Problem.Dispute.Pet store neon signs

     Signco is a manufacturer of signs. Petco is the operator of a chain of pet stores located throughout Southern California. In anticipation of expanding to Northern California, Petco contracted in writing with Signco to pay Signco $100,000 for the manufacture of ten identical neon signs, each in the shape of an exotic African bird, and for the delivery of signs to and the installation of signs at ten sites for new Petco pet stores in Northern California.

     In preparing for contract negotiations with Petco, Signco had estimated its total costs for the ten signs at $40,000 for parts, $40,000 for labor, $2,000 for transportation to the ten sites, and $8,000 for installation at the ten sites.

     During the manufacturing process, Signco's vice president read an article in the Wall Street Journal reporting the beginning of an investigation by a California state agency of hundreds of alleged violations by Petco of state regulations restricting the importation of certain categories of wild birds. The article stated that the state agency could fine a violator as much as $5,000 for every bird imported in violation of state regulations, but that fines often were less in the event of first time violators and in the event of unintentional violations. After reading the article, Signco's vice-president called the state agency but a spokesperson for the agency said that the agency could not comment on pending investigations. Immediately after this unproductive conversation with the state agency spokesperson, Signco's vice-president sent the following e-mail message to Petco:

"Please comment on the Wall Street Journal article about investigation of your practices in importing birds. Will this interfere with your plans to expand into Northern California. Please e-mail your response within 3 days as our manufacture of your signs is underway and we need to know whether to continue."

    At the time it sent the e-mail message, Signco had spent $20,000 for parts and $20,000 for labor in connection with the Petco contract.

    Four days after sending the e-mail message, Signco's vice-president received in the mail a copy of a press release issued by Petco which stated:

"Petco does not believe that it has committed any intentional violations of state regulations regarding importation of birds. Plans of Petco to expand into Northern California will probably not be delayed pending resolution of the matter with state authorities."

    Signco's vice-president immediately telephoned the vice-president of Petco and asked for clarification. In the telephone conversation, Petco's vice-president would say nothing more than: "Our attorneys have advised us to say nothing more than we have stated in our press release." As of the time of this telephone conversation, Signco had spent a total of $25,000 for parts and $25,000 for labor in connection with the Petco contract.

    Signco's vice-president immediately contacted PetMore, an existing chain of pet stores in Washington, to see if they might be interested in buying the signs, when finished, that Signco was manufacturing for Petco. Petmore told Signco that it was very interested in the signs but wanted to wait for its next quarterly earnings report, due in six weeks, before making a final decision.

    Signco seeks your legal advice. Signco tells you that before it read the Wall Street Journal article, it had planned to purchase all of the remaining component parts for the signs before the end of the current month because the supplier of parts had announced a steep price increase effective the beginning of next month. One week remains in the current month. Signco also tells you that it could probably get about $10,000 by selling for scrap the signs in their currently unfinished state.

    Signco wants to know what alternatives it now has and what the consequences of the various alternatives might be. What is your advice?  On the issues of adequate assurance of performance and repudiation, consider U.C.C. 2-609 and U.C.C. 2-610.  On the issue of damages, consider Rockingham County v. Luten Bridge Co., U.C.C. 2-704, U.C.C. 2-706, U.C.C. 2-708(2), and U.C.C. 2-709.