Teaching Assistants: William Widen on UCC § 2-718(2)

In keeping with our contracts and social justice theme this week, today we discuss William H. Widen’s 2019 article, Social Justice and Deposit Return Calculations: A Study of Success and Failure in Commercial Law Reforms, 19 St. John’s L. Rev. 365 (2019).

Where a buyer has paid a deposit, absent a liquidated damages clause, UCC § 2-718(2)(b) permits a seller to recover from a breaching buyer the lesser of 20% of the contract price or $500.   The problem arises because courts treat § 2-718(2) as a supplement to awards for actual damages permitted under §2-718(3) (370-72).  Professor Widen’s argues that allowing a seller to retain moneys paid under § 2-718(2) on top of actual damages transforms § 2-718(2) into a penalty clause, with an upper limit of $500.  And if $500 does not seem like a lot of money to you, consider yourself lucky.  Many Americans cannot afford an unexpected $500 expense (366). 

Professor Widen identifies two causes of the problematic application of § 2-718(2).  First, courts treat the provision as though it were part of a seamless civil code rather than a supplement to common law precedents and principles. (367)   They apply § 2-718(2) and then they apply § 2-718(3) without considering their relationship to one another and to the UCC’s broader remedial vision.  Other courts get things right.  The result is a lack of uniformity and predictability, undermining one of the advantages of having a uniform commercial code.  The result also undermines general remedial goals: returning the parties to the rightful position and avoiding penalties clauses.

Second, efforts at reasonable reform of the provision failed when state legislatures rejected the revision of Article 2.  It is regrettable that there seems to be no efficient mechanism for the piecemeal revision of the statute (367-68).  In his conclusion, Professor Widen proposes just such a mechanism, and offers language that clarifies the ambiguity in the current version of Article (433-35).  That language gives effect to what Professor Widen calls his “context-sensitive method” of reading the relevant provisions. Under this perfectly reasonable approach, a seller may not retain an offset under § 2-718(2) that exceeds actual damages under § 2-718(3).  If the offset does not exceed actual damages, the seller recovers actual damages only to the extent that they exceed the offset (379).

I usually don’t spend much time talking about § 2-718(2) in my Sales course because many of my students’ brains freeze up when asked to determine whether .2x > $500 and then to subtract the lesser number from the amount of a deposit.  You’d think I’d asked them for a proof of Pascal’s theorem.

This year, when I teach sales, I may draw on the case law referenced in Professor Widen’s article as part of a statutory interpretation theme within my Sales course.  I can assign students the task of attempting a drafting fix so that courts will be guided towards a result that does not overcompensate sellers and turn § 2-718(2) into a penalty clause.  Finally, I can share with them Professor Widen’s three options for legislative solutions: the version adopted in the Revised Article 2, North Carolina’s revision, and Professor Widen’s proposed language.