Cancellation Clauses Can Provide Clear Remedies to Product Suppliers
What are the UCC default rules for cancelling contracts or orders and what rights and remedies do sellers have when such a cancellation occurs? Two general scenarios are analyzed below: (1) contracts providing for successive performances of indefinite duration, and (2) “stand alone” contracts that do not provide for such successive performances.
Contracts Providing for Successive Performances of Indefinite Duration
In general, once there is an offer and acceptance for the sale of goods, the seller is obligated to deliver and the buyer is obligated to accept and pay. (UCC §§ 2-206 & 2-301). However, Section 2-309(2) states that where the contract provides for successive performances, but is indefinite in duration, it is valid for a reasonable time. Under that scenario, the contract “may be terminated at any time by either party.” (UCC § 2-309(2)). “Termination” is defined in Section 2-106, and means cancellation other than for breach. Termination in this instance—unless otherwise agreed—means the customer’s obligations to the supplier are discharged and the seller has no default remedy. (UCC §§ 2-106 & 2-309(2)).
Therefore, for these types of successive-performance contracts, the addition of a “cancellation clause” is necessary to provide a remedy in the event a customer decides to cancel.
“Stand Alone” Contracts that Do Not Provide for such Successive Performances
Again, in general, after there is an offer and acceptance, the cancellation of a contract or order by a customer (technically a “repudiation”) is a breach of contract. (See UCC § 2-609(1), stating “a contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired”). When either party repudiates the contract with respect to a performance not yet due, the loss of which will substantially impair the value of the contract to the other, the aggrieved party may resort to any remedy for breach. (UCC § 2-610).
There are multiple “default” remedy provisions for sellers/suppliers for breach depending upon the specific facts of the order/cancellation/production cycle (See UCC § 2-703(a)-(f)). Section 2-708 provides for the seller’s damages for a customer’s non-acceptance or repudiation as follows:
(1) Subject to subsection (2) and to the provisions of this article with respect to proof of market price (section 336.2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this article (section 336.2-710), but less expenses saved in consequence of the buyer’s breach.
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this article (section 336.2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
Section 2-710 sets forth the seller’s incidental damages as follows:
Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.
Because the definition of incidental damages is vague—i.e. left to a “commercially reasonable” standard—it is beneficial for a supplier to maintain a “cancellation clause” in its contracts to specifically identify its damages in such an event. You may also find that the default remedies under Section 2-708 are inadequate. Contractual remedies in addition to, or in substitution for, those provided in Article 2 are valid under Section 2-719. Therefore, a “cancellation clause” can mandate the remedies and damages acceptable to you in case a customer tries to bail on an agreement.
Remember: you should always consult an attorney when you are faced with a potential legal issue or you need legal advice. The facts of your specific situation can drastically affect and change any legal analysis.
