Right to Adequate Assurance of Performance: Be Clear!

Section 2-609 contemplates a situation where either party to a sales contract has ‘reasonable grounds for insecurity’ regarding the other party’s performance, and the insecure party wants some evidence that the other party is willing and able to perform. Subsection (1) to Section 2-609 states as follows:  

The cases are clear that the determination of whether or not a party’s stated grounds for insecurity are reasonable is a question of fact. In this regard, I want to emphasize a point made repeatedly throughout these posts, and particularly in connection with the discussion of Section 1-302(b) which allows parties to an agreement to set standards for what is or is not ‘reasonable’, provided the standards set are not ‘manifestly unreasonable’.  If standards for ‘reasonableness’ are in fact stated, the inquiry will be limited to: were the called for standards met, and if so, were the standards ‘manifestly unreasonable’? If the standards are not manifestly unreasonable, and proven, inquiry ends. Parties to a contract, can if they choose, create provisions for what ‘reasonably constitutes’ insecurity which would frame the inquiry as stated.

A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

Although there are some cases which state that an oral demand for ‘adequate assurance of due performance’ is sufficient, the majority of cases follow the clear language of the statute which requires that the request for adequate assurances be in writing. Further, the cases are clear that the writing which purportedly seeks adequate assurances actually make it clear in the writing that such a demand is being made.  Mere objections as to performance do not meet the standard of a demand for proper performance which is required to gain the benefit of the provisions of the section. As discussed in the last post regarding Section 2-607(5)(a), the best way to insure that the requirements of a particular provision are complied with is to track the language of the statute.

In Alaska Pacific Trading Company v Eagon Forest Products 85 Wn App 354, 93 P 2d 41 (1997) one of the issues considered by the court was whether the purported demand for assurances was properly stated.  The case involved a sales contract by which ALPAC was to sell 15,000 cubic meters of logs to Eagon.  The lumber was to be shipped from Argentina to Korea.  Between the time of the execution of the contract in April of 1993 and time stated time for shipment, the market price for the lumber dropped significantly. Eagon became tentative about performing under the contract and ultimately, ALPAC came to the conclusion that Eagan was not going to accept the logs, and decided not to ship. In discussing whether or not a proper demand for adequate assurance of performance had been made by ALPAC, the court stated:          

Here, while Ahn [Eagon] had some idea that Kimura and ALPAC were concerned about the status of the contract, he did not understand that ALPAC would withhold performance as a result….If we were to hold that, in every case where a contract becomes less favorable for one party, general discussions between the parties can be considered requests for assurances, we would defeat the purpose of 2-609. That section requires a clear demand so that all parties are aware that, absent assurances, the demanding party will withhold performance. An ambiguous communication is not sufficient.   Eagon at 357

When merchants are involved, the determination of whether or not a particular performance was such as to properly give rise to insecurity will be determined by commercial standards:

          (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any                 assurance offered shall be determined according to commercial standards.

This is consistent with Article 2 in general and the drafters’ consistent direction to focus on what is going on in the commercial world, not simply the legalese involved.  As stated in comment 2 to Section 2-202:

[This section definitely rejects] the premise that the language used has the meaning attributable to such language by rules of construction existing in law rather than the meaning which arises out of the commercial context in which it was used;

This policy applies throughout Article 2 and, through the expanded definition of good faith, arguably throughout the Code.

         Once a proper demand for adequate assurance of performance has been made, the failure to provide that assurance is a repudiation of the contract:

 After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.  Section 2-609(4)

Section 2-609 provides parties with a remedial type course of action which is short of litigation, but clearly creates a situation where insecurities about performance are either effectively dealt with through adequate assurances of performance or repudiation occurs as a result of not providing those assurances.  Firms dealing in sales and leases of goods would be well advised to create a template for properly activating and utilizing Section 2-609.  This is in addition to drafting a contract provision which sets standards for ‘reasonable grounds for insecurity.'

A Practical Application

During the past year, this blog has presented a number of creative readings and applications of a large number of Code Sections.  Among those section are Sections 1-201(b)(20) which defines good faith; Section 1-304 which imposes a duty of good faith in all contracts or duties under the Uniform Commercial Code;  Section 1-103(b) involving supplemental laws applicable to the Code, and Section 2-607(5)(a) which involves ‘vouching in’ a seller of goods whose buyer is sued.

An Ohio court recently considered some of these claims in an opinion which is linked to this post.  As you will see, consistent with the majority of cases which have addressed the issue, the court found that there was no independent cause of action for a breach of the duty to act in good faith.  However, the court did not discuss whether certain remedial provisions were lost if a party were not found to have been acting in good faith. Such a result is consistent with the comments to Section 1-304 as discussed in a previous post. The court did not address this point since it was not before the court on the plaintiff’s motion for summary judgment. As the court noted it did not consider the report I wrote which was a correct ruling.  It is the job of the attorneys to present respective interpretations of the law to the court, so that the court can make the most informed decision possible.

Section 2-607(5)(a) was discussed in relatively recent post. If you recall my suggestion was to be certain to track the language of the statute to avoid having to prove ‘substantial compliance’.  In the case under discussion, a good letter was drafted, but not one that tracked the language of Section 2-607(5)(a).  Fortunately for the plaintiff, the court found substantial compliance with the notice requirements of Section 2-607(5)(a) and found for plaintiff on the most critical issues of the case.  As discussed in the opinion, this finding rendered plaintiff’s cause of action for collateral estoppel moot. 

Finally, the court did not discuss the recovery of attorney’s fees under Section 2-607(5)(a) since it was not before the court.  An award of attorneys’ fees is supported by case law which was discussed in the post on Section 2-607(5)(a). It may be that if the case goes to trial they can be recovered.

For those of you who have read all the posts, you will see many things in the court’s opinion.  I have posted the opinion and the Expert Witness Report so that you can see some of the concepts we have discussed in action.  I also do so to emphasize how critical it is to have the facts down cold. That is how good arguments are put together.  Finally, to emphasize the role of the attorney in UCC cases.  Courts are busy.  Courts want to reach the right result.  They will make decisions based upon what is properly pled and in the record.  The attorney who consistently does this will win almost every time.

Find the Opinion and Expert Witness Report here.

A Case for Setting Standards

            In our discussion of Article 1, it was noted that the Uniform Commercial Code embodies freedom of contract as an underlying principle.  Section 1-302 is a codification of this basic principle. Section 1-302(1a) states as follows:

(a)  Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.

The limits of the abilities of the parties regarding freedom of contract, as well as some of the specific freedoms granted are noted in section 1-302(b)

(b) The obligations of good faith, diligence, reasonableness, and care prescribed by [the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.

            It is my belief that parties should set standards for good faith, diligence, reasonableness and care whenever contracts are being drafted. Setting these standards removes the question from the jury or the court as to the actual legal question and restricts inquiry to the question of whether or not the fact standards set by the parties have been met and whether or not the standards set are manifestly unreasonable.  An excellent example of the importance of setting standards can be found under Article 7 in connection with the storage of goods.

Section 7-204 deals with the duties of a warehouse to exercise care with respect to goods it has stored.  Subsection (a) to Section 7-204 states as follows:

A warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. However, unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.

It is seen that the warehouse must exercise the level of care which a ‘reasonably careful person’ would exercise under similar circumstances.  This of course, is a standard and used frequently in many areas of law. 

            What is or is not consistent with the standard enunciated however, can be dramatically different than what one might reasonably believe would meet that standard.  This is illustrated in United States Borax and Chemical Company v. Blackhawk Warehousing and Leasing Company 586 S.W. 2d 248 (Ark. CA, 1979). Borax involved the storage of goods consisting of agricultural chemicals owned by U.S. Borax pursuant to a warehousing agreement between the parties. In early 1977 goods belonging to Borax were stolen from Blackhawk. The goods in question consisted of 288 five gallon cans of a product known as Cobex.  The court described the burglary as follows:

The burglars entered the building by ripping open one of the side panels. Then chemicals which had been stored next to the wall were pulled outside to allow entry into the building. After entry a padlock and chain were cut to allow a door to be opened. A forklift truck was "hot wired" since it was locked. Then it was used by burglars to move a sailboat blocking the path to appellant's stored chemicals. Other chemicals in the way were shoved aside, and the cans of appellant's stored chemicals were taken from the premises. The loss sustained by the plaintiff amounted to $23,658.28 and suit was brought for that amount.  at 833-834

Defendant was granted a directed verdict by the trial court, and Borax appealed, stating that defendant was negligent in not providing the following specific security measures:

(a) In failing to provide watchmen inside the facility;

(b) In failing to have any burglar alarms or similar systems installed in the warehouse;

(c) In failing to provide roving patrols outside of the building;

(d) In failing to place palletized storage directly against the inside wall at the point of access as was done against other walls to prohibit any attempt to enter from the outside;

(e) In failing to provide other adequate security measures which would have prevented the break-in and subsequent loss to the plaintiff;

(f) In failing to be put on notice that extra security measures were needed after a previous break-in occurred at the warehouse approximately 7 months before the loss was sustained by the plaintiff. at 836

            The court discussed the security procedures in effect in the context of general negligence standards.  In quoting Arkansas case law, the court states the question as follows:

The failure to do something which a person of ordinary prudence would do under the circumstances, or the doing of something that a person of ordinary prudence would not do under the circumstances.  at 836-837

The court  reversed the trial court’s decision concluding that the question of reasonable care should have gone to the jury. 

            As a result of the agreement between the parties, the determination of reasonable care was placed in the hands of the court.  This worked out favorably for Borax, but the warehouse could have avoided the whole problem by simply stating the security measures being taken; selecting standards which are not ‘manifestly unreasonable; and then proving that those standards were met.  I am not an expert in warehouse security procedures, but it is clear that the burglary in question required considerable effort to succeed.  It may be that the suggestions made by Borax have merit, but it may also be that Blackhawk had adequate security in place.  If Blackhawk had properly drafted the warehouse receipt, the problem could have been avoided.

            The same rationale applies to every written contract.  Parties who set the standards of conduct to govern their transaction eliminate the problems which Blackhawk Leasing had to deal with in the Borax case.  In presenting this approach to the other party, it should be emphasized that everyone benefits from the certainty of setting standards.

Year End Evaluation: Going Forward

This post concludes one year of continuous posting on the UCC-Made Easy blog.  It has been fun, educational and highly productive.  When the blog was first suggested by and discussed with Conner, we agreed to evaluate at this point to determine a strategy for going forward.  The blog cannot be valued in a standalone context, but must be viewed in a larger one.  There are other matters which must be attended to.  For example, in two weeks I will be presenting a presentation entitled: Juveniles, Detention and Freedom to the Missouri Juvenile Justice Association and members of the Missouri State Bar Association.  Time spent writing about bills of lading must be viewed not just in the context of this blog, and the positives, but also what it takes from other areas. In October, I will be doing the most important empowerment presentation for professionals I have ever done.  This takes months to prepare.

            Upon evaluation, I have decided to keep doing the blog, but not on a weekly basis. The blog has demonstrated my core philosophies and approach to the Uniform Commercial Code, as well as the manner in which I approach litigation and drafting.  But it is extremely tedious and linear writing—both of which, not incidentally—have benefitted me greatly.  That stated, it is highly inefficient in a teaching context as opposed to vertically integrated fact patterns that provide information on many levels.   By way of illustration, I have done between 55-60 posts. The earlier posts were short, but the majority of them averaged 1200-1400 words.  If we choose the midway of 1300, the posts generated 78,000 words, and covered most of Article 1, a good portion of Article 3 and a small introduction to Article 2 and  Article 7.  The reason this is so many words is because it is written on a linear level—basically, this is what this section means in this context.  I would estimate that at this rate it would take well over a millions words to get to a satisfactory level of content.

The Uniform Commercial Code Made Easy by way of comparison has a total of 115,569 and covers an overwhelming majority of the Code. Many of the words are contained in the detailed indexes of the book, so the actual number is even shorter. While writing The UCC Made Easy required a great deal of discipline, it provided the opportunity to operate at a much higher level during the process. The book is written at, and operates at multiple levels at the same time.  Much like the text of the Code, which is not surprising since the book is predicated upon many factual assumptions upon which the Code was written.  From my perspective, the efficiency of the book is exponentially higher than a linear text.  That is not to say one can’t learn from a linear text; indeed, it may be more efficient for a certain type of mind. 

By way of analogy, linear instruction is like an enormous warehouse covering hundreds of thousands of square miles.  Multilayered and Multidimensional instruction is like a massive skyscraper.  Depending on which floor you exit, you will be presented with multilayered Code discussions and sections. It requires inferential reading and effort, but the net effect is mastering the book, and achieving an extremely high level of Code knowledge and success.

The point of all this is that I must move some of the 7-10 hours spent each week on the blog to other areas.  Productivity is not an option; direction can be in some situations.  Right now I am traveling, and will not be doing a UCC content post during March.  Thank you for reading, and I look forward to communicating with you in the near future.

Documents of Title: Shipment Under Reservation

The sale of goods often involves the commercial movement of goods by carrier and sometimes the subsequent storage of those goods.  Article 7 of the UCC- Documents of Title- governs the shipment of storage of goods under the Uniform Commercial Code.  At the outset, it must be pointed out that shipments of interstate transactions are governed by the Federal Bill of Lading Act 49 U.S.C.801 et. seq., and the storage of agricultural commodities may be governed by the United States Warehouse Act 7 U.S.C. 241.

A major distinction between these two acts is that the FBLA is a mandatory act, governing shipments in interstate commerce, while the USWA is a voluntary licensing statute in which a warehouse can apply for approval by the Secretary of Agriculture. 

The purpose of the posts relating to the movement and storage of goods will be confined the Uniform Commercial Code; however, given the statistic provided by the Farm Bureau Agency that 47% of all warehouse space in the United States falls within its purview, anyone involved in matters involving the storage of commodities should definitely investigate the applicability of the USWA to a particular transaction.  With respect to other goods which may be stored, Article 7 will control.

The following is an excerpt from The Uniform Commercial Code Made Easy and is designed as a general introduction to bills of lading including the delivery of goods under a bill of lading.  Special emphasis is given to the concept of a ‘shipment under reservation’ which is governed by Section 2-505.

V.    DELIVERY OF GOODS

(A)  Bill of Lading

(B)  Person Entitled to Take Possession of Goods;

          Person Entitled Under the Document.

(A) Bill of Lading[1]

When the carrier receives the boats it will issue  a document known as a bill of lading.   This document will acknowledge the carrier’s possession of the boats, and in addition will contain a contract for delivery of the boats. In such a situation, the carrier is called a bailee.[2] The person from whom the carrier receives the goods is called the consignor,[3] here, Royal. Since the contract calls for delivery to the order of Royal, Royal would also be the consignee.[4]

                                                 Form of Document of Title

A document of title can take one of two forms. It can be negotiable or non negotiable. Section 7-104 specifies when a document is negotiable or non-negotiable:

• (a)  Except as otherwise provided in subsection (c) a  document of title is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person;

(b)  A document of title other than one described in subsection (a) is non-negotiable.

(c)  A document of title is non-negotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is non-negotiable.

In the instant situation, the goods are to be delivered to the order of a named person, Royal. Thus, the form of the bill of lading falls squarely within Section 7-104(a). As is obvious from the quoted definition, whether or not a bill of lading [or any document of title] is negotiable or non-negotiable is simply a matter of form. To the extent that the bill of lading does not have the proper form, it is non-negotiable.[5] The distinction between negotiable and non-negotiable documents pervades all of Article 7. In fact, the last sentence to the first paragraph of the comments to Section 7-104 states as follows:

The distinction between negotiable and non-negotiable documents in this section makes the most important sub-classification employed in this article....

There are many reasons under Article 7 as to why this is so; it is, however, beyond the scope of this memorandum to discuss all of these. In the instant situation, the question for our purposes is: how does procurement of a negotiable bill of lading to the order of Royal reserve a security interest in Royal?  That is, how does Royal’s procurement of a negotiable bill of lading to its order secure payment or performance of an obligation, per Section 1-201(b)(35). The simple straightforward answer is that the carrier would be required to deliver the boats only to Royal, inasmuch as Royal would be the holder of the negotiable document (bill of lading),  and delivery to anyone else would be unlawful. Again, some further analysis is required to illustrate how this works under Article 7.

(B) Person Entitled to Possession of the Goods; Person Entitled under the Document

The first relevant section in dealing with this question is Section 7-403(a) which reads in pertinent part as follows:

The bailee shall deliver the goods to a person entitled under the document of title if the person complies with subsections (b) [dealing with bailee’s lien] and (c) [surrender or notation of deliveries on document of title]....

As previously noted, the bailee in the instant situation would be the carrier, who, per Section 7-403(a) noted above, must deliver to a “person entitled under a document,” which is defined under Section 7-102(a)(9) ) as follows:

Person entitled under the document means the holder, in the case of a negotiable document of title, or the person to which delivery of the goods is to be made by the terms of, or pursuant to written instructions in a record under, a nonnegotiable document of title.

As indicated, since a negotiable bill would be used here, the “person entitled under the document” would be the holder of that document. Holder is defined under Section 1-201(b)(21)(B) as ‘the person in possession of a negotiable tangible document of title if the goods are deliverable to bearer or to the order of the person in possession’. Thus, as long as Royal maintains possession of the negotiable document of title issued to its order, Royal is the person entitled under the document as the holder of the negotiable document. Should the carrier deliver to anyone other than the holder, it would be an improper delivery for which the carrier would be liable.  The carrier knows this and will only deliver to Royal or the subsequent holder of the document. Royal doesn’t want the boats; it simply wants to maintain possession of the bill of lading until it gets paid.

The next series of posts will roughly track the statutory provisions discussed in the memorandum above as it relates to bills of lading.  Warehouse receipts will be covered thereafter.  

 

---

          [1] “Bill of Lading” means a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.... Section 1-201(b)(6).

A bill of lading is a document of title under Section 1-201(b)(16). That section states as follows:

“Document of title” includes dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person or possession of it is entitled to receive, hold and dispose of the document and the goods it covers. To be a document of title a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass.

The use of documents in commercial transactions is extremely important and will be discussed in some detail in this book. For now it should simply be borne in mind that in many situations the document is treated as the equivalent of the goods it covers and that transfer of the document or rights thereunder will generally be equivalent to a transfer of the goods so covered.

[2] “Bailee” means the person who by … bill of lading or other document of title acknowledges possession of goods and contracts to deliver them. Section 7-102(a)(1).

[3] “Consignor” means the person named in a bill as the person from whom the goods have been received for shipment. Section 7-102(a)(4).

[4] “Consignee” means the person named in a bill to whom or to whose order the bill promises delivery. Section 7-102(a)(3).

[5] Section 7-104(c) previously quoted, states as follows:

(c) A document of title is nonnegotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is nonnegotiable.

This provision is contained in the newest amendments to Article 7 and is absent under Section 7-104. The amendment is logical insofar as it indicates a clear intent of the issuer, and presumably the consignor, that the document be treated as nonnegotiable. The importance of negotiability will be seen shortly in Doug’s memorandum.

Section 2-607(5)(a): Attorneys’ Fees as Consequential Damages

As noted in previous posts, the designation of a party as a merchant activates a number of special provisions under Article 2.  Among the most important is the warranty of merchantability under Section 2-314.  Subsection (1) to Section 2-314 states as follows:

Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in the contract for their sale if the seller is a merchant with respect to goods of that kind.  Section 2-341(1)

What is or is not merchantable is set forth in Section 2-314(2):

            Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and

(b) in the case of fungible goods, are of fair average quality within the description;     and

(c) are fit for the ordinary purposes for which such goods are used; and

(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and

(e) are adequately contained, packaged, and labeled as the agreement may require; and

(f) conform to the promise or affirmations of fact made on the container or label if any.

Sales of goods often involve several levels of distribution.  Initially, the sale of raw materials to be used in the manufacture of finished goods; sales from the wholesale to the retail level, and the sale to the retail customer. The warranty of  merchantability will be given at each stage provided the seller is a merchant.  Most of the time, the goods will meet the requisite standard of merchantability; sometimes they will not.  Very often this will occur in a situation involving a middleman who purchases goods for resale.  When the goods sold are not merchantable, and the middleman is sued for breach of warranty, specific rules kick in which the middleman should be aware of if he or she is to minimize exposure. 

Section 2-607(5)(a) contains rules of particular significance when goods are resold by a middleman to a third party.  That section states as follows:

Section 2-607(5)(a) states as follows:

Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over

(a)  he may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.

This section enables the middleman who is being sued for the allegedly defective product to put his seller on notice of the litigation and provide him with the opportunity to defend against the litigation.  The failure of the original seller to do so will result in his being ‘bound in any action against him by his buyer by any determination of fact common to the two litigations.’

            As has been stated throughout these posts, it is highly recommended that the actual language of the statute be tracked in this type of situation.  ‘Coming close’ can result in litigation costs that could have been avoided.  In this regard however, and in connection with Section 2-607(5)(a), it must be noted that this section is permissive in nature, and that if a party does not strictly comply with Section 2-607(5)(a), she or he may still maintain a cause of action against her/his buyer for the breach of warranty.

This follows from the language of Section 2-607(5)(a) which states that the buyer ‘may give his seller written notice of the litigation.’  It is clearly permissive.  This question was thoroughly discussed by the Michigan Court of Appeals in Old Kent Bank v Kal Kustom Enterprises, which has impact in all states by reason of the uniformity provision of Section 1-103(1)(b).  See e.g. of In re Hispanic American Television Co., Inc., 113 B.R. 453 (Bankr.N.D.Ill.1990). 

The court in Old Kent discussed the permissive nature of Section 2-607(5)(a) as follows:

The language of M.C.L. § 440.2607(5)(a) is clear and unambiguous.   The statute's plain language reflects its discretionary nature.   Again, the statute states that where a buyer is sued for breach of warranty or other obligation for which his seller is liable, he “may give his seller written notice of the litigation.”

The court went on to state:

Further emphasizing the permissive nature of subsection 2607(5)(a) is the fact that a review of other subsections set forth in M.C.L. § 440.2607(5) indicates that the Legislature intentionally made some portions of the statute mandatory, and others permissive.   Subsections 2607(3)(a) and 2607(3)(b) contain the mandatory “must” in terms of notice.⁵  If the Legislature intended subsection 2607(5)(a) to be mandatory, it would have used similar mandatory language.

            I have been involved in cases where the original seller refuses to come into defend and in some situations completely ignores the notice sent.  This leaves the middleman in a very bad situation, for the original seller is the party best equipped to defend the product he sold.  As a result of this reality, at least one court has awarded attorney’s fees to the middleman who gave proper notice.  The starting point for this analysis is Section 2-714, which deals with buyer’s damages for accepted goods where seller has breached.  That section states as follows:

(1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(3)In a proper case any incidental and consequential damages under the next section may also be recovered.

As noted in Section 2-714(3), in a ‘proper case’ incidental and consequential damages may be recovered under Section 2-715:

(2) Consequential damages resulting from the seller's breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty.  

            In addressing the question of attorney’s fees, it must be noted that the attorney’s fees recoverable under Section 2-715(2)(a) are of a different nature than those claimed in a traditional contract litigation.  Attorney’s fees incurred in connection with a litigation in which a non breaching party is, in effect, forced to defend a claim from his buyer for defective goods sold by the original seller, are of a whole different nature.

            The precise issue was discussed by the United States District Court Acushnet Co. v. G.I. Joe’s, Inc., 2006 WL 2729555 (D. Or. Sept. 22, 2006). The case involved a breach of infringement warranty governed by Section 2-312(3) of the UCC.  Acushnet is the sole manufacturer of Titleist golf balls.  G.I. Joe’s purchased what it thought were Titleist balls from Cam Golf. They were in fact fakes.  Acushnet investigated further and learned that other fake Titleist balls were being sold by G.I. Joe’s elsewhere.

            Acushnet sued G.I. Joe’s, who in turn joined Cam Golf, Inc., the latter for breach of the warranty of infringement.  Acushnet and G.I. Joe’s settled with G.I. Joe’s paying $25,000 and incurring $19,300 in attorney’s fees. G.I. Joe sought recovery of both amounts in its action against Cam Golf.   The latter argued that attorneys’ fees were not recoverable, citing supposed authority for that proposition.  G.I. Joe responded:

G.I. Joe’s contends that Cam Golf has confused the issue of recovering attorney’s fees in prosecuting a lawsuit against the seller of goods with attorney’s fees incurred in defending a claim brought against the buyer by a third party. [at page 5]

 In addressing the matter, the court noted the permissive nature of Section 2-607(5)(a) and concluded that attorney’s fees were recoverable under Section 2-715(2)(a),  the Court quoted from Raymond v. Feldman 124 Ore. App 543, 546 (1993) as follows:

The general rule is that attorney’s fees are not recoverable in a breach of contract action unless authorized by statute or the agreement.  However  an exception to the general rule is when a party’s breach of contract involves the non breaching party in litigation with a third party  In such a case the non breaching party may be entitled to recover its litigation costs resulting from the separate action. [at page 6; Emphasis the Court’s]

These consequential damages are recoverable under the language of Section 2-715(2)(a), and the general policy of Section 1-305 which seeks to make non breaching parties whole, and has a special exception for awarding attorney’s fees when permitted under ‘other applicable rules of law’. The rule allowing attorney’s fees in defense of third party products is one of those exceptions. 

I suggest that parties who may be involved in situations in which Section 2-607(5)(a) create a document tracking the language of that section so that effective notice can be given in any situation in which it is required.