Sellers Remedies for Breach of Contract by a Buyer - Essay Example

Seller’s Remedies for Breach of Contract by a Buyer A. Introduction Rowan1 defines a contract as a binding agreement between two or more parties in which both or all the parties to the contract promise to do something. Once the parties to the contract have entered into a valid contract, they are required by law to abide by the terms of the contract, according to Whincup2. In case of breach by one of the parties to the contract, the law allows the aggrieved party to claim for damages and apply certain remedies3. Even though the law provides parties to a contract with certain remedies in case the other party breaches the contract, the adequacy of the remedies has been an issue of concern. The aim of the paper is to analyze the adequacies of the remedies available to a seller in the event of breach of contract by a buyer. B. Remedies Available To the Seller in Case a Buyer Breaches Contract Any breach of a valid and binding contract gives the aggrieved party the right to sue for damages from the party that has breached the contract4. English law of contract provides certain remedies to an aggrieved seller whose contract has been breached by a buyer as noted by Whincup5. It is worth noting that unlike buyer’s remedies that are dependent on the acceptance of an offer, seller’s remedies for breach of contract does not depend on the acceptance of the contract6. According to Rowan, regardless of whether the buyer has accepted the goods or not, a breach of the contract entered into with the seller gives the seller the right to sue for incidental damages or sue the buyer for fraud or third party tort in case the seller still has an interest in the goods7. The law of contract states that in the event that a buyer wrongfully revokes acceptance, rejects goods, or refuses to pay the amount due in respect of the goods before delivery, the seller is entitled by law to withhold the goods until the buyer pays the total amount due as agreed in the contract. Secondly, the seller also has the right under the law to stop delivery of the goods by any bailee or resell the goods to recover the damages. The law also permits the seller to recover damages from the buyer for non-acceptance of the goods or a price in some cases8. In addition, the seller is also allowed by law to cancel the contract altogether after giving the buyer in breach a notice and after allowing them more time to make up for their breach according to Article 64(1)(b) and Article 63(1) of the CISG9. 1 Seller’s Right to Damages The seller can claim damages from the buyer as long as they result from a breach of contract and the damages are not too remote according to Article 61(1)(b) of the CISG10. Essentially, the damages that the buyer pays the seller is aimed at putting the seller in the position he/she would otherwise have been had the contract well performed (Robinson v Harman [1848]) 11. Hadley v Baxendale ([1854]) 12 present the principles of remoteness in respect of damages. For damages to be applied to a party in breach of contact, the losses that the aggrieved party suffers must naturally flow from the breach. Alternatively, the losses that arise from possible breach of contract must have been contemplated by the parties to the contract. Some specific types of contracts are subject to legislations that prescribe remedies in the event a party breaches the contract. A contract that involves the sale of goods, for example, allows a party to recover special damages in line with section 54 of the Sale of Goods Act 1979 (SGA). A seller can claim compensation for reliance loss in case it is not easy to prove loss of expectation (Anglia TV v Reed [1972])13. As exemplified in Jarvis v Swans Tours Ltd [1973]14and Jackson v Horizon Holidays [1975]15, a seller can successfully claim damages for mental distress or disappointment in case the contract is, for example, a holiday contract. Furthermore, if the seller suffers physical inconvenience as a result of the buyer’s breach of contract, he/she may claim damages as was in the Bailey v Bullock [1950]16. In the case, a breach of contract by the buyer may affect future prospects adversely for the seller, the latter may seek compensation for the loss Dunk v George Waller [1970]17. In the event that a buyer has made advance payments for goods only to breach the contract later, the seller can hold onto the money depending on whether the advance payment was a guarantee or deposit. In the case of a deposit, the buyer cannot recover the payment, as it will be used to pay damages to the seller. A deposit, however, may be recovered by the buyer if he/she has a lien over it as it was in the case of Chattey and Another v Farndale Holding Inc. The seller can also recover damages from advance payments that are not deposits and refund the balance to the party in breach. It is worth noting, however, that in the event of only partial failure of consideration, an innocent part cannot recover the advance payment (Rowland v Divall [1923])18. In many cases, parties entering a contract expressly state a specific amount of money that a party will pay in case they breach the contract. Yet again, in other cases, the parties agree in the contract that in case a party breaches the contract, they will forfeit the goods due to them. These measures are often instituted in contracts to ease damage recovery, avoid arguments related to remoteness of losses, avoid problems related to proving actual loss, and as a way of assuring the other party that they intend to be bound by the contract19. Since penalty clauses in contracts are generally not enforceable, it is upon the party in breach to prove that the sum stated in the contract is a penalty as opposed to a liquidated damage (Robophone Facilities Ltd v Blank [1966]20). What this means is that the seller will probably have no award for the damages they suffer solely by relying on the penalty clause of the contract. Dunlop Pneumatic Tyre Co Limited v New Garage & Motor Co Limited [1915]21 sets the tests for establishing between liquidated damages and penalties. While no public policy exists to guide the upper limit that a party to a contract can claim for damages, the Unfair Contract Terms Act 1977 often imposes a test on how reasonable the damages claimed are with respect to the exclusion clause of a contract22. The degree of damages suffered due to non-acceptance of goods or due to repudiation of the contract by the buyer is deemed to be the difference between the market price of the goods at the time of entering into the contract and the contract price, plus any other incidental damages resulting thereof23 (Bettini v Gye (1876)) 24. According to article 50 of the Sales Of Goods Act 1979 Part 6, a seller whose contract has been breached by a buyer by non-acceptance of good has the recourse of suing for damages for the refusal to accept the goods25. The SGA 1979 part 6 states that the measure of the damages that a seller can claim is the estimated loss that results directly due to the buyer’s breach of the contract. In such an event, the seller may recover the profit that might have accrued plus any other incidental damages resulting from the breach of the contract, according to Rowan26. The law entitles the seller to recover the price of making the goods conform to the contract and any other incidental damages suffered in case of a breach of contract by the buyer27. This is expressly spelt out in article 49 of the Sales Of Goods Act 1979 Part 6. The article states that, once the seller has passed the titles of the goods to the buyer, but the buyer wrongfully repudiate or declines to pay for the goods delivered, then the seller has the right to maintain an action against the buyer for the price of the goods delivered28. In this case, the law stipulates that as long as the seller has passed the risk of the goods to the buyer, even if the buyer has not accepted them, he/she will be allowed to claim the cost incurred for conforming the goods to its contract condition29. This entitlement also exists where the seller is not able to resell the goods that the buyer has repudiated. 2 Specific Performance A court of law may issue a decree compelling a party to honor their contractual obligations as stated in article 62 of the CISG30. The remedy for specific performance is also spelt out in articles 52 of the Sales Of Goods Act 1979 Part 6, where the court may decree an action for specific performance for breach of contract. This is often only the case where damages do not provide adequate remedy. In Falcke v Gray [1859]31, for example, the court ordered specific performance given that the subject matter of the contract was unique. A court, however, may not issue a decree toward specific performance in case the subject matter be replaced even after a long period of delay (Societe des Industries Metallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyds Rep 46)32. In many cases, a court will not issue an order of specific performance where a contract requires constant supervision or performance over a long duration and obligations of the parties are not properly defined. In Co-op Insurance v, Argyll Stores [1997]33 the House of Lords refused to issue specific performance. The House of Lords made this decision on the basis that a covenant to carry on a business would require the court’s constant supervision to the extent that if the party in breach failed to comply with the courts order, the court would punish him for contempt of court. Whenever a court issues specific performance, the activity to be done is usually clearly defined (Jeune v Queens Cross Properties Ltd [1973])34. There are exceptional cases where a court can issue specific performance even though the order would require the court’s constant supervision. In for example, Rainbow Estates Limited v Tokenhold Limited and another [1998]35, the judge noted that the old rule served no good or perhaps had exceptions to it. The court ordered specific performance in this case to the extent that tenants had to spend 300,000 Euros on repairing the flats36. Courts often order specific performance where building contracts are concerned. On the other hand, they are often reluctant to order specific performance where the activity to be carried out will take a long duration. Specific performance may not be issued in the case of contracts that require personal services owing to the fact that it would limit the freedom of an individual (Chappell v Times Newspapers Ltd [1975])37. 3 Injunction An injunction is yet another equitable remedy that sellers can rely on to safeguard his/her business from loss. An injunction may be awarded by a court at its discretion in case damages would not adequately compensate the claimant38. A seller can seek a court injunction to stop the buyer from starting or continuing to breach a contract of if they need to compel the buyer to honor a contractual obligation. In this respect, an injunction may be prohibitory or mandatory. Courts may issue interim injunctions to restrain a party from acting in a certain way much as they may issue special injunctions to preserve the assets or property of a party before trial (Mareva injunctions and Anton Piller orders) 39. 4 Seller’s Right to Withhold Goods, Retain Title, and Retain Proceeds of Sale The law provides that in the event that the buyer breaches a contract or where the buyer becomes insolvent, the seller can sell the goods withheld for his/her personal gain, regardless of whether the title of the goods had passed to the buyer or not40. As long as the seller does this in good faith and in a reasonable manner, the law entitles the seller to recover the gains resulting from the difference between the contract price and the resale price and any other incidental damages less the expenses saved due to the buyer’s failure to honor the contract41. This implies that the seller is entitled under such circumstances to retain any profit generated on resale. However, the seller must meet certain conditions before proceeding with resale. In this regard, the law requires that the resale must be conducted in private, public, and unit or in parcel42. In case the seller resells the goods in public, it must be at a usual place in which one of the parties is available. At the same time, the resale must be conducted by auction. The law also requires the seller to give notice of resale to the buyer who breached the contract. If the goods are not perishable or are likely to decrease in value due to increased delay, the seller must notify the buyer of the exactly place and time where the resale is to take place. If the seller fails to abide by these rules, then the resale will be deemed inconclusive and the seller will be compelled to prove the damages suffered and the market price of the goods. The law entitles the seller to withhold goods in case a buyer repudiates or breaches a contract43. For instance, in the event that the buyer becomes insolvent or bankrupt before delivery of the goods, then the law entitles the seller to withhold the goods in question until the full price is paid. This is important because it ensures that the seller does not run at a loss because of the insolvency of a buyer. In cases where the seller has the right to withhold goods due to breach of contract, the seller is also permitted to stop any good that may have been on transit for delivery to the buyer44. In this regard, the seller may stop the delivery of the good until the buyer fulfills his or her contractual obligation45. The law provides that as long as the seller has stopped the delivery of goods on transit to the buyer, the seller acquire the right of the goods as though the goods had never been delivered to the buyer. The law provides that once a buyer has accepted the goods under the contract made with the seller, he/she immediately owes the seller the price of the goods as provided for in the contract. Therefore, in the event of a breach of the contract, the seller’s immediate remedy is to claim for the price and any other incidental damages46. The same remedy is available to the seller even in circumstances where the goods are damaged or lost within a reasonable time after the passage of the risk of loss or damage to the buyer. However, the seller must prove that the goods conformed to the terms of the contract. The law further provides that in the event that a buyer receives goods when he or she is already insolvent and thus cannot pay for the goods, the seller have the right to reclaim the goods after becoming aware of the insolvency of the buyer47. The law also requires the seller to claim the goods within ten days after delivery, even though actual repossession may take place later. C Effectiveness of the Remedies Available to Sellers Sellers have certain remedies in case of breach of contract by buyers. The main remedies that sellers can apply with the leave of court in this respect include repudiation, injunction, rescission, specific performance, and seeking compensation for damages. Outside the courtroom, the seller can withhold goods, retain title of goods, and retain proceeds of sale of goods as potential remedies in the event that a buyer is in breach of a contract. A specific performance is enforceable by a court, provided that the seller promptly seeks such an order in timely fashion and considering the effects that such an order will have on the buyer and third parties. The law entitles a seller to seek a decree from the court ordering specific performance from the buyer48. The order of specific performance may require the buyer to fulfill his contractual obligations as agreed at the time of entering into a contract with the seller. This implies that the buyer might be compelled by law to pay the full price of the goods, even if the buyer decides to repudiate the goods. Such an order, however, is not effective in cases where a contract is devoid of adequate compensation and may not be ordered if the contract involves nominal consideration. The remedy of specific performance is also facing the challenges of enforceability by the courts. For instance, in order for the seller to receive the remedy of specific performance, the court requires the seller to prove that specific performance is necessary. This is by proving that no adequate remedy is available at law and that the only appropriate remedy available is the specific performance. This is very challenging to sellers in a court of law. At the same time, even if the seller proves that specific performance is an appropriate remedy, the seller is never guaranteed specific performance49. This is because awarding specific performance is not a right, but a matter of grace, which depends on the discretion of the court. Further, enforcing specific performance is challenging since it requires the cooperation of the two parties to a contract. Similarly, an injunction may not be granted under the same terms as a specific performance. Where damages suffice, specific performance cannot be applied. Specific performance when ordered by a court ensures that the seller retains the right to take possession of the good that is being disputed. Like it happens with an injunction, a buyer who fails to abide by the court order may be subject to criminal punishment for contempt of court. This in itself gives the seller an assurance that the buyer will more likely honor their obligation as prescribed in the contract. Quasi contract remedies are applicable especially where there seems to be no remedy for a contract breach. These remedies, however, may not be effective if the seller delays to act within a given period of time as prescribed by the Limitation Act of 1980. Self-help remedies such as retention of title, retaining proceeds of sale, and withholding payment and set off give the seller a chance to recover part or whole of their losses as a result of a breach by the buyer. However, these methods may not be effective if their respective clauses are not properly worded. For example, a seller may fail to recover their losses or damage in cases where the identity of good changes as it goes through a manufacturing process. Furthermore, where the goods that have been supplied by the seller have low scrap value or are perishable, retention of title may not be effective to the seller. Repudiation basically involves ending a contract owing to one party’s breach of a condition of a contract. Anticipatory repudiation goes a long way in preventing a seller from suffering losses that they would otherwise suffer if they honor their obligations as prescribed in a contract. This also helps the seller mitigate damages that may result in a breach. In itself, instituting repudiation may not favor the seller as much as damages since they may have suffered other losses (such as disappointment and physical inconvenience) as a result of the buyer’s breach of contract. Payment of liquidated damages to the seller by the buyer when in breach of a contract is quite effective in ensuring that the seller’s losses are reversed. However, the claim for damages based on sums that the court perceives to be extravagant and unconscionable will probably work against the seller since the court will refrain from enforcing a penalty clause. D Conclusion A contract is a binding agreement between two or more parties in which both or all the parties to the contract promise to do something. It is worth noting that not all agreements entered into between a buyer and a seller is valid and binding. Only a valid contract is binding on the parties to a contract. This implies that a contract that is not valid is not binding on the parties50. In such contracts, any of the parties to the contract can terminate the contract at will without remedy to the aggrieved party or parties. However, when one party to the contract breaches a valid contract, the aggrieved party can file a suit for breach of contract. In such a circumstance, the court will award the aggrieved party certain remedies for breach of a valid contract. Some common remedies that a seller may apply in case a buyer breaches contract include repudiation, injunction, rescission, specific performance, and seeking compensation for damages, withholding goods, retaining title of goods, and retaining proceeds of sale of goods. Each of these remedies has its specific benefits and limitations in terms of effectiveness. This being the case, sellers may opt to apply a combination of remedies to heighten their chances of getting protection when the buyer breaches contract. For example, in addition to rescinding, a seller can claim damages from the buyer. References ACL Mullis Termination for Breach of Contract in C.I.F. Contracts Under the Vienna Convention and English Law; Is There a Substantial Difference? ‘Contemporary Issues in Commercial Law’, (Sweet & Maxwell London 1997) 137-160. http://www.cisg.law.pace.edu/cisg/biblio/mullis.html (22 December 2013) AE Butler A Practical Guide To CISG: Negotiations Through Litigation Chapter 7 Seller’s remedies (Aspen Publishers London 2007) http://www.cisg.law.pace.edu/cisg/biblio/butler6-ch7.pdf (22 December 2013) Cornell University ‘Uniform Commercial Code § 2-703 Seller's Remedies in General’ http://www.law.cornell.edu/ucc/2/2-703 (22 December 2013) e-lawresources ‘Remedies in contract law’ http://www.e-lawresources.co.uk/Contract-remedies.php (22 December 2013) J Edelman Profits and Gains from Breach of Contract 2001 ‘Lloyd’s Maritime and Commercial Law Quarterly’ 9 Law Teacher. ‘Sales Of Goods Act 1979’ http://www.lawteacher.net/contract-law/acts/sales-of-goods-act-1979-part6.php (22 Dec. 2013) M H Whincup, Contract law and practice: The English System with Scottish, Commonwealth, and continental comparisons (Kluwer Law International London 2006) Q Zhou ‘Is Seller's Efficient Breach Possible Under English Sale Law’ http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=qi_zhou (22 December 2013) R Birmingham Breach of Contract, Damage Measures, and Economic Efficiency 1970 ‘Rutgers Law Review’ 24 273 S Cotton ‘Remedies for breach of contract’ http://uk.practicallaw.com/7-101-0603?q=&qp=&qo=&qe= (22 December 2013) S Rowan Remedies for breach of contract: A comparative analysis of the protection of performance (Oxford University Press Oxford 2012) Read More