June 14, 2024 Navigating Problem Suppliers Under the UCC

Learn how to navigate defective product deliveries under the UCC concepts of Acceptance, Rejection, Revocation, and Cure.

By Brandon Krajewski, Patrick Taylor, and Michael Chargo, Quarles & Brady

You recently signed a supply contract for Alpha Corp.’s purchase of widgets from Zeta Corp., which Alpha needs to manufacture its products. The contract contained a detailed list of specifications for the widgets. Unfortunately, you just discovered that Zeta’s widgets do not meet the specifications. When approached, Zeta claims they are not responsible for the non-conforming goods because Alpha accepted them. Can this be right?  And if so, what now? You call your lawyer, who explains that the UCC (Uniform Commercial Code) 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 accepts goods when: 1) after a reasonable opportunity to inspect them, the buyer informs the seller that the goods are conforming or that the buyer will keep the goods despite the non-conformity; (2) the buyer fails to reject the goods after having had a reasonable opportunity to inspect them; or (3) the buyer takes any actions inconsistent with the seller’s ownership of the goods (e.g., using the goods after rejection).¹ Most courts interpret the “reasonable opportunity to inspect” requirement as meaning reasonable in terms of place, time, and manner. In defining 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 reject the goods and is deemed to have accepted them.

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

• After receipt, did the buyer pay for the goods?
• Did the buyer sign any documentation related to the goods?
• Did the buyer conditionally accept the goods? If so, were the conditions satisfied?

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 cannot reject accepted goods (unless it revokes acceptance, as discussed below);
• if acceptance was made despite the buyer knowing of a non-conformity, the buyer cannot revoke acceptance unless acceptance 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)²

Rejection of Goods

Returning to our example above, let’s say Alpha discovered the non-conformity immediately upon delivery.  What rights does a buyer have for rejecting non-conforming goods? The answer depends in part on whether the 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 are non-conforming, the buyer may:

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

This is commonly referred to as the “Perfect Tender Rule,” and it has some key limitations.  First, the buyer is obliged to deal with the seller in good faith, or the rejection may be deemed ineffective.⁴ Second, a seller has certain rights to cure non-conformities in the goods.  Third, courts have historically imposed limitations on the Perfect Tender Rule 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 individual installment 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 intent to cure.⁵

This is frequently referred to as the “Substantial Performance Rule.” In addition, if the non-conformity substantially impairs the value of the entire installment contract, the buyer may cancel the contract and recover damages from the seller, provided that the buyer presents objective evidence regarding its own needs to prove substantial impairment.⁶

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 goods⁷, 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 must hold them with reasonable care until the seller can remove them.

Revocation of Acceptance of Goods

Now let’s say Alpha accepted the widgets before they noticed the defect. Is Alpha stuck with the non-conforming widgets?

A buyer may revoke 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.⁸

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.⁹ 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. However, if 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.¹⁰

Seller’s Right to Cure

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.¹¹ 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.¹²  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.¹³

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, and courts have split on this issue.    

Conclusion

While acceptance, rejection, revocation and cure are not new legal concepts, executives that develop an understanding of these principals will be well-equipped to guide businesses through supply chain disputes.

About the Authors:

Brandon Krajewski is a Partner at Quarles & Brady LLP who practices in commercial litigation.

Patrick Taylor is a Partner at Quarles & Brady LLP who practices in commercial contract drafting and negotiation.  

Michael Chargo is an Associate at Quarles & Brady LLP who practices in business law.

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(2).
⁸ UCC § 2-608(1).
⁹ UCC § 2-608(1).
¹⁰ UCC § 2-608(3).
¹¹ UCC § 2-508(1).
¹² UCC § 2-508(2).
¹³ Official comment two to UCC § 2-508(2).

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