Question: Walter Widget, producer, has entered into a contract to purchase a new

Question

Question:

Walter Widget, producer, has entered into a contract to purchase a new production machine from Sam Supplier to be delivered on December 1. Walter tells Sam that he must have the machine on that date because he must expand his plant production to meet increased demand. The contract has a provision that states, "The buyer's remedies are limited to repair or replacement." The machine delived on December 1 will not produce proper widgets. Sam cannot repair the machine and he has no other machines in his inventory. Walter purchases another machine from a different supplier, at a higher price, on December 15. He then sues Sam for the extra amount he had to pay for the new machine and two weeks lost profits. What liability, if any, does Sam have?

Chapter 27 Overview:

UCC 2-703 and 2-711 are the main sections under Article 2 that address breach and remedies. 2-609 (adequate assurances) and 2-702 (recovery of goods from insolvent buyer), which were discussed previously, could also be considered remedies, in a broad sense. Buyers breach and sellers remedies are covered in 2-703. The buyer can breach the contact by wrongfully rejecting goods or wrongfully revoking acceptance of goods. It is also breach if he fails to pay or repudiates the contact before the day of performance (anticipatory breach). Upon breach by the buyer, the seller has 6 remedies he can use, the most common of which are “resale” under 2-706 or a suit for damages under 2-708. The latter was the most common remedy used at common law. The problem was that the seller must prove the market price of the goods in order to get the difference between the market price and the contract price. The UCC recognized this problem when it developed the resale provision under 2-706. If the seller resells the goods in good faith and in a commercially reasonable manner, the resale price becomes the market price for damage purposes. Because of the easier proof, most sellers will use this section for their remedy.

     The sellers breach and buyers remedies are found in 2-711. The seller is in breach if he repudiates, fails to deliver, or delivers defective goods which are rejected or on which the acceptance is rightfully revoked. In those instances, the buyer has 4 remedies, of which the 2 most common are sue for damages under 2-713 or “cover” under 2-712. These are similar to the sellers remedies, in that the section on recovering damages requires proof of market price while the “cover” section assumes that if the buyer buys other goods on the open market in good faith and in a commercially reasonable manner, the purchase price is the equivalent of market price. The buyer may also seek specific performance under 2-716 if the goods or circumstances are unique.

     The damages recoverable for breach of contract under Article 2 are found in 2-715. The basic term used is “consequential” damages. This term comes from some court decisions that recognize all “damages that flow as the natural and probable consequence of the breach” should be recoverable. This would include lost profits if they are foreseeable (“had reason to know”) unless limited by 2-719. However, if they are limited (such as by “repair or replacement”), 2-719(2) would allow the non-breaching party to escape the limitation if it there was, in effect, no remedy because of failure to repair or replace. However, the limitation on lost profits is always available between business people. In the case problem, Sam would be liable for the increased cost of the new machine because of 2-719(2) but would not be liable for the lost profits because of 2-719(3). The built in liquidated damage clause under 2-718(2) was discussed previously in Chapter 24.

Explanation / Answer

The ‘buyer's remedies are limited to repair or replacement’ clause fails when the seller (Sam) fails to fix or replace the machine in reasonable time, as the warranty in this case fails the essential purpose and hence the buyer can receiver consequential losses from the seller despite the contractual exclusion of the same (UCC 2-719(2)). “Consequential” damages as per UCC, includes all the damages that flow as the probable and natural consequences of the breach (Sam’s failure to provide a properly working machine by December 1, or repair/replace the machine in reasonable time, i.e. December 1). Hence, Sam will be liable for Walter’s lost profits and the cost difference between the new purchased machine and Sam’s machine.

Some courts however, consider sections 2-719 (2) and 2-719 (3) independently. The failure of essential purpose of limited remedy under the section 2-719 (2) is prevented by 2-719 (3) and section 2-719 (2) does not invalidate the clause that excludes the seller form consequential damages. Hence, if the court takes 2-719 (2) and 2-719 (3) independently, then Sam will be liable only for the difference in the cost of the new machine purchased by Walter and the machine provided by Sam.

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