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Buyer's Remedies for Seller's Breach IV

We did not consider 2-714 in class, but I would like you to know that section, especially 2-714(2) regarding the measure of damages for breach of warranty. That section provides that in such an instance, "the measure of damages...is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount (2-714(2))."

An example will show how to interpret this section. Suppose you purchase a fancy watch for $3,200 that is billed as being "18 carat gold." Later you discover that it has no gold content at all, but would sell for $400 if accurately described. Though you bought it for $3,200, the market price of the fancy watch is actually $3,500 (you actually patted yourself on the back for getting such a good deal). If you keep the watch and sue for damages, what would you be entitled to recover? Under 2-714(2), you would be able to recover the difference between $3,500 (value of goods accepted...not the purchase price!) and $400, the value if the watch "had been as warranted." Thus, your recovery would have been $3,100. You keep the watch and obtain nearly all you paid for it.

However, in the following example, things would be different. What if you bought the watch for $3,200 but the 18 carat gold watch was usually selling (i.e., its "value" according to 2-714(2)) for $2,800 (you went to an expensive store because you like the personal treatment you receive). In this case your recovery would only be $2,400, the difference between $2,800 and $400.

Consequential and Incidental Damages. These are defined in 2-715. Incidental damages are those that are reasonably incurred by the buyer resulting from the seller's breach, including transportation and care and custody of goods rightfully rejected. 2-715(1). Thus, in the quiz example on the storage of drapes, if the buyer had rejected the drapes but the seller delayed picking them up, the buyer's remedy would include the cost of storage of the drapes as incidental damages. Also, in the example given in class which I didn't explain particularly well, a buyer who "covered" for a non-conforming refrigerator (contract price was $1,000 plus a $50 delivery fee) by purchasing another one for $1,200, would be entitled to a recovery of $200 from the seller, since $50 of the contract price would be an incidental damage.

Consequential damages are defined in 2-715(2) as including losses from the general or particular requirements of the contract which the seller "at the time of contracting had reason to know" and "which could not reasonably be prevented by cover or otherwise." This is a surprisingly narrow view of consequential damages, since it requires both that the seller know the buyer's business and that the buyer could not have stemmed part of the loss after discovering the breach. Thus, in the example given in class, if a defective pizza oven was delivered to Joe's Pizza Parlor on a Thursday, and not properly replaced until Monday, and if Joe's was closed Sundays but averaged profits of $1,000 a day from Thursday-Saturday, Joe would be able to collect $3,000 if the seller had reason to know of Joe's potential loss and Joe couldn't have reasonably gotten a replacement oven. However, there would be no recovery for Joe if he had rented out the Parlor on Sunday for $2,000 for a wedding reception, which then had to be canceled, because chances are that a vendor would not know of this special circumstance.

I also mentioned that whereas lost profits may be recoverable if they are quantifiable and known by the seller, generally courts will not give recovery for loss of good will. Good will is an intangible asset possessed by almost all businesses, and it may be hurt considerably if a business produces or sells a defective product. Thus, a business worth $500,000 before the sale of a dangerous product and which only garners $200,000 when it is sold after the problem with the product, will probably not be able to recover the difference from the manufacturer of the defective good.

A Word on Specific Performance. 2-716 allows the remedy of specific performance "where the goods are unique or in other proper circumstances." 2-716(1). We saw that at common law, specific performance was allowed almost exclusively in land sale contracts. Personal service contracts and sales of goods almost never could be enforced by specific performance (i.e., actual performance of the contract). The exception was if the good was a "one of a kind" good, especially something that might be akin to a family heirloom.

Article 2 revises the common law, not unexpectedly, by making the remedy more readily available than at common law. The standard now is "commercial feasibility of replacement" (Comment 2 to 2-716) rather than absolute uniqueness of the product. The Sedmak case (p. 459) illustrates this point well. There the court allowed the remedy of specific performance when a man entered into a contract with an auto dealership for the purchase of a limited edition (6,000 made) replica of the 1977 Indy 500 pace car but was told, when the car arrived, that the $500 "down payment" he tendered was only the "right to bid" on the auto.

Limitation of Damages. Finally, we considered the issue of damage limitations in contracts for the sale of goods under 2-718 and 2-719. The basic principle is that damages may be liquidated (an agreed-upon sum) as long as they are "reasonable" in the light of the anticipated or actual harm caused by the breach. 2-718(1). However, 2-719 gives two limitations on that principle. First, if a remedy is limited or exclusive and if it "fail[s] of its essential purpose," it is unenforceable and remedies may be had "as provided in this Act." 2-719(2). In addition, consequential damages may be limited, but only if the limitation is not unconscionable. 2-719(3). The Beal (p. 493) and Chatlos (p. 499) cases deal with 2-719 in an interesting fashion. The court held in Beal that an express warranty providing for 24 month/24,000 mile free service/part replacement failed of its essential purpose when Beal was unable to get his car repaired in a timely fashion under the warranty. The result was that this breach by the company opened it to all the other remedies flowing from 2-711, and especially, in this case, 2-714(2).

The Chatlos case presented the problem of two contractual limitations: one a 12 month warranty against defects and one a limitation of liability for consequential damages. The court held that even if the former was breached by the company (NCR), thus causing the contract to "fail of its essential purpose," the panoply of remedies available would NOT include 2-715 (consequential damages) because the parties negotiated for this limitation in the separate contract clause. Thus, warranty and limitation of consequential damages can be perceived separately, especially if they are in separate clauses.