Summary
Contract remedies serve to protect three different interests: an expectation interest (the benefit bargained for), a reliance interest (loss suffered by relying on the contract), and a restitution interest (benefit conferred on the promisor). In broad terms, specific performance addresses the expectation interest, monetary damages address all three, and restitution addresses the restitution interest.
The two general categories of remedies are legal and equitable. In the former category are compensatory, consequential, incidental, nominal, liquated, and (rarely) punitive damages. In the latter category—if legal remedies are inadequate—are specific performance, injunction, and restitution.
There are some limitations or restrictions on the availability of damages: they must pass the tests of foreseeability and certainty. They must be reasonably mitigated, if possible. And liquidated damages must be reasonable—not a penalty. In some situations, a person can lose the remedy of rescission—the power to avoid a contract—when the rights of third parties intervene. In some cases a person is required to make an election of remedies: to choose one remedy among several, and when the one is chosen, the others are not available any more.
EXERCISES
Owner of an auto repair shop hires Contractor to remodel his shop but does not mention that two days after the scheduled completion date, Owner is to receive five small US Army personnel carrier trucks for service, with a three-week deadline to finish the job and turn the trucks over to the army. The contract between Owner and the army has a liquidated damages clause calling for $300 a day for every day trucks are not operable after the deadline. Contractor is five days late in finishing the remodel. Can Owner claim the $1,500 as damages against Contractor as a consequence of the latter’s tardy completion of the contract? Explain.
Inventor devised an electronic billiard table that looked like a regular billiard table, but when balls dropped into the pocket, various electronic lights and scorekeeping devices activated. Inventor contracted with Contractor to manufacture ten prototypes and paid him $50,000 in advance, on a total owing of $100,000 ($10,000 for each completed table). After the tables were built to accommodate electronic fittings, Inventor repudiated the contract. Contractor broke the ten tables up, salvaged $1,000 of wood for other billiard tables, and used the rest for firewood. The ten intact tables, without electronics, could have been sold for $500 each ($5,000 total). Contractor then sued Inventor for the profit Contractor would have made had Inventor not breached. To what, if anything, is Contractor entitled by way of damages and why?
Calvin, a promising young basketball and baseball player, signed a multiyear contract with a professional basketball team after graduating from college. After playing basketball for one year, he decided he would rather play baseball and breached his contract with the basketball team. What remedy could the team seek?
Theresa leased a one-bedroom apartment from Landlady for one year at $500 per month. After three months, she vacated the apartment. A family of five wanted to rent the apartment, but Landlady refused. Three months later—six months into what would have been Theresa’s term—Landlady managed to rent the apartment to Tenant for $400 per month. How much does Theresa owe, and why?
Plaintiff, a grocery store, contracted with Defendant, a burglar alarm company, for Defendant to send guards to Plaintiff's premises and to notify the local police if the alarm was activated. The contract had this language: “It is agreed that the Contractor is not an insurer, that the payments here are based solely on the value of the service in the maintenance of the system described, that it is impracticable and extremely difficult to fix the actual damages, if any, which may proximately result from a failure to perform its services, and in case of failure to perform such services and a resulting loss, its liability shall be limited to $500 as liquidated damages, and not as a penalty, and this liability shall be exclusive.”
A burglary took place and the alarm was activated, but Defendant failed to respond promptly. The burglars left with $330,000. Is the liquidated damages clause—the limitation on Plaintiff’s right to recover—valid?
The decedent, father of the infant Plaintiff, was killed in a train accident. Testimony showed he was a good and reliable man. Through a representative, the decedent’s surviving child, age five, recovered judgment against the railroad (Defendant). Defendant objected to expert testimony that inflation would probably continue at a minimum annual rate of 5 percent for the next thirteen years (until the boy attained his majority), which was used to calculate the loss in support money caused by the father’s death. The calculations, Defendant said, were unreasonably speculative and uncertain, and damages must be proven with reasonable certainty. Is the testimony valid?
Plaintiff produced and directed a movie for Defendant, but contrary to their agreement, Plaintiff was not given screen credit in the edited film (his name was not shown). The film was screened successfully for nearly four years. Plaintiff then sued (1) for damages for loss of valuable publicity or advertising because his screen credits were omitted for the years and (2) for an injunction against future injuries. The jury awarded Plaintiff $25,000 on the first count. On the second count, the court held Plaintiff should be able to “modify the prints in his personal possession to include his credits.” But Plaintiff appealed, claiming that Defendant still had many unmodified prints in its possession and that showing those films would cause future damages. What remedy is available to Plaintiff? [1]
In 1929 Kerr Steamship Company, Inc. (Plaintiff), delivered to Defendant, the Radio Corporation of America (RCA), a fairly long telegram—in code—to be transmitted to Manila, Philippine Islands, with instructions about loading one of Kerr’s ships. By mistake, the telegraph was mislaid and not delivered. As a result of the failure to transmit it, the cargo was not loaded and the freight was lost in an amount of $6,675.29 [about $84,000 in 2010 dollars], profit that would have been earned if the message had been carried. Plaintiff said that because the telegram was long and because the sender was a ship company, RCA personnel should have known it was important information dealing with shipping and therefore RCA should be liable for the consequential damages flowing from the failure to send it. Is RCA liable?
Defendant offered to buy a house from Plaintiff. She represented, verbally and in writing, that she had $15,000 to $20,000 of equity in another house and would pay this amount to Plaintiff after selling it. She knew, however, that she had no such equity. Relying on these intentionally fraudulent representations, Plaintiff accepted Defendant’s offer to buy, and the parties entered into a land contract. After taking occupancy, Defendant failed to make any of the contract payments. Plaintiff’s investigation then revealed the fraud. Based on the fraud, Plaintiff sought rescission, ejectment, and recovery for five months of lost use of the property and out-of-pocket expenses. Defendant claimed that under the election of remedies doctrine, Plaintiff seller could not both rescind the contract and get damages for its breach. How should the court rule?
Buyers contracted to purchase a house being constructed by Contractor. The contract contained this clause: “Contractor shall pay to the owners or deduct from the total contract price $100.00 per day as liquidated damages for each day after said date that the construction is not completed and accepted by the Owners and Owners shall not arbitrarily withhold acceptance.” Testimony established the rental value of the home at $400–$415 per month. Is the clause enforceable?
SELF-TEST QUESTIONS
Contract remedies protect
a restitution interest
a reliance interest
an expectation interest
all of the above
A restitution interest is
the benefit for which the promisee bargained
the loss suffered by relying on the contract
that which restores any benefit one party conferred on the other
none of the above
When breach of contract caused no monetary loss, the plaintiff is entitled to
special damages
nominal damages
consequential damages
no damages
Damages attributable to losses that flow from events that do not occur in the ordinary course of events are
incidental damages
liquidated damages
consequential damages
punitive damages
Restitution is available
when the contract was avoided because of incapacity
when the other party breached
when the party seeking restitution breached
all of the above
SELF-TEST ANSWERS
d
c
b
c
d
[1] Tamarind Lithography Workshop v. Sanders, 193 Cal. Rptr. 409 (Calif. Ct. App., 1983).
Chapter 17
Introduction to Sales and Leases
LEARNING OBJECTIVES
After reading this chapter, you should understand the following:
Why the law of commercial transactions is separate from the common law
What is meant by “commercial transactions” and how the Uniform Commercial Code (UCC) deals with them in general
The scope of Article 2, Article 2A, and the Convention on Contracts for the International Sale of Goods
What obligations similar to the common law’s are imposed on parties to a UCC contract, and what obligations different from the common law’s are imposed
The difference between a consumer lease and a finance lease
17.1 Commercial Transactions: the Uniform Commercial Code LEARNING OBJECTIVES
Understand why there is a separate body of law governing commercial transactions.
Be aware of the scope of the Uniform Commercial Code.
Have a sense of this text’s presentation of the law of commercial transactions.
History of the UCC
In Chapter 8 "Introduction to Contract Law" we introduced the Uniform Commercial Code. As we noted, the UCC has become a national law, adopted in every state—although Louisiana has not enacted Article 2, and differences in the law exist from state to state. Of all the uniform laws related to commercial transactions, the UCC is by far the most successful, and its history goes back to feudal times.
In a mostly agricultural, self-sufficient society there is little need for trade, and almost all law deals with things related to land (real estate): its sale, lease, and devising (transmission of ownership by inheritance); services performed on the land; and damages to the land or to things related to it or to its productive capacity (torts). Such trade as existed in England before the late fourteenth century was dominated by foreigners. But after the pandemic of the Black Death in 1348–49 (when something like 30 percent to 40 percent of the English population died), the self-sufficient feudal manors began to break down. There was a shortage of labor. People could move off the manors to find better work, and no longer tied immediately to the old estates, they migrated to towns. Urban centers—cities—began to develop. Urbanization inevitably reached the point where citizens’ needs could not be met locally. Enterprising people recognized that some places had a surplus of a product and that other places were in need of that surplus and had a surplus of their own to exchange for it. So then, by necessity, people developed the means to transport the surpluses. Enter ships, roads, some medium of exchange, standardized weights and measures, accountants, lawyers, and rules governing merchandising. And enter merchants.
The power of merchants was expressed through franchises obtained from the government which entitled merchants to create their own rules of law and to enforce these rules through their own courts. Franchises to hold fairs [retail exchanges] were temporary; but the franchises of the staple cities, empowered to deal in certain basic commodities [and to have mercantile courts], were permanent.…Many trading towns had their own adaptations of commercial law.… The seventeenth century movement toward national governments resulted in a decline of separate mercantile franchises and their courts. The staple towns…had outlived their usefulness. When the law merchant became incorporated into a national system of laws enforced by national courts of general jurisdiction, the local codes were finally extinguished. But national systems of law necessarily depended upon the older codes for their stock of ideas and on the changing customs of merchants for new developments. [1]
When the American colonies declared independence from Britain, they continued to use British law, including the laws related to commercial transactions. By the early twentieth century, the states had inconsistent rules, making interstate commerce difficult and problematic. Several uniform laws affecting commercial transactions were floated in the late nineteenth century, but few were widely adopted. In 1942, the American Law Institute (ALI) [2]hired staff to begin work on a rationalized, simplified, and harmonized national body of modern commercial law. The ALI’s first draft of the UCC was completed in 1951.The UCC was adopted by Pennsylvania two years later, and other states followed in the 1950s and 1960s.
In the 1980s and 1990s, the leasing of personal property became a significant factor in commercial transactions, and although the UCC had some sections that were applicable to leases, the law regarding the sale of goods was inadequate to address leases. Article 2A governing the leasing of goods was approved by the ALI in 1987. It essentially repeats Article 2 but applies to leases instead of sales. In 2001, amendments to Article 1—which applies to the entire UCC—were proposed and subsequently have been adopted by over half the states. No state has yet adopted the modernizing amendments to Article 2 and 2A that the ALI proposed in 2003.
That’s the short history of why the body of commercial transaction law is separate from the common law.
Scope of the UCC and This Text’s Presentation of the UCC
The UCC embraces the law of commercial transactions, a term of some ambiguity. A commercial transaction may seem to be a series of separate transactions; it may include, for example, the making of a contract for the sale of goods, the signing of a check, the endorsement of the check, the shipment of goods under a bill of lading, and so on. However, the UCC presupposes that each of these transactions is a facet of one single transaction: the lease or sale of, and payment for, goods. The code deals with phases of this transaction from start to finish. These phases are organized according to the following articles:
Sales (Article 2)
Leases (Article 2A)
Commercial Paper (Article 3)
Bank Deposits and Collections (Article 4)
Funds Transfers (Article 4A)
Letters of Credit (Article 5)
Bulk Transfers (Article 6)
Warehouse Receipts, Bills of Lading, and Other Documents of Title (Article 7)
Investment Securities (Article 8)
Secured Transactions; Sales of Accounts and Chattel Paper (Article 9)
Although the UCC comprehensively covers commercial transactions, it does not deal with every aspect of commercial law. Among the subjects not covered are the sale of real property, mortgages, insurance contracts, suretyship transactions (unless the surety is party to a negotiable instrument), and bankruptcy. Moreover, common-law principles of contract law that were examined in previous chapters continue to apply to many transactions covered in a particular way by the UCC. These principles include capacity to contract, misrepresentation, coercion, and mistake. Many federal laws supersede the UCC; these include the Bills of Lading Act, the Consumer Credit Protection Act, the warranty provisions of the Magnuson-Moss Act, and other regulatory statutes.
We follow the general outlines of the UCC in this chapter and in Chapter 18 "Title and Risk of Loss" and Chapter 19 "Performance and Remedies". In this chapter, we cover the law governing sales (Article 2) and make some reference to leases (Article 2A), though space constraints preclude an exhaustive analysis of leases. The use of documents of title to ship and store goods is closely related to sales, and so we cover documents of title (Article 7) as well as the law of bailments inChapter 21 "Bailments and the Storage, Shipment, and Leasing of Goods".
In Chapter 22 "Nature and Form of Commercial Paper", Chapter 23 "Negotiation of Commercial Paper", Chapter 24 "Holder in Due Course and Defenses", andChapter 25 "Liability and Discharge", we cover the giving of a check, draft, or note (commercial paper) for part or all of the purchase price and the negotiation of the commercial paper (Article 3). Related matters, such as bank deposits and collections (Article 4), funds transfers (Article 4A), and letters of credit (Article 5), are also covered there.
In Chapter 28 "Secured Transactions and Suretyship" we turn to acceptance of security by the seller or lender for financing the balance of the payment due. Key to this area is the law of secured transactions (Article 9), but other types of security (e.g., mortgages and suretyship) not covered in the UCC will also be discussed in Chapter 29 "Mortgages and Nonconsensual Liens". Chapter 27 "Consumer Credit Transactions" covers consumer credit transactions and Chapter 30 "Bankruptcy" covers bankruptcy law; these topics are important for all creditors, even those lacking some form of security.
We now turn our attention to the sale—the first facet, and the cornerstone, of the commercial transaction.
KEY TAKEAWAY
In the development of the English legal system, commercial transactions were originally of such little importance that the rules governing them were left to the merchants themselves. They had their own courts and adopted their own rules based on their customary usage. By the 1700s, the separate courts had been absorbed into the English common law, but the distinct rules applicable to commercial transactions remained and have carried over to the modern UCC. The UCC treats commercial transactions in phases, and this text basically traces those phases.
EXERCISES
Why were medieval merchants compelled to develop their own rules about commercial transactions?
Why was the UCC developed, and when was the period of its initial adoption by states?
[1] Frederick G. Kempin Jr., Historical Introduction to Anglo-American Law (Eagan, MN: West, 1973), 217–18, 219–20, 221.
[2] American Law Institute, “ALI Overview,” accessed March 1, 2011,http://www.ali.org/index.cfm?fuseaction=about.overview.
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