right to a claim against the seller if the goods arenon-conforming. An exception to thebuyer’s agreement to pay applies if the goods are self-evidently non-conformingwithout need for an inspection.[12]
Acceptance and Rejection
The seller must tenderconforming goods and this provision is what the Code calls “the perfect tenderrule.”[13]Note that the goods need not be “perfect” ina strict sense, but they must conform to the contract.[14]If a buyer rejects tendered goods, he must doso in good faith and not use a minor anomaly or defect to serve as a pretext toescape his obligation to pay. The buyermust reject the goods and timely notify the seller of his objection beforeacceptance.[15]The reasonableness of the rejection is viewed in light of the types of goodsinvolved, such as whether they are perishable, and the degree to which theprice of the goods fluctuates in the market.[16]The buyer must be afforded a reasonable timeto inspect the goods before acceptance.
A buyer may accept goods inseveral ways.[17]A buyer may accept goods as conforming or mayaccept goods even though they are non-conforming. A buyer’s acceptance may be by words orconduct, such as a signature on a seller’s order form. Alternatively, a buyer may improperlyreject the goods, which means the rejection is ineffective. If, for example, the buyer discovers that thegoods are non-conforming but waits an unreasonable amount of time to make anobjection, he will have waived his right to reject the goods. A buyer may also demonstrate behaviorconsistent with ownership of the goods, such as using a car after objecting toits shipment. A buyer who continues touse non-conforming goods may be liable for a reasonable amount of compensationto the seller even if the goods are eventually properly rejected.
The buyer should inform theseller of a defect rendering goods non-conforming when the seller has a rightto cure and the defects are curable.[18]Failure to do so will preclude the buyer fromusing the defect as justification to reject the goods. If the contract is between merchants, theseller may request a record of all the defects upon which the buyer is relyingto justify rejection. If the buyer failsto properly state the defects of goods alleged to be non-conforming afterreceiving the seller’s request, the buyer is precluded from rejecting thegoods.[19]
The seller has a right to curea non-conforming shipment either when the buyer rejects the goods or when thebuyer revokes acceptance.[20]Minor deviations in the goods customary inthe usage of trade do not trigger an obligation to cure the shipment. It is the seller’s obligation to timelynotify the buyer of the intention to exercise the right to cure.The seller has not rectified in a timelymanner, though, if the buyer has arranged for the procurement of substitutegoods. The seller must act in good faithand tender a conforming shipment when exercising the right to cure. If the seller does not cure, he has breachedthe contract.[21]
Revocation
The issue of revocationof an acceptance involves the question of whether the buyer can return thegoods even after they have been accepted.The buyer may do so if the goods are non-conforming to the extent thatthe defects substantially impair the value of the goods to the buyer.[22]The Code requires that the buyer had areasonable expectation that the seller was going to cure the non-conformity,but the seller did not do so. “Cure” means the seller would fix the goods oroffer alternative conforming goods. Also, the buyer must have been unaware of the defect in the goods at thetime of acceptance and the seller must have induced the buyer to miss thedefect or the defect must have been undiscoverable at the time of the acceptance.[23]
Revocation of acceptance, whenallowed, must occur before there is any substantial change to the goods and thebuyer must notify the seller of the non-conforming nature of the goods. If thebuyer uses the goods in a manner consistent with ownership and inconsistentwith the seller’s ownership, then the buyer’s revocation right might not be effective,or the buyer’s use may be deemed a “re-acceptance” of the goods. Conversely, the buyer might have acommercially reasonable need to make use of the goods after rejection whichwould not invalidate the buyer’s right to reject the goods.[24]
Forexample, assume Biscayne Real Estate has several offices throughout SouthFlorida and purchases several air conditioning units from Intercoastal ClimateControl Systems in April. Thecompressors in almost all the units intermittently overheat after a couple ofhours and shut down. Biscayne notifiesIntercoastal of the issue and Intercoastal agrees to send replacement units inOctober. The heat index where Biscayne’soffices are located typically exceeds one hundred degrees every day in thesummer, so it uses the air conditioners anyway to try to mitigate theoppressive heat while waiting for the replacement units. Intercoastal would likely not be able toclaim Biscayne accepted the units by using them because Biscayne gave themappropriate notice and the use was commercially reasonable and expected underthe circ*mstances.
Anticipatory Repudiation
When a party indicates that it will not fulfill itsobligations under a contract, the party is said to have repudiated thecontract. A repudiation is typically tantamount to a breach of contract.[25]If the repudiation substantially impairs thevalue of the contract then the non-breaching, aggrieved party may institute asuit for breach of contract.Theaggrieved party need not await the date on which the performance was to havetaken place, rather he may immediately seek remedies for breach. The aggrieved party may also suspendperformance or continue with performance to try to minimize any loss. It is theaggrieved party’s choice. Of course,making sure the party actually did repudiate is critical because, otherwise,the non-repudiating party could prematurely breach an agreement if a courtfinds there was not actual repudiation.[26]
A repudiating party may retract its repudiation unless theother party relied on the repudiation to its detriment.[27] If the repudiation isretracted on time, the contract duties of performance are back on, as thoughthere had never been a repudiation.
If a party has reasonable cause to believe that the otherparty might seek repudiation (for example, if the other party is insolvent,declares bankruptcy or engages in conduct inconsistent with the agreement),then that party may deem itself insecure, which means the party reasonably believesthat performance of the contract may be jeopardized.[28]The insecure party may demand “adequate assurances”from the other party that the contract will be performed. The assurances mustbe commercially reasonable under the circ*mstances, such as putting thepurchase price into escrow, consigning some of the goods to a third party orsome such arrangement. If the other party fails to provide the requiredassurances within a reasonable time, then the insecure party may treat thesituation as one of repudiation.[29]
Forexample, Wilshire Furniture of Los Angeles orders several handmade rattan rockingchairs from Pacific Furniture company of Honolulu. Several of the workers with the needed skillsleft the company and Pacific indicated it would probably discontinue carryingthe rockers as a product and would be unable to deliver the rockers that Wilshireordered. Deeming itself insecure, Wilshire demands assurances from Pacific to fulfill Wilshire’s order forrockers. Exactly what would be commercially reasonable assurances is unclear butputting the purchase price into escrow or demonstrating that it is continuingto produce the chairs would probably qualify.
Excuse
The Code provides threesituations where a party may be excused from performance or be allowed tosubstitute a different performance.[30]Shipping carriers or facilities may besubstituted when there are exigent circ*mstances and the means and manner ofpayment may be substituted when there are changes in domestic or foreigngovernment regulation that adversely affect the original means of payment. If the goods suffer loss before title passesto the buyer, there is no breach of contact. Instead, the buyer may deduct the amount of loss from the payment whenthe loss is partial. If the goods suffer a total loss, the contract isterminated.[31]
If an unforeseeable eventrenders performance impossible or so commercially unreasonable as to be tantamountto impossible under reasonable circ*mstances, then the performance is said tobe impracticable and the parties are excused from performance.[32]Increased cost alone is rarely sufficient toescape liability.[33]The test of foreseeability is whether theadverse event could have been foreseen by the parties, not whether the event wasactually was foreseen by the parties.[34]
In the event that a loss wasforeseeable, the Code assumes that the parties could have guarded against it,and so the parties are not excused from performance. Moreover, a seller might not be afforded animpracticability defense if the seller does not notify the buyer of the delayor non-delivery in a timely fashion. Upon notice, the buyer may terminate the contract or agree to theseller’s proposed modification of the contract. If the buyer fails to agree tothe seller’s proposed modification within thirty days of the seller’s notice,the contract is terminated.[35]
The Code provides for threeunique types of contracts.[36]Installment contracts involve separateshipments of goods.[37]A buyer may reject an installment if thatinstallment is non-conforming, but may not reject the whole shipment based onone non-conforming installment unless the breach impairs the value of theentire shipment. Note that this impairmentstandard replaces the “perfect tender” rule for shipments in multipleinstallments. A sale on approvalcontract is a contract where the buyer can return the goods to the sellereven if they conform to the requirements of the contract.[38]The buyer’s use of the goods during a trialperiod does not mean that buyer has accepted the goods. In a sale or return contract, a buyermay similarly return the goods to the seller if the buyer cannot resell thegoods in a predetermined time period.[39]
In the next module, we’ll turnto remedies for breach of contract under the UCC.
[1] For an extensive discussion ofgap-filler terms, see James J. White and RobertS. Summers, West Hornbook Series, Uniform Commercial Code, 6th Ed. §§ 4-3 to 4-10 (2010).
[9] For payment provisions see Uniform Commercial Code - Sales. § 2-511.
[20] Gabriel and Rusch, 106-108; Uniform Commercial Code - Sales. § 2-508. [Note “508,” not “608”.]
[34] An objective test.
