worksheet answers

I thought it would be good to post the answers to the two multi-part questions I gave you last Thursday even though we may spend a few minutes on these in class. I want to reiterate that I think these sections of the Code (2-609 to 2-611) are fairly easy to understand, even if the reality (insecurity or "mixed signals" that parties may receive from one another) is sometimes hard to "read."

1a. S's letter is a repudiation because it "centers upon an overt communication of intention....which...demonstrates a clear determination not to continue with performance" (2-610 Cmt.1). Don't be misled by the hope of working together in the future; the letter is not a "warm fuzzy" letter--it basically says that the contract is off. Even though the Code does not like the common law word "rescission," opting for terms like "termination" or "cancellation" instead (see 2-106(3)-(4)), the language of the letter is clear enough--S wants out of the contract. B does have rights upon receipt. These rights are described in 2-610(a)-(c). I don't need to go through them all, since you can read the section easily, but I want to stress (b)--that the buyer now can go to 2-711, the index of buyer's remedies, and then to the rest of the remedies that are available in 2-712 to 2-717. Most likely B will want to "cover" under 2-712. Damages then are calculated according to 2-712(2).

1b. This, too, is a repudiation. Delivery will be 45 days late, and this is an "overt communication which...renders performance impossible." Perhaps words in 2-610 Cmt. 2 are more to the point. "Repudiation can result from action which reasonably indicates a rejection of the continuing obligation." Delivery six weeks after the contract date would be such a rejection. If B wanted to agree to the proposed change, it would be through the mechanism of contract modification (2-209). If, however, delivery could be assured but it would be on March 17 (2 days after agreed-upon delivery date), the analysis is slightly different. Cmt 3 helps us here. "The test chosen to justify an aggrieved party's action under this section is the same as that in the section on breach in installment contracts--namely the substantial value of the contract." The comment goes on to say that the issue is "whether material inconvenience or injustice will result if the aggrieved party is forced to wait." Thus, we then have a factual inquiry. For example, if (in another case) the delivery was of Christmas poinsettias for a Christmas Eve service on Dec. 24, and delivery was two days later, then we would say that material inconvenience resulted. In many instances, however, a two day delay in delivery would not hurt the buyer. Although the perfect tender rule of 2-601 might seemingly give the buyer the option of rejecting any late delivery for any reason, the Code has a number of sections that limit that seemingly unlimited discretion. 2-610 Cmt 3 is one of those limitations.

1c. We talked about an example like this in class. The question was whether this was a repudiation or whether this was simply a proposal for contract modification. We need to look at the language of Cmt.2 to 2-610. The gist of the words is that such a new price demand is not necessarily a repudiation except if "under a fair reading" it "amounts to a statement of intention not to perform except on conditions which go beyond the contract." What is our "fair reading" here? Mine is that this IS a repudiation. S gives no indication that the price increase is debatable. It appears as if it is a nonnegotiable demand. It is a factual inquiry, however.

1d. Here, however, we have a slightly different scenario. S is appealing to something other than whim in the price increase. He says that the contract and U/T allows the increase. It would be risky for B to treat this as a repudiation. S is giving no indication of being unwilling to perform the contract. The best thing to do is for B to accept delivery and either pay or not pay for the additional amount. One or the other parties will then bring suit, no doubt, and a court will have to sort out who is in the right by examining the relevant contract language and the industry U/T. But taking this as a repudiation is probably not the way to go. Recall, also, that the Code puts a requirement of good faith on the performance of every contract. If S is not acting in good faith in this demand, a court will smoke that out, most likely through a motion for summary judgment.

2a. This problem implicates 2-609. I used one word improperly in the problem, which may have brought some confusion into our analysis. I should have said that S waited 30 days and then cancelled the contract. In other words, S had considered B's silence in that 30 day period as B's repudiation under 2-609(4). With that correction in mind, let's get to the problem. The problem requires you to ask the question in the first instance whether S's written request to B to pay for the dolls on receipt functions as a request for adequate assurances under 2-609(1). In order to be able to request adequate assurances, you must first have "reasonable grounds for insecurity." Thus, what I was getting at in the problem, ultimately, is whether S had reasonable grounds of insecurity that B would perform. The answer is no. Nothing in what B has done is at stake. Nothing about rumors regarding B's ability to perform has come to S's attention, according to the fact pattern. In short, S was not within its rights to cancel after waiting 30 days because it was not within its rights to ask for adequate assurances.

2b. Here we must look at 2-609, Cmt 3 last paragraph. The reasonability of the grounds for insecurity is there described. "For example, a report from an apparently trustworthy source that the seller had shipped defective goods or was planning to ship them would normally give the buyer reasonable grounds for insecurity." Are these other toy manufacturers just jealous that S has B's business and they want to hurt him or are they reliable? We don't know. They may just be wanting to "pull S's chain." The business (and legal) world consists of bluster and false moves, of allegations and rumors. But with the facts given, I would say that S has reasonable grounds for insecurity. It has to do with his business and his ability to be paid for his product. The threshold for demands for adequate assurances is rather low, so I would say S is within his rights to demand them.

2c. Normally a party can demand adequate assurances if it has reasonable grounds for insecurity not simply in the contract at issue but in any contract that the other party has. "Thus a buyer who falls behind in 'his account' with the seller, even though the items involved have to do with separate and legally distinct contracts, impairs the sesller's expectation of due performance" (2-609, Cmt.3). But here we have an additional fact that makes such a demand cloudy. While S may be worried, B claims that the goods are defective. That is, B's explanation for being late in paying its bills elsewhere is that the goods in that other contract were defective. This really doesn't implicate B's willingness or ability to perform, it seems to me or, in other words, B's lack of performance here may not be due to his own financial circumstances. This fact alone doesn't make him a "known cost cutter" or give the impression that he is acting in bad faith. Even though the threshold for demands of adequate assurance is rather low, I don't think we have reached that here.