Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller

Exercise 2

Facing a Breach of Contract A contract for the sale of goods has been breached. Can the dispute be settled without a trip to court? The answer, of course, depends on the willingness of the parties to agree on an appropriate remedy.
A Store Policy against Refunds As the manager of a retail outlet, you may wish to establish a policy of not providing refunds. Instead, you will offer only to repair or replace items that are defective. Does this mean that you will never have to provide a refund if a customer purchases a good (or service) that turns out to be defective and cannot be repaired? That was the question facing a court in New York when a store cited its no-refund policy in declining to provide a dissatisfied customer with a full refund.
Sarah Milligan purchased a wig from Shuly Wigs, Inc., but discovered that the wig was defective. Shuly twice tried to repair the wig, but both attempts failed. Milligan purchased another wig and asked Shuly for a refund. When Shuly refused, Milligan sued. A small claims court ruled in Milligan's favor. On appeal, the reviewing court affirmed the ruling. The court observed that when "a vendor prohibits refunds and limits the purchaser's remedies to repair or replacement of its goods, the remedy fails of its essential purpose if a delay or failure adequately to repair or replace the goods in a reasonable time deprives the plaintiff of a substantial benefit of her bargain."
Contractual Clauses Concerning Applicable Remedies Often, the parties to sales and lease contracts agree in advance in their contracts on what remedies will be applicable in the event of a breach. This may take the form of a contract provision restricting or expanding remedies available under Section 2-719 of the Uniform Commercial Code (UCC). Such clauses help to reduce uncertainty and the necessity for costly litigation.
When the Contract Is Silent on Applicable Remedies If your agreement does not cover a breach and you are the nonbreaching party, the UCC gives you a variety of alternatives. You need to determine the available remedies, analyze them, rank them in order of priority, and then predict how successful you might be in pursuing each remedy if you decide to go to court. Before going to court, however, consider the position of the breaching party to determine if you can negotiate a settlement.
For example, when defective goods are delivered and accepted, usually it is preferable for the buyer and seller to reach an agreement on a reduced purchase price. Practically speaking, though, the buyer may be unable to obtain a partial refund from the seller. In this situation, UCC 2-717 allows the buyer to give notice of the intention to deduct the damages from any part of the purchase price not yet paid. If you are a buyer who has accepted defective goods and has not yet paid in full, you may wish to exercise your rights under UCC 2-717 and deduct appropriate damages from your final payment. Remember that most breaches of contract do not end up in court-they are settled beforehand.
Managerial Implications Of course, the best way to avoid having to go to court to settle a dispute about a breached contract is to specify in the contract itself what remedies will be available to each party in the event of a breach. Nothing in the UCC prevents parties from expanding the remedies available under it, as UCC 2-719 points out. In general, the more clearly remedies for breach are outlined in a sales contract, the less chance there will be a lawsuit.
Under what circumstances is a negotiated settlement for a breach preferable to litigation?