Breach of Contract, Cancellation, Damages

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Author: Attorney Desk Reference Manual
Last updated: May 2003

Statutes and Other Law 
Remedies when Seller Has Breached the Contract (Overview) 
Cancellation of Sale 
Rejection as a Remedy 
Revocation as a Remedy 
What to do with the Goods after Cancellation 
Damages

Statutes and Other Law

Article 2 of the Illinois Commercial Code 810 ILCS 5/2-601 et. seq. and 5/2-701 et.seq.

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Remedies When Seller Has Breached the Contract (Overview)

Buyer Responses

The buyers have two possible responses to a seller’s breach of contract for the sale of goods. they can either:

  • cancel the sale or
  • keep and use the goods.

 

Cancellation Remedies: Rejection and Revocation.

There are two cancellation remedies (rejection and revocation of acceptance) and they are mutually exclusive.

Rejection is only available before acceptance of the goods. Revocation is available only after acceptance.

Of the two cancellation remedies, rejection is the more generous to the buyer. First, it is available for any breach of warranty, in contrast to revocation which can be used only when the breach substantially impairs the value of the goods to the buyer. Second, the burden of proof also differs. For rejection, the burden is on the seller to show no breach. For revocation, the burden is on the buyer. Third, to revoke acceptance, the buyer must show that s/he accepted the goods either in justifiable ignorance of the nonconformity or knowing of it, but reasonably believing it would be fixed. This requirement does not apply to rejection.

The Right to Rejection or Revocation

The right to rejection or revocation is dependent upon several possible restrictions, noted below. The buyers also have remedies, discussed below, for the seller’s breach if they decide to keep and use the goods.

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Cancellation of Sale: Relief

Designed as a Self-Help Remedy

Cancellation, whether by rejection or revocation, is designed as a private self-help remedy. It is exercised by the buyer notifying the seller and making the goods available to the seller to pick up. If all goes well, the seller takes back the goods, returns any money paid toward the purchase price and cancels the buyer’s outstanding obligations. If the seller fails to do any of these things, the buyer may seek judicial relief under the Code in the form of damages.

Relief Upon Proper Cancellation

810 ILCS 5/2-711 entitles the buyer to the return of all money paid toward the purchase price. Incidental and consequential damages (specified in 810 ILCS 5/2-715) are also available. Incidental damages include expenses reasonably incurred in inspection, receipt, transportation, and care/custody of rejected goods and any other reasonable expense incident to any delay or breach. Consequential damages include certain losses resulting from the particular needs of the buyer as well as injuries to the person or property proximately resulting from any breach of warranty.

The canceling buyer may also recover any extra cost incurred buying substitute goods. This remedy is called "cover" and is expressly authorized by 810 ILCS 5/2-712. The buyer is not penalized for failing to cover and may recover damages for increased cost of the goods under 810 ILCS 5/2-713.

If the seller refuses to return any payments made by the buyer, the buyer has a security interest in the goods to cover such payments and may sell the goods and keep the proceeds necessary to reimburse him. 810 ILCS 5/2-711(3).

The seller’s refusal to discharge its UCC duties of recognizing the buyer’s rightful rejection or revocation may also be actionable under the Consumer Fraud and Deceptive Business Practices Act (CFDBP).

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Rejection as a Remedy

Available Only Before Acceptance

Remember that rejection is available only before acceptance (revocation only after acceptance). The key is whether the buyer accepted the goods. Acceptance is a term of art under the Code. Essentially, it occurs when the buyer, by words, conduct, or silence, manifests an intention to accept the goods.

What Is Acceptance?

810 ILCS 5/2-606 provides three methods by which the buyer can manifest the intent to accept:

  • the buyer fails to reject after a reasonable opportunity to inspect.
  • the buyer signifies acceptance or signifies that goods are conforming, after a reasonable opportunity to inspect.
  • the buyer performs any act inconsistent with the seller’s ownership.

Important Notes

Important: Buyers do not accept goods merely because they have obtained title to them, have paid for them, or have possession of the goods.

Very Important: To properly reject the buyer must not only inspect and reject within a reasonable time, but must also give "seasonable" notification, that is notification of the rejection to the seller within the time specified in the contract or, otherwise within a reasonable time. There is no prescribed method of notification in the Code, but merely returning the goods to the seller is insufficient.

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Revocation as a Remedy

Conditions for revocation of acceptance. Once buyers have accepted the goods, they can cancel the sale only by revoking that acceptance. 810 ILCS 5/2-608 establishes five conditions:

  • the non-conformity must substantially impair the value of the goods to the buyer;
  • the buyer must have been justifiably unaware of the nonconformity when acceptance occurred, or if known, reasonably assumed that the seller would cure the nonconformity;
  • the revocation must occur within a reasonable time after the buyer discovers or should have discovered the nonconformity;
  • the goods must be in essentially the same condition as when delivered, except for damage caused by the nonconformity; and
  • the buyer must notify the seller of the revocation.

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What to Do with the Goods after Cancellation

Generally, the buyer has four options:

  • Hold the Goods Until the Seller Picks Them Up

810 ILCS 5/2-602(2) makes it clear that buyer has no duty to return the goods. The goods need only be held for a "reasonable" time, using reasonable care. The buyer does not even have this minor duty, and the buyer should not let the seller pick up the goods, if any payments were made toward the price or if any expense was incurred in inspecting, transporting or holding the goods. That gives rise to a buyer security interest. Holding the goods does not mean using them. Using them may constitute a new acceptance.

  • Return the Goods to the Seller

This may be the best option for reducing the inconvenience or expense of holding the goods with reasonable care or selling them. On the other hand, for the buyer who has paid money to the seller or incurred expenses, returning the goods to the seller may be unwise because it eliminates the only leverage the buyer has to recover out of pocket loss without a lawsuit.

  • Sell the Goods

The buyer can exercise this option where he has obtained a security interest in the goods, which usually arises when the seller fails to return a payment made by the buyer. Resale must follow the procedures in 810 ILCS 5/2-706 and is risky because a court might find the resale requirements were not met. On the other hand, resale has advantages because it allows the buyer to receive cash in hand soon after cancellation. Holding the goods requires waiting until litigation is final.

  • Using the Goods

Not recommended because it is inconsistent with an intent to cancel and may constitute a new acceptance.

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Damages 

 

Damages of the Buyer Who Keeps/Uses Non-Conforming Good

The buyer who decides not to cancel, but chooses to keep and use the goods, or who fails to properly cancel the contract, is liable for the purchase price. However, such a buyer is still entitled to damages to make him/her whole. Such damages include:

  • the loss from the breach, generally measured by the difference between the value of goods as warranted and their value as accepted. 810 ILCS 5/2-714. The former value is easy to establish (contract price). The latter value is difficult to prove. One useful and acceptable way of minimizing the problem is to use the cost of repair as the measure of damages.
  • Incidental and consequential damages. (specified in 810 ILCS 5/2-715).

Conditions Precedent to Any Remedy

There are three major limits on the buyer’s right to any Article 2 remedies. They are as follows:

  • Notice of Breach 810 ILCS 5/2-607(3) requires the buyer to give the seller notice of breach within a reasonable time after the buyer discovered or should have discovered the nonconformity. If buyers fail to give this notice, they are barred from all remedy under the Code. (Note: the contract may specify the time to give notice). The notice need not be written.
  • Seller’s Right to Cure Under 810 ILCS 5/2-508, the seller may have a right to cure the nonconformity before acceptance when the buyer tries to cancel by rejection. Failure to allow the seller the opportunity to correct the nonconformity when the seller has that right renders the attempted cancellation ineffective and wrongful. The buyer who so fails to allow a cure can still obtain breach of warranty damages pursuant to 810 ILCS 5/2-714.
  • Contract Limitations The contract may limit the Code remedies available to the buyer. The most common contractual limitation on remedies restricts the buyer to the remedy of repair or replacement instead of cancellation or damages. Another common limitation excludes recovery for consequential damages. Note, however, that some limitations on UCC remedies may be "unconscionable" under 810 ILCS 5/2-302.

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