The seller defaulted, now what?

Q: I made an offer to buy a boat several months ago but we had to back out of the deal before closing. My mortgage broker conducted a title search and determined that the boat’s Hull Identification Number was a duplicate of another boat and the boat I was looking at was stolen. I obviously withdrew my offer but I am out several thousand dollars in expenses for surveys, travel and time off to attend the surveys. The purchase agreement was a standard form contract from the California Yacht Brokers Association and it includes a provision for the buyer to recover reasonable expenses if the seller defaults. We believe the failure to provide clear title to us is a default and have demanded that the seller pay our expenses but he refuses to respond. Before we pursue this any further can you confirm for us that this was a default under the contract?

A: I cannot provide an ironclad answer to our reader’s question without taking a look at his contract and asking a list of background questions, but since he used a standard CYBA form contract I can provide a general overview of his options.

In this case, the question of whether the seller defaulted under the purchase contract, or breached the contract, will depend on who terminated the contract and whether the buyer signed the final acceptance section of the agreement before the contract was terminated.

The current version of the CYBA contract allows the buyer to complete sea trial and survey and satisfy other contingencies within a certain time period, but regardless of the outcome of those inspections the buyer is not obligated to purchase the boat until he or she signs the “Final Acceptance” section at the end of the contract. Therefore, if the seller in our reader’s case terminated the contract before the buyer signed the final acceptance, he would most likely not be found to be in breach of the contract since the buyer was not obligated to do anything at that time.

If the seller terminated the contract after the buyer signed the final acceptance, the seller would have breached the contract regardless of the reason for his change of heart, since at that point he would be obligated to sell the boat to the buyer. Those conclusions would hold regardless of the question about the Hull Identification Number (“HIN”).

If the Buyer terminated the contract – before or after signing the final acceptance – the analysis gets a lot more complicated because he technically never gave the seller a chance to fulfill his side of the contract. The seller’s obligation was to deliver clear title when title passed to the buyer, but – regardless of the reason – the buyer never allowed title to pass.  At that point the obligations of the parties would be governed by the “anticipatory breach” sections of the Uniform Commercial Code.

UCC 2-609 addresses the scenario, where one party has a legitimate concern that the other party will not be able to perform that party’s obligations under the contract. The aggrieved party may demand adequate assurance of performance in writing. In our reader’s case, the seller could perhaps show that it was all a mistake, or that his boat has the proper HIN and the other boat is the one that was stolen, or perhaps some other plausible argument that would indicate that he will be able to deliver the boat with a clear title.  But he needs to have an opportunity to set things straight.

If in fact the seller is unable to provide adequate assurance of his ability to deliver clear title, he would then be deemed to be in breach of the contract even though he is technically not required to deliver clear title until he sells the boat. 

It is important to note that a demand for adequate assurance of performance is not a wasted exercise. We have encountered quite a few cases over the years involving duplicate or incorrect Hull Identification Numbers and first impressions are sometimes wrong. 

Regardless, our reader will have a tough time recovering damages if he terminated the contract without giving the seller a chance to respond to a demand for adequate assurance.  Both parties in this case should retain qualified legal counsel to investigate these issues in more detail.