In our previous articles in the Supply Chain Survival Series, we discussed when a party’s failure to perform may (or may not) be excused by a contractual force majeure provision or by the common law doctrines of impracticability, impossibility, and frustration of purpose. This article will continue to explore a party’s rights and protections under the UCC with respect to a failure by a party to fully comply with the terms of the contract. Specifically, this article will discuss the topics of acceptance and rejection of goods, revocation of acceptance of goods, and a seller’s right to cure a breach associated with the goods being provided under a supply contract.

You recently signed a supply contract for ABC Corp.’s purchase of widgets from XYZ Corp., which ABC Corp. needs to manufacture its products. The supply contract contained a detailed list of specifications that XYZ Corp. was supposed to follow in manufacturing the widgets. Unfortunately, you just discovered that XYZ Corp. did not follow some of the key specifications when manufacturing the widgets ABC Corp. ordered. When you contact XYZ Corp. to inform them of the non-conforming goods, XYZ Corp. tells you that they are not responsible for the non-conforming goods because ABC Corp. has accepted the non-conforming goods. You wonder, is it possible that ABC Corp. inadvertently accepted the non-conforming goods and is now stuck with them? What are the rules related to acceptance and rejection of goods? What is the process ABC Corp. needs to follow to validly reject the non-conforming goods that XYZ Corp. supplied? If ABC Corp. did accept the widgets, does ABC Corp. have any other options available? Is XYZ Corp. entitled to any rights associated with the non-conforming widgets (e.g., a right to cure the defects)? You once again call your lawyer, who explains that the UCC has a number of detailed rules related to the acceptance and rejection of goods, a buyer’s revocation of acceptance of goods, and a seller’s right to cure non-conforming goods.

Acceptance of Goods

A buyer’s acceptance of goods generally occurs in any of the following circumstances: (1) after a reasonable opportunity to inspect the goods, the buyer signifies to the seller that the goods are conforming or that the buyer will keep the goods in spite of the non-conformity; (2) the buyer fails to make an effective rejection after having had a reasonable opportunity to inspect the goods; or (3) the buyer takes any actions inconsistent with the seller’s ownership of the goods (e.g., using the goods after rejecting them).¹

Most courts interpret the “reasonable opportunity to inspect” requirement as meaning reasonable in terms of place, time, and manner. In defining what is reasonable, courts will look at, among other things, industry customs and practices. In general, if the reasonable opportunity to inspect passes, then the buyer waives the right to make an effective rejection of the goods and is deemed to have accepted the goods.

While there are many factors a court will consider in determining whether a buyer accepted the goods, some common factors include the following:

• After the buyer received the goods, did the buyer pay (partially or in full) for the goods?
• Did the buyer sign any documentation provided by the seller related to the goods (e.g., a sales confirmation)?
• Did the buyer conditionally accept the goods? If so, were the conditions satisfied?

A buyer’s acceptance of goods triggers a number of obligations. Upon a buyer’s acceptance of goods:

• a buyer must pay for the goods at the contracted rate;
• a buyer no longer has the right to reject accepted goods (unless it revokes acceptance, as discussed below);
• if acceptance of the goods was made with buyer knowing of a non-conformity, the buyer cannot revoke its acceptance of the goods unless the acceptance of the goods was based on a reasonable assumption that the non-conformity would be fixed by the seller in a timely manner;
• a buyer can only seek remedies against the seller for breach if the buyer notifies the seller within a reasonable time after the buyer discovers or should have discovered the breach (otherwise, buyer is barred from any remedy against the seller for such breach);
• a buyer who receives notice of an intellectual property infringement claim from a third party associated with the goods sold by the seller can only seek remedies against the seller if the buyer notifies the seller within a reasonable time after receiving the third party claim (otherwise, buyer is barred from any remedy against the seller for such claim);
• a buyer has the burden of proof to establish any breach with respect to accepted goods; and
• a buyer has various rights and obligations associated with the defense and settlement of third party claims asserted against the buyer that involve the accepted goods from the seller.²

Rejection of Goods

Returning to our example above, let’s say ABC Corp. discovered the non-conformity in the widgets immediately upon the delivery of the widgets, and so ABC Corp. is unquestionably within its reasonable opportunity to inspect the widgets. What rights does a buyer have for rejecting non-conforming goods?

The answer depends in part on whether the sales contract is for a single delivery of goods or is an installment contract (i.e. a contract that involves multiple deliveries over a period of time).

Single Delivery Contracts

If the sales contract is for a single delivery of goods, and the goods or the delivery fail in any respect to conform to the contract, the buyer may:

• reject all of the goods;
• accept all of the goods; or
• accept part of the goods and reject the rest.³

This is commonly referred to as the “Perfect Tender Rule.” It is important to note that there are some key limitations of the Perfect Tender Rule. First, there is an obligation on the buyer to deal in good faith with the seller.⁴ If a buyer’s rejection of the goods is not in good faith, it is viewed as a wrongful rejection by the buyer. Second, a seller has certain rights to cure non-conformities in the goods it sells (discussed in greater detail later in this article). Third, courts have historically imposed limitations on the Perfect Tender Rule in circumstances where the buyer is not harmed by the non-conformity (e.g., the goods were delivered a day late and buyer suffered no harm from the late delivery).

Installment Contracts

If the non-conforming goods are delivered under an installment contract, a buyer may reject an installment of non-conforming goods if:

• the non-conformity substantially impairs the value of that installment; and
• the non-conformity cannot be cured, or the seller does not give adequate assurances of its cure (see our prior article for a discussion on adequate assurances under the UCC).⁵

This is frequently referred to as the “Substantial Performance Rule.” In addition, if the non-conformity substantially impairs the value of the whole installment contract, the buyer may cancel the contract and recover damages from the seller.⁶ In order to show that the non-conformity “substantially impairs the value” of the installment contract, a buyer must present objective evidence with respect to its own needs to prove that the value of the goods was substantially impaired.

Under both single delivery and installment contracts, a buyer must comply with certain requirements in order to make a valid rejection of any non-conforming goods. First, the buyer must reject the non-conforming goods within a reasonable time after their delivery or tender. It is considered an ineffective rejection of the goods if the buyer does not timely notify the seller (even if the seller is already generally aware of the defect).7 Second, the buyer must describe the defect for the seller with reasonable detail in connection with notifying the seller of the rejection.⁸

Once the buyer has rightfully rejected the goods, the buyer is required to take and/or refrain from taking certain actions with respect to the rejected goods⁹, including, among other things, the following:

• The buyer must not take any action that would indicate any exercise of ownership by the buyer with respect to the rejected goods.
• If the buyer has physical possession of the goods, the buyer has a duty to hold them with reasonable care until the seller can remove them.

Revocation of Acceptance of Goods

Now let’s say ABC Corp. did in fact accept the widgets, before they noticed that there was a defect. Is ABC Corp. stuck with the non-conforming widgets?

A buyer may revoke its acceptance of non-conforming goods if the non-conformity substantially impairs the value of the goods to the buyer and the buyer accepted the goods either:

• based on the reasonable assumption that the non-conformity would be cured by the seller, if the non-conformity was not cured in a timely manner; or
• not knowing of the non-conformity at the time of acceptance as a result of either (i) the difficulty in discovering the non-conformity before acceptance or (ii) the seller’s assurances.¹⁰

In order to revoke acceptance, a buyer must notify the seller within a reasonable time after the buyer discovers, or should have discovered, the non-conformity and before any substantial change in the condition of the non-conforming goods, which is not caused by such non-conformity.¹¹ For example, if a defect in the widgets caused them to catch fire, the buyer would be able to revoke acceptance for the widgets even though their condition has substantially changed, since the change in condition was caused by the non-conformity.  If, on the other hand, the buyer decides, without consulting with the seller, to dispose of the defective widgets in an incinerator, that buyer would likely no longer be able to revoke acceptance. Once a buyer validly exercises its right to revocation of acceptance, the buyer will have the same rights and obligations with respect to the non-conforming goods that the buyer would have had if it had rejected the goods (see above for a discussion of some of those rights and obligations).¹²

Seller’s Right to Cure

Now that we have discussed a buyer’s rights associated with rejecting non-conforming goods or revoking its acceptance of non-conforming goods, it is important to analyze what rights the seller of the non-conforming goods may have to try to fix the non-conformity. The UCC provides the seller of non-conforming goods two potential pathways for correcting issues associated with non-conforming goods rejected by a buyer. First, if the non-conforming goods were rejected but the time for performance by the seller has not yet expired, the seller may notify the buyer of the seller’s intention to cure the defect, and may then make delivery of conforming goods within the contract timeline.¹³ For example, if a contract says the goods must be delivered by the 60th day after the contract is signed and the rejected goods were delivered on the 30th day after the contract was signed, the seller would still have 30 days before the contractual deadline to deliver the conforming goods. Second, if a buyer rejects non-conforming goods which the seller had reasonable grounds to believe would be accepted by the buyer (with or without discount to the price), the seller may be entitled to a reasonable amount of time to provide conforming goods.¹⁴ A seller’s reasonable grounds for believing that the buyer would accept the non-conforming goods can be established through prior course of dealing, course of performance, usage of trade or the circumstances surrounding the making of the contract between the buyer and the seller.¹⁵

While the UCC clearly defines the situations in which a seller has the right to cure non-conforming goods after a buyer rejects such goods, it does not directly address whether a seller has similar rights to cure when a buyer revokes acceptance of goods. Courts are split on the issue. Some courts allow the seller the same rights to cure after a buyer’s revocation of acceptance as a seller would have if buyer rejected the non-conforming goods outright.¹⁶ However, most courts have taken the view that a buyer’s revocation of acceptance does not provide a seller the right to cure any non-conforming goods.¹⁷ As a result of the differing rulings on the issue, it is necessary for a buyer to review the applicable law governing the contract between the buyer and the seller to determine whether it must provide a seller an opportunity to cure in such situation.

Having gained a better understanding of a buyer’s and seller’s rights with respect to non-conforming goods or delivery, we move next to a discussion of breach of contract, which will be addressed in our next article.

END NOTES

¹ UCC § 2-606(1).

² UCC § 2-607.

³ UCC § 2-601.

⁴ UCC § 1-304.

⁵ UCC § 2-612(2).

⁶ UCC § 2-612(3).

⁷ UCC § 2-602(1).

⁸ UCC § 2-605(1).

⁹ UCC § 2-602(2).

¹⁰ UCC § 2-608(1).

¹¹ UCC § 2-608(2).

¹² UCC § 2-608(3).

¹³ UCC § 2-508(1).

¹⁴ UCC § 2-508(2).

¹⁵ Official comment two to UCC § 2-508(2).

¹⁶ See Tucker v. Aqua Yacht Harbor Corp., 749 F. Supp. 142, 145-46 (N.D. Miss. 1990)

¹⁷ See Accettura v. Vacationland, Inc., 155 N.E.3d 636, 408-410 (Ill. 2019); footnote 7 in Gorman v. Saf-T-Mate, Inc., 513 F. Supp. 1028 (N.D. Indiana 1981); Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974).