Welcome back to the Bar Exam Toolbox podcast. Today we have another in our "Listen and Learn" series - this one, talking about UCC expectation damages. Your Bar Exam Toolbox hosts are Alison Monahan and Lee Burgess, that's me. We're here to demystify the bar exam experience, so you can study effectively, stay sane, and hopefully pass and move on with your life. We're the co-creators of the Law School Toolbox, the Bar Exam Toolbox, and the career-related website CareerDicta.
Alison also runs The Girl's Guide to Law School. If you enjoy the show, please leave a review or rating on your favorite listening app, and check out our sister podcast, the Law School Toolbox podcast. And if you have any questions, don't hesitate to reach out to us. You can reach us via the contact form on BarExamToolbox.com, and we'd love to hear from you. And with that, let's get started. Hello, and welcome back to the "Listen and Learn" series.
Today, we are going to be talking about the expectation damages of sellers and buyers of goods under Article 2 of the Uniform Commercial Code, or the UCC. If you've listened to our other episodes on contract damages, you should already be familiar with the legal remedies available for breach of contract under the common law, including expectation damages. If you want to review these, I will link to them in the show notes.
As under the common law, expectation damages are the primary remedy for breach of contract under the UCC, and are an attempt to put the non-breaching party in the same position it would have been in, but for the breach. In fact, in many cases, applying the common law rule would get you to the right answer, even when the UCC is the governing law; but your answer would not be as precise as an answer that applied the correct UCC rules. And when it comes to exams, precision is the name of the game.
Before we jump into our rules, a quick note on the scope of this episode. This episode will only cover expectation damages under the UCC. It will not cover other types of damages, such as consequential damages, incidental damages, specific performance, or replevin, all of which are also available under the UCC in certain circumstances. Moreover, this episode is meant to help you understand the basic UCC rules, which is sufficient for the bar exam and most law school Contracts exams.
If you are taking a Sales class in law school, you might need to have a deeper understanding of these rules. And with that said, let's get into our rules. Under Article 2 of the UCC, when a buyer breaches a contract for the sale of goods, the seller can recover the following types of expectation damages: a) cover damages; b) market damages; or c) lost profits, if the seller is a lost volume seller. Let's dig a little deeper into each type of damages, starting with cover damages.
Cover damages are the difference between the resale price and the contract price of the goods. This type of damages is used if the resale was made in good faith and in a commercially reasonable manner. To illustrate this rule, let's say that I breach an agreement to buy 100 widgets from you at $10 per widget. As a result of my breach, you solicit bids from other buyers and accept the highest bid, which is $9 per widget.
By reselling the widgets you "covered", and your cover damages are the difference between the resale price of $9 per widget and the contract price of $10 per widget, which is $1 per widget. Multiply that by 100 widgets and your cover damages are $100. These are appropriate damages, because your resale seems to be commercially reasonable.
We're not going to go too deep into what constitutes commercial reasonableness, but you're basically looking for a fair sales process that's designed to get the best price for the goods. Alright, let's move on to market damages. Market damages are the difference between the market price at the time and place for tender, which is when and where the seller agreed to deliver the goods.
Market damages are used when a seller doesn't resell the goods, or resells the goods in a manner that is not commercially reasonable. To illustrate, let's modify our prior example. Let's say that our agreement was that you would deliver the widgets to me at my factory in New York on June 1st. On June 1st in New York, the market price for widgets was $9.50.
After I breached our agreement, you chose either not to resell the widgets or to resale the widgets to the first buyer that came calling for $5 per widget. In either case, cover damages would not be appropriate. Instead, we would use market damages. At the time and place of tender, the market price was $9.50 per widget, and the contract price was $10 per widget. So the market damages are 50 cents per widget, or the difference between the two prices.
Multiply that by 100 and your market damages are $50. Our last sellers' remedy is lost profits, which is only available to lost volume sellers. A lost volume seller is a seller who regularly engages in the sale of the goods at issue and has unlimited inventory. To illustrate, let's say you agreed to buy my used bicycle for $100. You don't go through with the purchase and I sell the bicycle to someone else for $100.
In that situation, my resale of the bicycle is a direct substitute for my sale to you, because I'm only selling one bicycle. After I resell the bicycle, I'm in exactly the same position as I would have been had I sold the bicycle to you. But what if instead of agreeing to buy my used bicycle, you agree to buy a new bicycle from a bicycle dealer that has thousands of the same bicycle to sell?
In that situation, after the dealer resells the bicycle you agreed to buy, the dealer is actually worse off, because they could have sold you a bicycle, and the other person a bicycle. In other words, the dealer should have the profits from two sales; but instead, they only have the profits from one sale. Accordingly, the dealer is entitled to the lost profits from your sale. Okay, that's it for sellers' expectation damages. Let's move on to buyers' expectation damages.
Under the UCC, a buyer who, a) never received the goods; b) rightfully rejected non-conforming goods; or c) justifiably revoked acceptance of the goods, may, 1) recover any amount paid [i.e. a refund], even if the buyer doesn't cancel the contract; and 2) recover either cover damages or market damages. Refund is self-explanatory, and cover and market damages generally apply to buyers in the same way as sellers.
The one difference is that in the case of buyers, market damages are determined at the time the buyer learned of the breach, and at either, a) the place for tender; or b) the place of arrival in cases of rejection after arrival or relocation of acceptance. If the buyer keeps the non-conforming goods, then the buyer is entitled to loss in value damages, which are measured by the difference between the value as promised and the value of the non-conforming goods.
To illustrate this last rule, let's say I agreed to sell you a set of silverware made of Sterling silver for $1,000, which is the true value of the silverware. Instead, I delivered to you a set of silver-plated silverware. You realize that the silverware was not Sterling silver, but you chose to accept delivery and notify me of the breach. You then had the silverware professionally appraised at $400.
Even though you accepted the goods, you can likely recover $600 from me, which is the difference in value. Okay, that is it for our rules. Let's test out our understanding of these rules by working through our first hypo: " CarCo is a car dealership that sells new and used cars and trucks. On June 1st, Alan, Beth, and Charles visited CarCo to shop for vehicles. After shopping around for awhile, Alan saw a used pickup truck he liked.
He asked a CarCo salesperson whether CarCo had any other similar vehicles for sale. The salesperson responded, 'No, that's the only one of those trucks that we have.' Alan then entered into a valid written contract to purchase the truck for $20,000. Meanwhile, Beth was busy test driving a limited-edition SUV. After her test drive, she told a salesperson that she was interested in the SUV, but wanted to make sure it was really a limited edition.
The salesperson assured her that only 100 of the SUVs were manufactured, and that this was the only one CarCo had available to sell. Beth then entered into a valid written contract to purchase the SUV for $40,000. By the time Alan and Beth were completing their paperwork, Charles was getting overwhelmed by all the options. He told a salesperson he just wanted the most popular vehicle CarCo had. The salesperson responded, 'If that's what you're looking for, you should go with our new sedan.
We get hundreds of them in every month, and they sell like hotcakes.' Charles then entered into a valid written contract to purchase the new sedan for $50,000. All three contracts provided that the vehicles would be delivered in one week, and that payment was to be made upon delivery. When CarCo timely delivered the vehicles, Alan, Beth, and Charles unjustifiably refused to accept delivery and make payment. All three vehicles were then returned to CarCo.
CarCo put the used pickup truck back on its lot and advertised the vehicle in the same manner as all its other vehicles. Over the next two weeks, it received several offers for the truck and accepted the highest offer, which was $18,000. CarCo sold the limited-edition SUV to one of its salespeople for $30,000, taking 25% off the sales price as an employee discount. At the time and place the SUV was delivered to Beth, the market value of the SUV was $35,000.
CarCo sold the new sedan the same day it was returned to CarCo for $50,000. CarCo then sued Alan, Beth, and Charles for breach of contract. Assuming Alan, Beth, and Charles breached their contracts with CarCo, what damages could CarCo reasonably recover from each of them?" Alright, the question here is specifically asking us about damages, and we're instructed to assume that Alan, Beth, and Charles breached the contract, so we don't need to deal with any other contract issues.
We can assume that there was a valid contract and a breach, and focus solely on what damages are available. So let's take each defendant in turn, starting with Alan. We're told that Alan agreed to purchase the used pickup truck for $20,000, and that after he refused to pay for the truck, CarCo resold the truck for $18,000. Because CarCo chose to resell the vehicle - or "cover" - CarCo could be entitled to the difference between the resale price and the contract price as cover damages.
But remember, before we can conclude that CarCo is in fact entitled to cover damages, we need to determine whether the resale was commercially reasonable. Here, it appears that it was. We're told that CarCo put the truck back on its lot and advertised the vehicle in the same manner as other vehicles. We're also told that CarCo received offers for two weeks before accepting the highest offer. Overall, CarCo's method and manner of reselling the truck seems commercially reasonable.
Therefore, CarCo would be entitled to $2,000 in cover damages. Note that if CarCo had chosen not to resell the vehicle, or sold the vehicle in a commercially unreasonable manner, cover damages would be inappropriate and we would need to consider market damages. Also note that cover damages are a sufficient remedy for Alan's breach, because CarCo cannot be considered a lost volume seller with respect to the used truck.
We know that because a CarCo salesperson explicitly told Alan that CarCo had only one used pickup truck of that type for sale. Now let's move on to Beth. We're told that Beth agreed to purchase the SUV for $40,000, and then after she refused to pay for the SUV, CarCo resold the SUV to one of its salespeople for $30,000, reflecting a 25% employee discount.
As with the truck, because CarCo chose to resell the SUV, it would be entitled to cover damages of $10,000 if the resale was commercially reasonable. Unlike with the truck, however, the resale of the SUV was very likely not commercially reasonable, because it was sold to an employee at a significant discount, and there is no indication that CarCo made any attempt to sell the SUV to another buyer for a higher price. Therefore, CarCo would likely not be entitled to cover damages.
Instead, CarCo could recover market damages, or the difference between the market price and the contract price. We're told that the market price of the SUV at the time and place of delivery to Beth was $35,000. Therefore, CarCo would likely recover $5,000 in market damages. As with the cover damages for Alan's breach, the market damages for Beth's breach are a sufficient remedy, because CarCo is not a lost volume seller with respect to the limited-edition SUV.
CarCo's salesperson explicitly told Beth that CarCo had only one limited-edition SUV available for sale. Okay, we are almost done with this hypo; we just need to deal with Charles. We're told that Charles agreed to purchase the new sedan for $50,000, and that after Charles refused to pay for the sedan, CarCo resold the sedan for $50,000 the same day it was returned to CarCo.
While CarCo has covered, it is not entitled to cover damages, because there is no difference between the resale price and the contract price. It expected to make $50,000 on the sale to Charles, and it ended up making $50,000 on the sale to another buyer. While there might have been additional costs associated with returning the car to the lot and reselling it, those would have been recoverable by CarCo as incidental damages, not cover damages.
So Charles would argue that CarCo cannot recover any expectation damages. CarCo would argue, however, that it can recover its lost profits, because it is a lost volume seller of new sedans. Unlike with the truck and SUV, CarCo has hundreds of new sedans available to sell each month. Although CarCo didn't lose any money on the particular sedan it was going to sell Charles, it lost money on the car it would have sold to the replacement buyer had Charles not breached his agreement.
In other words, CarCo was fully capable of selling two cars - one to Charles and one to the replacement buyer. Because of Charles' breach, CarCo only sold one - the car sold to the replacement buyer. Therefore, CarCo can recover its lost profit on the sale to Charles. That's it for our first hypo. Let's do one more that deals with buyers' remedies: "PastaCo is a producer of pastas and sauces.
In January, PastaCo entered into a valid written contract with Dan the farmer to buy 1,000 bushels of tomatoes from Dan on July 1st at $100 per bushel, with 50% payable upon signing and 50% payable upon delivery. Upon signing the agreement, PastaCo paid Dan the 50% payment of $50,000. On May 15th, Dan unjustifiably repudiated the contract. That same day PastaCo received quotes from several other farmers for $105 per bushel for 5,000 bushels.
PastaCo decided not to accept any of the quotes, and chose instead to focus on its pasta production for the rest of the year. On June 1st, PastaCo entered into a valid written contract with Kitchenware to purchase a new commercial pasta machine from Kitchenware for $20,000, payable upon delivery, with delivery to be made to PastaCo on June 15th. The contract included a warranty by Kitchenware that the pasta machine had a capacity of 50 pounds.
On June 15th, Kitchenware delivered the pasta machine to PastaCo. Under inspection, PastaCo realized that the machine Kitchenware delivered only had a capacity of 30 pounds. Nevertheless, PastaCo decided to accept the machine. PastaCo paid the contract price and promptly notified Kitchenware that it had breached the contract by delivering a non-conforming machine. On July 2nd, PastaCo sued Dan and Kitchenware for breach of contract.
Dan does not dispute that the market price of tomatoes in PastaCo's area was $105 per bushel on May 15th and $110 per bushel on July 1st. Kitchenware does not dispute that the value of the pasta machine as warranted in the contract was $20,000, and the value of the machine as delivered was $10,000. Assuming Dan and Kitchenware breached their agreements with PastaCo, what damages could PastaCo reasonably recover?" Alright, as in our first hypo, we only need to focus on damages here.
The first thing we need to figure out is what PastaCo is entitled to recover from Dan. We're told that after Dan agreed to deliver 1,000 bushels of tomatoes for $100 per bushel, Dan unjustifiably repudiated the contract. That puts PastaCo in the first category of buyer [i.e. a buyer that never received the goods]. Based on our rule, PastaCo could be entitled to a refund of any amount already paid, and either cover or market damages. Let's address refund first.
We know that upon signing the agreement with Dan, PastaCo paid 50% of the contract price, or $50,000. Therefore, PastaCo is entitled to a refund of $50,000. Now let's address cover and market damages. We know that Dan agreed to deliver the tomatoes on July 1st and repudiated the contract on May 15th. After Dan's repudiation, PastaCo explored the possibility of covering by calling around for other quotes for the tomatoes, but ultimately decided not to cover.
Therefore, PastaCo is not entitled to cover damages. PastaCo is entitled to market damages. The question is how we should determine the market price. We're told that Dan does not dispute that the market price of tomatoes in PastaCo's area was $105 per bushel on May 15th and $110 per bushel on July 1st. If we were applying the sellers' rule, we would look at the market price at the time of tender, which in this case was July 1st.
But under the buyers' rule, we look at the market price at the time the buyer learned of the breach, which in this case was May 15th. So the applicable market price is $105 per bushel, and the difference between that price and the contract price of $100 per bushel is $5 per bushel. After multiplying that by 1,000 bushels, PastaCo is entitled to market price damages of $5,000.
Moving on to Kitchenware, we're told that Kitchenware agreed to deliver to PastaCo a pasta machine with a capacity of 50 pounds. Instead, Kitchenware delivered a pasta machine with a capacity of 30 pounds. PastaCo was aware that the machine did not conform to the contract, but chose to accept delivery and promptly notified Kitchenware of the breach. Because PastaCo accepted the machine, neither cover damages nor market damages would be appropriate.
Rather, we need to look at the loss in value of the machine as measured by the difference between the value as promised and the value of the non-conforming machine. We're told that Kitchenware does not dispute that the value of the pasta machine as warranted in the contract was $20,000, and the value of the machine as delivered was $10,000. Therefore, PastaCo is entitled to the difference of $10,000 as lost value damages. And with that, we're done for today.
We hope you found these hypos to be helpful examples of how to work through the specific expectation damages issues that arise under the UCC. If you enjoyed this episode of the Bar Exam Toolbox podcast, please take a second to leave a review and rating on your favorite listening app. We'd really appreciate it. And be sure to subscribe so you don't miss anything.
If you have you have any questions or comments, please don't hesitate to reach out to myself or Alison at [email protected] or [email protected]. Or you can always contact us via our website contact form at BarExamToolbox.com. Thanks for listening, and we'll talk soon!