Let the Buyer Beware: If You Don’t Take the Goods, the Damages Might be More Than You Expect

In 49 states, sales of goods are governed by the Uniform Commercial Code. One major part of the Code is a series of provisions describing how damages are calculated when either a buyer or a seller violates a sales agreement. These provisions, however, give sellers a choice of how to calculate damages, and the Oregon Supreme Court has recently ruled that the decision of a seller to resell does not lock the seller into one of those choices.

The case involved a sale of grass seed from a wholesaler to a retailer. The retailer agreed to buy two years’ crop of seed from specified fields at a specified price. When the market price dropped, it refused to accept some of the seed, and everyone agreed that it had no excuse. The wholesaler managed to resell some of the refused seed for more than the market price.

The Code allows sellers a choice of calculating damages based on the difference between the agreed price and the market rate, or the agreed price and the resale price (or several other remedies, including canceling the deal). The wholesaler claimed the market price calculation for all of the refused seed, including the seed that it resold. The retailer argued that because the basic principle of Code damage calculations is to put each party in as good a position as if the deal had gone through properly, the damages for the resold seed should be calculated based on the resale price. This could have saved the retailer about 11 percent of the agreed price on some of the seed. Experts commenting on the Code and courts in states other than Oregon have divided over this issue.

Before the Code was enacted in Oregon in 1961, the law was that a seller’s decision to resell goods locked the seller into a resale price calculation. The legislature made official comments to the Code, however, and it noted that it did not intend to have a seller’s conduct considered as being a decision to take one remedy over another. It also stated, however, that a buyer did have to make a choice. This, the court decided, overrode the general idea that damages were only supposed to compensate the seller. As a result the court ruled for the wholesaler and allowed it to claim damages based on the market rate for its entire claim.

In Washington, sellers also may choose between resale and market price in a damage calculation, and they are not locked into a resale price by selling.

Sellers should be aware, however, that they have to warn the buyer that they plan to resell, as this gives the buyer one last chance to take the goods. If the seller doesn’t give notice, the resale price can’t be used. (It can be used to help show what the market rate is, but the buyer can always try to show that the resale was a lowball.)

Most of my experience in cases involving sales of goods involves questions of who was at fault, such as whether a buyer could refuse the goods for some reason, or, in one case, whether a seller was given enough of a chance to get a replacement for bad goods. Calculating the damages comes into play after the question of fault is resolved.

A buyer who is considering backing out of a deal may want to talk to a lawyer about its risk. It should be prepared to discuss what it thinks the market rate is and what the seller might be able to resell at, and be prepared to pay damages based on the lower of those figures. Sellers notified of a refusal to accept goods may want to get advice on how to notify the buyer that the goods may be resold. Both sellers and buyers, also should be ready to discuss who is at fault in the breakdown of the deal, as that will determine who pays.

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