What Is the Seller's Performance Under the UCC (2024)

In simplified terms, performance of a contract means doing what you're required to do under the contract. If you fail to do what's required—and thus fail to perform under the contract—then you're in breach of the contract. When you've breached the agreement, the other side can sue (and the court can make you pay damages.)

When it comes to contracts specifically related to the buying and selling of goods, the Uniform Commercial Code (UCC) has various rules regarding the seller's performance. It might seem obvious that the seller is obligated to deliver the right goods at the right time to the right place. But in practice, business transactions divert from the plan all the time—whether it's a substitution of goods, delayed delivery time, or shipment oversight.

While circ*mstances might change, the seller's obligations don't.

The Perfect Tender Rule Under the UCC

General contract law, as opposed to the UCC, generally allows for a party to fulfill contractual obligations through substantial performance. Substantial performance means that the party substantially—though not exactly or perfectly—meets the requirements of the contract. So, while the party might not have performed perfectly, they also didn't breach the contract.

For contracts for the sale of goods, however, the UCC requires "perfect tender" by the seller. Tender means, in essence, the delivery of goods to the buyer. Perfect tender means delivering goods that precisely meet the terms of the contract.

What Happens When the Seller Fails to Perform?

According to the UCC, if the goods as tendered "fail in any respect to conform to the contract," the buyer has three options:

• accept all of the goods
• reject all of the goods, or
• accept some of the goods and reject the rest.

(U.C.C. § 2-601 (2023).)

For example, suppose Carrie sells tables and Freddy runs a convention center. With a big convention coming up, Freddy contracts to buy 30 tables from Carrie at $40 per table. On the agreed-to delivery date, Carrie tenders 28 tables to Freddy—two short of what the contract required. Because the UCC requires perfect tender, Freddy can choose to accept some or all of the delivery or reject it. Freddy decides to accept all of the tables and pays Carrie $40 each for the 28 tables.

What Is the Seller's Right to "Cure" Defective Goods?

A key section of the UCC gives a seller the right to "cure" goods delivered to a buyer that are defective or non-conforming. In other words, if a seller delivers goods that don't match the contract, and the buyer rejects those goods, the UCC gives the seller an opportunity to fix the problem.

The seller has the right to cure the defective goods in two specific situations:

• where goods were rejected because of nonconformity, but the seller still has time under the contract to provide conforming goods; and
• where the seller had reasonable grounds to believe that the nonconforming goods delivered to the buyer would be acceptable to the buyer, with or without a money allowance (discount).

(U.C.C. § 2-508 (2023).)

For example, suppose a sales contract lists the date of delivery as March 31. The seller delivers defective goods on March 15, which the buyer rejects. The seller would still have until March 31 to deliver conforming, non-defective goods to the buyer.

Consider another example. Suppose Joe Young orders a surveillance security system from Mighty Security to install at his warehouse. Mighty Security is out of stock on the particular security system that Joe ordered. Instead, they send Joe a more expensive, higher quality system that offers a crisper picture and better features. Joe nevertheless rejects the new security system. Mighty Security would likely have the right, within a reasonable time, to provide the model actually ordered by Joe.

How the Seller Must Tender Delivery Under the UCC

A seller's primary obligation under the UCC is "tender of delivery," meaning, delivering the goods to the buyer. In some cases, tender of delivery will involve the seller shipping or otherwise transporting goods to the buyer. In other cases, it can mean that the seller holds the goods where the buyer can take possession of them.

When the Seller Isn't Required to Ship the Goods

Unless agreed to otherwise, under the UCC, the seller will deliver the goods to their own place of business as long as the goods aren't known by both parties to be kept somewhere else. (U.C.C. § 2-308 (2023).)

Often, the sales contract specifies how the goods will be tendered. However, where the contract doesn't require the seller to ship the goods to the buyer, the two primary requirements for the seller under the UCC are:

• to "put and hold" the goods "at the buyer's disposition," and
• to give the buyer whatever notice is reasonably necessary for the buyer to take delivery.

(U.C.C. § 2-503 (2023).)

So, the seller must hold onto the goods until the buyer can either come and pick the goods up or can arrange for the goods to be brought to them. And when the goods are ready to give to the buyer, the seller needs to notify the buyer that they're ready.

When the Seller Is Required to Ship the Goods

The buyer and seller can contractually arrange for a specific delivery location. Under the UCC, the parties can agree to have the seller either:

• make the goods available at a separate location for the buyer to pick up
• hand off the goods to a third-party shipper, technically called a "carrier," without the buyer specifying to the seller the ultimate destination for the goods; or
• use a carrier to deliver the goods to a destination specified by the buyer. .

(U.C.C. § 2-504 (2023).)

Let's look at these three options in more detail.

Make the goods available at a separate location. The UCC says that if both the seller and the buyer know specifically what goods are involved, and also know that those goods are located "in some other place" than the seller's place of business, then that other place is the place for delivery. (U.C.C. § 2-308 (2023).)

Ship the goods to a location not specified by the buyer. This option is known as a "shipment contract." For shipment contracts, the seller has three responsibilities. First, they have to promptly notify the buyer of the shipment. Second, the seller has to make a "proper contract" with a carrier for the transportation of the goods, taking into account the specific nature of the goods involved—for instance, whether they're perishable. Third, the seller has to give the buyer any document necessary to allow the buyer to claim the goods from the carrier.

Ship the goods to a location specified by the buyer. This option is known as a "destination contract." Some destination contracts will involve shipping goods to a third party, who will then hold the goods for the buyer. (The third party in this situation is technically known as a "bailee.") In such situations, the UCC requires the seller to provide the buyer with the necessary documents to allow the buyer to get the goods from the third party.

As a final point, it's worth noting that if the goods are being shipped to the buyer, the buyer has an obligation to provide facilities reasonably suited to receive the goods.

Seller's Duty to Mitigate When the Buyer Breaches

We know that the seller is responsible for performing their obligations under the contract. But what happens when the buyer doesn't perform their obligations and breaches the agreement? In that case, the seller has remedies available just like the buyer. But the seller also has obligations—namely, the duty to mitigate damages.

If a buyer fails to purchase the goods according to the sales agreement—either by wrongfully rejecting the goods, revoking their acceptance of the goods, or not paying for the goods—the seller must make reasonable efforts to sell the goods to another party. If it's a private sale, the seller must give notice to the buyer of the proposed sale.

Exceptions to Seller's Duty to Mitigate the Damages

There are several exceptions that might relieve a seller of its duty to mitigate:

• when the goods can't be resold, such as those ordered on commission, or
• when the goods are no longer in the seller's possession.

In both instances, the seller would be entitled to damages equal to the full contract price. For example, suppose Oscorp Inc. commissioned an artist, May Parker, to paint a picture of the company's founder, Norman Osborn, for $50,000. May paints the picture and Oscorp wrongfully rejects the painting. Because the painting was ordered on commission and isn't reasonably resalable, May wouldn't have a duty to mitigate the damages.

Calculating the Seller's Damages

If the seller resells the goods, the measure of damages is the difference between the resale price and the contract price, along with any incidental damages. You subtract from this amount any expenses the seller saved as a result of the buyer's breach.

Under the UCC, "incidental damages" are defined as any expenses the seller incurred:

• to stop the delivery of the goods
• to transport, care for, and hold the goods after the buyer's breach, and
• in connection with the return or resale of the goods.

(U.C.C. § 2-710 (2023).)

For example, suppose a manufacturer sold a company 100 construction cones for $3,000 in total. The manufacturer delivers the cones to the company's shop but the company wrongfully refuses to pay, breaching the contract. The manufacturer has to transport the cones back to its warehouse. The manufacturer makes a reasonable effort to find another fit buyer and sells the 100 cones to another business for $2,000. Under the UCC, the manufacturer would be entitled to $1,000 (the difference between the resale price and the contract price) plus the expense of transporting the cones back to its warehouse (the incidental damages).

If, alternatively, the seller can (but has not yet) resold the goods, the measure of damages would be the difference between the contract price and the market price at the time of the buyer's breach.

Additional Guidance for Sellers

While the UCC provides rules to protect businesses and customers, these rules typically align with what most people would view as reasonable. And if there's an issue in the sale, many buyers and sellers can work it out. But if you and the buyer can't find a solution under the UCC rules or you need help interpreting the model code, consider consulting a business lawyer. They can help you find a resolution and advise you on your state's laws as they relate to your situation.