What Remedies Does a Buyer Have When a Seller of Ag Goods Breaches the Contract?

Overview

 

Not all contractual transactions for agricultural goods function smoothly and without issues.  From the buyer’s perspective, what rights does the buyer have if the seller breaches the contract?  That’s an important issue for contracts involving agricultural goods.  Ag goods, such as crops and livestock, are not standard, “cookie-cutter” goods.  They vary in quality, size, shape, and moisture content, for example.  All of those aspects can lead to questions as to contract breach.

So, what rights does a buyer have if there is a breach?  A basic review of those rights is the topic of today’s post.

 

Right of Rejection

A buyer has a right to reject goods that do not conform to the contract.  Under the Uniform Commercial Code (UCC), a buyer may reject nonconforming goods if such nonconformity substantially impairs the contract.  A buyer usually is not allowed to cancel a contract for only trivial defects in goods.  For example, in a 1995 New York case, a manufacturer of potato chips rejected shipments of potatoes for failure to conform to the contract based on the color of the potatoes.  The court held that the failure to conform substantially impaired the contract and justified the manufacturer’s refusal to accept the potatoes.  The defect was not merely trivial.  Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444 (W.D. N.Y. 1995). 

Triviality is highly fact dependent.  It will be tied to industry custom, past practices between the parties and the nature of the goods involved in the contract.    

 

Right To “Cover” 

The traditional measure of damages for a seller’s total breach of contract is the difference between the market price and the contract price of the goods.  For example, in Tongish v. Thomas, 251 Kan. 728, 840 P.2d 471 (1992), the seller breached a contract to sell sunflower seeds to a buyer.  The buyer recovered damages for the difference in the market price and the contract price.  The UCC retains this rule, (UCC § 2-713(1)) but also allows an aggrieved buyer to “cover” by making a good faith purchase or contract to purchase substitute goods without unreasonable delay. UCC § 2-712(1). The buyer that covers is entitled to recover from the seller the difference between the cost of cover and the contract price.  UCC § 2-712(1).

Most of the agricultural cases concerning “covering” focus on the difference between the goods purchased as cover and the goods called for in the contract (cover goods must be like-kind substitutes), and the timeframe within which cover was carried out (there must be no unreasonable delay).  On the timeframe issue, a Nebraska case serves as a good illustration of how the courts analyze the issue.  In, Trinidad Bean and Elevator Co. v. Frosh, 1 Neb. App 281 494 N.W.2d 347 (1992), a navy bean producer was able to terminate a contract without penalty, even though prices had doubled by harvest (the delivery date specified in the contract).  The farmer notified the elevator in May, when market prices were identical to the forward price, that the farmer would not fulfill the contract later that fall.  The court noted that under the UCC when a seller repudiates a forward contract before delivery is required, the buyer is entitled to the difference between the contract price and the price of the goods on the date of repudiation if it is commercially reasonable for the buyer to cover at that time.  The court ruled that the elevator was not entitled to damages because it could have filled the contract at the forward contract price at the time it was notified of the seller’s contract repudiation.

Right Of Specific Performance

If the goods are unique, the buyer may obtain possession of the goods by court order.  This is known as specific performance of the contract.  Contracts for the sale of real estate or art work, for example, are contracts for the sale of unique goods and the buyer’s remedy is to have the contract specifically performed.  Monetary damages can be awarded to a contracting party along with specific performance if it can be shown that damages resulted from the other party’s failure to render timely performance.  See, e.g., Perry v. Green, 313 S.C. 250, 437 S.E.2d 150 (1993).

Nonconforming Goods

A buyer has a right before acceptance to inspect delivered goods at any reasonable place and time and in any reasonable manner.  The reasonableness of the inspection is a question of trade usage and past practices between the parties. If the goods do not conform to the contract, the buyer may reject them all within a reasonable time and notify the seller, accept them all despite their nonconformance, or accept part (limited to commercial units) and reject the rest. Any rejection must occur within a reasonable time, and the seller must be notified of the buyer's unconditional rejection.  For instance, in In re Rafter Seven Ranches LP v. C.H. Brown Co., 362 B.R. 25 (B.A.P. 10th Cir. 2007), leased crop irrigation sprinkler systems failed to conform to the contract.  However, the buyer indicated an attempt to use the systems and did not unconditionally reject the systems until four months after delivery.  As a result, the buyer was held liable for the lease payments involved because the buyer failed to make a timely, unconditional rejection.

The buyer’s right of revocation is not conditioned upon whether it is the seller or the manufacturer that is responsible for the nonconformity. UCC § 2-608. The key is whether the nonconformity substantially impairs the value of the goods to the buyer.

A buyer rejecting nonconforming goods is entitled to reimbursement from the seller for expenses incurred in caring for the goods. The buyer may also recover damages from the seller for non-delivery of suitable goods, including incidental and consequential damages.  If the buyer accepts nonconforming goods, the buyer may deduct damages due from amounts owed the seller under the contract if the seller is notified of the buyer’s intention to do so.  See, e.g., Gragg Farms and Nursery v. Kelly Green Landscaping, 81 Ohio  Misc. 2d 34; 674 N.E.2d 785 (1996)

Timeframe for Exercising Remedies

The UCC allows buyers a reasonable time to determine whether purchased goods are fit for the purpose for which the goods were purchased, and to rescind the sale if the goods are unfit.  Whether a right to rescind is exercised within a reasonable time is to be determined from all of the circumstances. UCC §1-204.  The buyer’s right to inspect goods includes an opportunity to put the purchased goods to their intended use.  Generally, the more severe the defect, the greater the time the buyer has to determine whether the goods are suitable to the buyer.

Statute Of Limitations

Actions founded on written contracts must be brought within a specified time, generally five to ten years.  For unwritten contracts, actions generally must be brought within three to five years.  In some states, however, the statute of limitations is the same for both written and oral contracts.  A common limitation period is four years.  Also, by agreement in some states, the parties may reduce the period of limitation for sale of goods but cannot extend it.

Conclusion

Most contractual transactions for agricultural goods function smoothly.  However, when the seller breaches, it is helpful for the buyer to know the associated rights and liabilities of the parties.