Shawn McClure, Esquire
As a commercial seller, distributor, manufacturer or purchaser of goods you are certainly aware of an area of the law known as the Uniform Commercial Code (U.C.C). In fact you have most likely read articles dealing with contract formation and the “Battle of the Forms” under the U.C.C., but what happens in this area of the law after this “battle” has been waged and a contract has been formed?
What happens when an agreement has been reached and the goods have been packaged and shipped? Surely, all that the law requires is the Buyer to take possession of the goods and then make payment to the Seller on the accompanying invoice. Not quite. This article will briefly outline and discuss the rights and duties of both a Seller and Buyer with respect to the performance of a contract for the sale of goods. In addition, we will look at how certain actions taken by the Seller and Buyer affect those rights and duties. When reading the following sections, it may be helpful to imagine a timeline with each topic representing a point in time where certain rights, duties, choices or remedies available to a party are either triggered or lost.
REJECTION – Can the Buyer refuse the goods?
Once a Seller has presented the goods to the Buyer, an act known as “tender”1 under the law, it is up to the Buyer to act next. The Buyer must react to the Seller’s tender of the goods whether or not the goods or delivery conform to that which was agreed upon. In other words, the goods are now at the Buyer’s doorstep and the Buyer has one of two options, the Buyer may reject or accept the goods.
If tender of the goods conforms in every respect to the contract, i.e. type of goods, time of delivery, method of delivery, etc., then typically the Buyer must accept the goods.2 However, if there is any defect in the tender of the goods the Buyer has the right to reject the whole lot, accept the whole lot, or accept any commercial unit or units and reject the rest. This ability of the Buyer to reject the goods in light of any defect, no matter how slight, is known as the “perfect tender rule.”3
In order to exercise the right of rejection, a Buyer must seasonably notify the Seller that the Buyer is rejecting the goods. This notice must state with sufficient particularity the grounds for the rejection, i.e. the problem with the goods. As discussed below, failure to provide this notification may result in the Buyer being stuck with goods it neither wants nor needs. Additionally, the Buyer must exercise this right of rejection in “good faith” and not for the sole purpose of escaping from an unwise bargain that had previously been entered into.
Of course in certain circumstances the Buyer may want to accept goods that do not conform to the parties’ contract. The Buyer may do so and often will when the Buyer has made plans in reliance upon the delivery of the goods by the Seller. As you will see below, it is important for a Buyer to carefully analyze how much these goods are needed because certain rights are lost the moment that the Buyer decides to accept the goods.
To better illustrate the concept of rejection, we look to the following hypothetical. A Seller and a Buyer enter into an agreement whereby the Seller will provide the Buyer with 50 blue widgets for the price of $5.00 per widget, to be delivered on November 1. On November 1 the Seller tenders 50 red widgets at a price of $5.00 per widget. In this situation the goods are nonconforming because the contract provided for blue rather than red widgets. As a result of this nonconformity, the Buyer has the absolute right to reject the widgets. It is important to note that at this point of the transaction it does not matter whether or not the Buyer could have used red widgets rather than blue widgets, the “perfect tender rule” allows the Buyer to reject the widgets.
What are the consequences of this rejection? Once a Buyer has properly exercised a rightful rejection, it is the Seller who must now act.4 The Seller is going to have to arrange to get the goods back. Meanwhile, the Buyer has a duty to hold the goods in safekeeping for a reasonable period of time to ensure that the goods are not damaged while awaiting pick up by the Seller.5
As a practical businessperson you are probably asking, how is this possible? Surely, the law does not expect that every contract for the sale of goods begins with a perfect tender by the Seller. Once the Buyer exercises a rightful rejection, is the deal over? As we will see in our next section, the deal is not always dead after a rightful rejection. The Seller’s right to cure is one way that the Seller can mitigate the harsh results of the “perfect tender rule” and keep a deal alive.
CURE – Is there anything the Seller can do to salvage the deal?
Suppose the Seller has delivered the goods. Now suppose further that the Buyer has a right to and does reject those goods, citing particular nonconformities in justification of this response to the Seller’s delivery.
Is the deal lost? As a practical matter, the answer is most often no. This is because the Buyer often concludes that this particular Seller is still either the only potential supplier of just what is wanted or if not the only one then at least the supplier best positioned to quickly and effectively fill the Buyer’s order. As a result, the Buyer’s notification of rejection will be accompanied by a request for the Seller to come back soon and “make right” on the deal. In this situation any damages incurred by the Buyer may be worked out informally between the Seller and Buyer through various non-legal remedies such as a price rebate or free shipping.
What if the relationship between the Seller and Buyer has soured to the point that the Buyer no longer wants anything to do with the Seller? In this situation the Buyer either doesn’t want the goods or wants to look elsewhere for them. Does the Seller have any say in this? In other words, does the Seller get a second chance or is the deal lost?
The legal question becomes whether or not the Seller has a right to cure or remedy the situation. The answer, as with any legal question, is that it depends on the timing and circumstances surrounding the Buyer’s rejection. Generally, the Seller has a right to remedy the situation if such remedy can be completed before the time for performance of the contract has expired.
With regard to our hypothetical, suppose that instead of delivering 50 red widgets at $5.00 per widget to the Buyer on November 1 that the Seller delivered the same 50 red widgets on October 25. The Buyer rightfully rejects the red widgets. The price of widgets has dropped to $4.00 since the time the parties entered into the contract, and the Buyer is unwilling to allow the Seller to make good by sending 50 blue widgets. The Buyer wants to purchase widgets from another supplier in order to take advantage of the drop in market price of widgets. However, in this situation the law allows the Seller to claim the right to cure if the Seller immediately notifies the Buyer of his intention to cure the defect and does so within the time for performance under the parties’ contract. Accordingly, the Seller can “save the deal” by notifying the Buyer that he will send 50 blue widgets, and actually doing so before November 1, the time for performance under the parties contract.
There is another situation in which the Seller may be afforded time to cure or remedy a defect in the goods or delivery of the goods. When a Seller has reasonable grounds to believe that the Buyer would accept nonconforming goods and the Buyer subsequently rejects such nonconforming goods. Then the Seller may, after immediate notification to the Buyer of his intention to do so, have a reasonable time to substitute conforming goods.
To that end, suppose that the Seller and Buyer in our hypothetical have a previous business relationship and that several times in the past the Seller has been short on blue widgets and sent the Buyer red widgets instead. The Buyer had always accepted and used these red widgets. Therefore, based on the parties’ previous dealings, the Seller had reason to believe that 50 red widgets would suffice in place of the 50 blue widgets that were required under the contract. However, the Buyer rightfully rejects the 50 red widgets utilizing the “perfect tender rule.” Under these circumstances, the law affords the Seller a reasonable time, without regard to the time of performance, to cure or remedy the defect by presenting 50 blue widgets to the Buyer.6
The Seller’s right to cure operates to allow the Seller time to repair and revive the parties’ contract if the circumstances permit. Any interference by the Buyer with the Seller’s right to cure may operate as a breach of contract on the part of the Buyer. On the other hand, a Buyer is not forced to deal with an incompetent Seller by affording unlimited opportunities to cure any defect. This protection is given to the Buyer in the form of temporal requirements on the Seller’s right to claim cure.
As you can tell from the preceding sections the law provides great flexibility to both parties at the earliest stages of the performance of a contract for the sale of goods. This is done both to protect the rights of each party and to preserve the original agreement that the parties entered into.
ACCEPTANCE – When has the Buyer accepted the goods?
What if the Buyer doesn’t reject the goods, but instead chooses to keep them? In this situation the Buyer has “accepted” the goods. It must be understood that a Buyer need not expressly accept the goods for the law to find that an “acceptance” has occurred. Under the law, “acceptance” occurs when: 1) after a reasonable opportunity to inspect the goods the Buyer signifies to the Seller that the goods are conforming or that the goods will be retained in spite of any non-conformity; or 2) after a reasonable opportunity to inspect the goods the Buyer fails to make an effective rejection of the goods; or 3) the Buyer does any act inconsistent with the Seller’s ownership in the goods.7
It is important to recognize that in all three situations the Buyer must have been afforded a “reasonable opportunity” to inspect the goods before he is deemed to have accepted them.8 This requirement prevents a Buyer from being deemed to have accepted goods that it could not have chosen to reject. Thus, the Buyer can avoid the deadly game of “Russian Roulette” that would result if he were forced to choose whether or not to reject or accept goods without prior inspection because a wrongful rejection would result in a breach by the Buyer. Not only is the Buyer given this opportunity to inspect the goods before acceptance, the Buyer has an affirmative duty to perform this inspection. This duty cannot be ignored and the Buyer need not actually have inspected the goods in order for the law to find that the Buyer had a “reasonable opportunity” to do so.
Turning to our hypothetical, the Buyer will be deemed to have accepted the 50 widgets, red or blue, if upon receipt of the widgets from the Seller the Buyer inspects the goods and signifies that the goods will be accepted. This could be done through something as simple as signing an invoice. Suppose the Buyer receives delivery of the 50 red widgets and upon inspection decides that the he will reject the widgets as nonconforming, but the Buyer never informs the Seller of his intention to reject and the goods remain in the Buyer’s warehouse. The Buyer has “accepted” the goods despite his desire not to. Lastly, suppose that the Buyer, upon delivery of the 50 red widgets, uses the widgets in the manufacture its product, but later decides that the red widgets will not work due to aesthetic reasons. However, the Buyer cannot reject the 50 red widgets because the Buyer has accepted the widgets by utilizing them, an act that is certainly inconsistent with any ownership interest the Seller has in the widgets. Now that we have outlined the various acts and situation that may constitute acceptance of goods under the law, we must turn to the next question.
What effect does the “acceptance” of goods have on both the rights and obligations of the Seller and Buyer? First and foremost, “acceptance” imposes upon the Buyer the duty to pay the contract rate for any accepted goods. In the situation of acceptance of nonconforming goods the Buyer may be entitled to offset the contract price with a claim for damages, but for purposes of this article it is important to remember that at the moment of acceptance the Buyer is on the hook for and the Seller is entitled to the contract price of the accepted goods.
Second, upon acceptance the Buyer loses the opportunity to reject the goods, meaning that the Buyer can no longer take advantage of the buyer-friendly “perfect tender rule.” As we will discuss below, the Buyer still may be able to revoke acceptance of the goods. However, the ability to revoke acceptance is not as clear-cut and unfettered as the Buyer’s initial right of rejection.
Acceptance also shifts the burden to establish breach of contract from the Seller to the Buyer. While a “burden” is something that you typically would allow your lawyer to be concerned with, it may be helpful to include a brief explanation at this juncture. A “burden” may be viewed as establishing who must first “speak to the court” when there has been a dispute between the parties. For example, when the Seller provides 50 red widgets at a price of $5.00 per widget to the Buyer on November 1 and the Buyer rejects the goods, as discussed above, it is the Seller who must prove to the court that on November 1 the 50 widgets that the Seller provided to the Buyer conformed in every respect to the contract. Now suppose that the Buyer had accepted the 50 red widgets on November 1 and the parties later went to court, the Buyer must prove that what the Buyer accepted did not conform to the parties’ contract. Admittedly, this example may not drive home the importance of a “burden” in the courtroom because of the ease of showing that the widgets provided were red and the contract required blue. However, in more complex situations the burden to prove breach of contract can be very costly and time consuming, especially when the evidence necessary to show breach is in the hands of a third party such as a shipper or distributor.
Perhaps the most important consequence of the Buyer’s “acceptance” of the goods is that once the goods have been accepted the Buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of the breach or be barred from any remedy. Thus, once a Buyer has accepted the goods not only is the onus upon the Buyer to provide notice of any non-conformity that the Buyer discovers, but also any non-conformity that the Buyer should have discovered. Think about the harsh results this could impose upon a Buyer who is not attentive and prompt in dealing with newly acquired goods.
Suppose our Buyer, upon acceptance of the 50 red widgets from the Seller and their subsequent use in the manufacturing of Buyer’s product, finds out that every one of his products in which he used the red widget is catching fire and causing harm to the Buyer’s customers. Moreover, suppose that Buyer knows that the reason his product is catching fire and harming customers is due to the use of the 50 red widgets and it is determined that the red paint used on the widget spontaneously combusts when exposed to sunlight for more than four hours at a time. At this time, due to the fact that acceptance has already occurred, the Buyer must notify the Seller of this defect or else risk being barred from any recourse he may have against the Seller.
So we have concluded that acceptance requires notification of any breach and/or non-conformity in the goods. Also, we just stated that once the Buyer accepts the goods he can no longer reject them. What then is the purpose of this notification?
REVOCATION OF ACCEPTANCE – Can the Buyer send the goods back after acceptance?
What occurs when a reasonable inspection of the goods does not disclose a defect or non-conformity in the goods that later comes to light? Or, when the Seller assures the Buyer that he will remedy any known defect or non-conformity in the goods?
After a Buyer has accepted the goods, the Buyer still may have the ability to deal with situations such as those set forth above. Under certain circumstances, the Buyer may have the ability to revoke acceptance.
However, before discussing the Buyer’s ability to revoke acceptance it must be noted that the Buyer can certainly choose to seek monetary relief. In doing so, the Buyer keeps the goods and must pay the contract price for the goods that were accepted, but the Buyer may be able to subtract from what is owed a significant amount for damages due to the defect or non-conformity in the goods.9 This option leaves the Buyer owning and in possession of the goods, albeit having paid less than what was originally was called for under the contract. For many Buyers this remedy will suffice.
On the other hand, due to the defects or non-conformities now apparent in the goods after acceptance, the Buyer may have no use or desire for the goods whatsoever and may wish that he or she never accepted them at all. It is in this situation that the Buyer will want to revoke acceptance of the goods and return them to the Seller.
There are certain requirements that the Buyer must meet before gaining the right to revoke acceptance. The non-conformity or defect in the goods must “substantially impair” the value of the goods as to the Buyer. In addition to “substantial impairment,” the prior acceptance of the goods must have been made: 1) based on a reasonable assumption that any known non-conformity or defect would be cured; or 2) without discovery of such non-conformity or defect if the Buyer’s acceptance was reasonably induced either by the difficulty of discovery or by the Seller’s assurances.
Once it is determined that the Buyer has the right to revoke acceptance, the Buyer must also follow additional steps in order to exercise this right. The most important being notice to the Seller within a reasonable time after the Buyer discovers or should have discovered the grounds for revocation of acceptance. In addition, this notice must be given before there is any substantial change in the condition of the goods, which is not caused by their own defects.
As you can see, whether or not the Buyer has a right to revoke acceptance is an almost entirely fact based inquiry, which would be too exhaustive for our hypothetical. There are many factual issues including: whether or not there is a “substantial impairment;” whether or not the acceptance was “reasonable” in light of the circumstances;10; whether or not the Buyer should have discovered the defect or non-conformity sooner; and whether or not notice was timely. To engage in a discussion of the intricacies of each of these questions would require volumes rather than the paragraphs that are available in this article. To that end, we turn to the result that revocation of acceptance can have on the dealings between the parties.
The effect of a successful revocation of acceptance is the same as if the Buyer had successfully exercised a rightful rejection of the goods. In other words, the Buyer has a duty to hold the goods for a reasonable time until the Seller arranges to have them picked up. Also, the Buyer has the right to claim any damages that he has incurred as a result of the Seller’s failure to provide conforming goods in accordance with the contract.
As you can see once the Buyer has successfully revoked acceptance the goods are sent back to the Seller and the parties are essentially back at square one with respect to the performance of the contract. However, in this situation the Seller will most likely have to pay damages to the Buyer for failing to perform the contract as required.
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1 “Tender” entails certain acts and imposes certain duties upon the parties to a contract depending on the subject matter and terms of the contract. In general, tender encompasses the time, place, and manner in which the Seller must present the goods to the Buyer.
2 It is important to note that nothing under the law prevents the Buyer from rejecting goods that are perfectly fine, however this is known as a “wrongful” rejection and is in fact a breach of the parties underlying contract.
3 The “perfect tender rule” does not exist when the parties have entered into an installment contract. An installment contract is best described as a contract, which requires or authorizes the delivery of goods in separate lots to be separately accepted. The right of rejection with respect to an installment contract is available only when the defect “substantially impairs” the value of the contract as a whole. The “perfect tender rule” is not available under an installment contract because the parties have agreed to subsequent deliveries, which the Seller can use to cure any technical defects.
4 As previously mentioned, a wrongful rejection would result in a breach of contract by the Buyer and the Seller would be able to resort to legal action including filing suit.
5 Of course the costs of storing rejected goods is recoverable from the Seller.
6 Recognize that under these circumstances the Seller is given the ability to perform the contract after the time for performance set forth by the parties has passed.
7 The U.C.C. provides that if such an act is wrongful as against the Seller then it is only deemed to constitute an acceptance if the Seller ratifies the acceptance.
8 In the event that a contract of sale requires that payment be made for the goods before the buyer inspects the goods, a payment so made will not constitute an acceptance of the goods. That is not to say that such payment is to be ignored when analyzing whether the Buyer has accepted the goods, but rather that acceptance cannot be deemed to have occurred based solely on the fact that such pre-payment has been made.
9 These damages would be recovered under a breach of warranty theory, which is a topic far too complex to even be briefly discussed in this short article.
10 The law does not protect the Buyer who blindly accepts goods and then subsequently attempts to utilize revocation of acceptance to compensate for his lack of care.
For additional information on perfection of security interests and the usage of other credit enhancements, please see the other articles in this Publications section.