UCC Contract Obligation to Mitigate Damages
This posts discusses a UCC (Uniform Commercial Code) contract, specifically, one in which a buyer and seller agree that the buyer will purchase a set amount of goods from the seller, but one party later changes his mind.
Seller’s Remedies Under a UCC Contract
When a contract is breached the seller can recover either his expectation interest or his reliance interest. The expectation interest is what you expected to make had the transaction gone through; the reliance interest is your out-of-pocket expense.
If goods are involved in the transaction, the remedies are covered by the UCC. Specifically, UCC 2-703 lists what options an aggrieved seller might have:
(a) Withhold delivery of such goods
(b) Stop delivery by any bailee as hereafter provided (Section 2-705)
(c) Proceed under the next section respecting goods still unidentified to the contract
(d) Resell and recover damages as hereafter provided (Section 2-706)
(e) Recover damages for non-acceptance (Section 2-708), or, in a proper case, the price (Section 2-709)
UCC 2-708 and UCC 2-706: Recovering Damages
Generally, in the event a buyer cancels a purchase, a seller will stop delivery, identify goods, and possibly finish them as allowed under the UCC. However the seller then must choose between recovery options (d), (e), or (f) above.
Generally option (f)—cancelling the contract—does not feel satisfactory to the seller. Options (d) and (e) are interrelated as they both contemplate recovering some form of the expectation interest: (d) (UCC Section 2-706) contemplates selling the goods and then recovering the difference between the sale price and the contract price; (e) (UCC 2-708 and UCC 2-709) contemplate recovering either the entire price of the contract or the difference between the contract price and the market price.
Mitigation of Damages
When a contract is breached, the non-breaching party has a duty to mitigate damages. Although UCC 2-708 and UCC 2-709 appear to say that a seller can recover his expectation interest and retain the goods, this is not the case. A seller has an obligation to mitigate his damages by attempting to sell the goods. Of course, there are exceptions to this; this might be the case in a lost volume sale, if the goods cannot be sold, or if the seller does not have possession of the goods, among other situations.
If someone has contracted to buy your goods, then breaches and refuses to, you are obligated to mitigate your damages. In mitigating your damages it is likely that you will need to sell the goods. When doing this, you must give the buyer notice of your intention to do so. The actual sale price of the goods is then deducted from the balance owed.
For example, imagine you have a $100 contract for 2 deliveries of apples, payable $50 down and $25 after each delivery of apples. The buyer repudiates after accepting one delivery and having paid $75. You would be required to sell the second delivery after giving notice. If the sale were for $20, you would be entitled to collect $5 from the buyer. If you had storage or other incidental fees associated with the sale, you could recover those as well.
If you are interested in having me review a transaction or contract to discuss your options in the event of a breach, please contact me.