Rejection, cure, acceptance and revocation

Somerville, New Jersey, the twentieth of July, nineteen seventy eight. A couple visit a dealer after a mobile home show and agree to buy a new camper van for fourteen thousand one hundred dollars, trading in their old van for four thousand seven hundred. They leave the old van with the dealer. Delivery is set for on or about the third of August, because the dealer needs two weeks to prepare the new one.
On the third of August they come with their checks. The paint is scratched, the electric and sewer hookups are missing, and the hubcaps are not on. The salesman on duty tells them not to accept the camper because it was not ready. They want it for a summer vacation. They call and call. Each time they are told it is not ready.
On the fourteenth they are called in. Workers are still touching up the paint, the windows have been left open, and the dining cushions are soaking wet. The manager suggests they take it anyway and he will replace the cushions later. The wife offers to take it if they can hold back two thousand dollars. He offers two hundred and fifty. She refuses. He promises to call when it is ready.
On the first of September they are told to come in. They wait an hour and a half. No one comes out to talk to them, and they leave in disgust. In October they ask for their old van back. The dealer has already sold it, to an innocent third party, for four thousand nine hundred and ninety five dollars. They sue.
So here is the question. Scratched paint, missing hubcaps and wet cushions are small things. The dealer could fix every one of them in an afternoon. May a buyer walk away from a fourteen thousand dollar van for defects that small? Think about it before I go on, because the Code gives two different answers depending on one fact, and the fact is not the size of the defect.
And now the question I keep asking. What exactly did these people promise each other? A van, conforming to the contract, on or about a date. Today the Code's machinery for goods that arrive wrong. Rejection before acceptance. The seller's right to cure. What counts as acceptance. Revocation of acceptance. And the buyer's damages when he keeps what he got.
Here is the first line for the board, section two dash six oh one. If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial unit or units and reject the rest. In any respect. That is the perfect tender rule.
And its procedure, from two dash six oh two. Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
Second line, section two dash five oh eight. Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
And after the time has run, where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.
Third line, acceptance. Under two dash six oh six, acceptance of goods occurs when the buyer, after a reasonable opportunity to inspect the goods, signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity. Or when he fails to make an effective rejection. Or when he does any act inconsistent with the seller's ownership.
And its consequences, from two dash six oh seven. The buyer must pay at the contract rate for any goods accepted. Acceptance of goods by the buyer precludes rejection of the goods accepted. The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy. And the burden is on the buyer to establish any breach with respect to the goods accepted.
Fourth line, revocation, section two dash six oh eight. The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured, or without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.
Hear the change of word. Before acceptance, fail in any respect. After acceptance, substantially impairs its value to him. The line between the two regimes is acceptance itself.
Now the case. Ramirez against Autosport, Supreme Court of New Jersey, nineteen eighty two, Justice Pollock. The court began with history. In the nineteenth century, sellers were required to deliver goods that complied exactly with the sales agreement. By the nineteen twenties the doctrine was so entrenched in the law that Judge Learned Hand declared there is no room in commercial contracts for the doctrine of substantial performance.
The objection to the rule was practical. The chief objection to the continuation of the perfect tender rule was that buyers in a declining market would reject goods for minor nonconformities and force the loss on surprised sellers. A buyer who has found a cheaper supplier looks for a scratch.
So what did the Code keep? To the extent that a buyer can reject goods for any nonconformity, the UCC retains the perfect tender rule. The Code, however, mitigates the harshness of the perfect tender rule and balances the interests of buyer and seller. The Code achieves that result through its provisions for revocation of acceptance and cure.
Then the structure, which is the part to learn. Before acceptance, the buyer may reject goods for any nonconformity. Because of the seller's right to cure, however, the buyer's rejection does not necessarily discharge the contract. Within the time set for performance in the contract, the seller's right to cure is unconditional.
After expiration of that time, the seller has a further reasonable time to cure if he believed reasonably that the goods would be acceptable with or without a money allowance. And what is a further reasonable time depends on the surrounding circumstances, which include the change of position by and the amount of inconvenience to the buyer.
After acceptance, the Code strikes a different balance: the buyer may revoke acceptance only if the nonconformity substantially impairs the value of the goods to him. This provision protects the seller from revocation for trivial defects. It also prevents the buyer from taking undue advantage of the seller by allowing goods to depreciate and then returning them because of asserted minor defects.
The court gave a reason for the whole design that I want you to keep. Faceless manufacturers mass-produce goods for unknown consumers who purchase those goods from merchants exercising little or no control over the quality of their production. In an age of assembly lines, we are accustomed to cars with scratches, television sets without knobs and other products with all kinds of defects. Buyers no longer expect a perfect tender.
If a merchant sells defective goods, the reasonable expectation of the parties is that the buyer will return those goods and that the seller will repair or replace them. Rejection starts a conversation. Cure is the seller's answer. Only if the seller does not answer does the deal end.
And if the seller does not cure? Should the seller fail to cure the defects, whether substantial or not, the balance shifts again in favor of the buyer, who has the right to cancel or seek damages. Because a buyer may reject goods with insubstantial defects, he also may cancel the contract if those defects remain uncured. Otherwise, a seller's failure to cure minor defects would compel a buyer to accept imperfect goods and collect for any loss caused by the nonconformity.
One more difference between the regimes, and it decides cases. Once a buyer accepts goods, he has the burden to prove any defect. By contrast, where goods are rejected for not conforming to the contract, the burden is on the seller to prove that the nonconformity was corrected.
Now apply it. The trial court found the couple rejected on the third and the fourteenth of August, within a reasonable time. Did the dealer cure? The Supreme Court answered itself. Although the Ramirezes gave Autosport ample time to correct the defects, Autosport did not demonstrate that the van conformed to the contract on September 1. In fact, on that date, when Mr. and Mrs. Ramirez returned at Autosport's invitation, all they received was discourtesy.
So they could cancel, and the trial court had been right not to ask whether the defects were substantial. That question belongs only to revocation. What did they get back? A buyer who rightfully rejects goods and cancels the contract may, among other possible remedies, recover so much of the purchase price as has been paid. Their trade-in was part of the price.
It had been sold, so they recovered its value, and the court took the value the parties themselves had put on it, four thousand seven hundred dollars.
Summarize the court's own way. The UCC preserves the perfect tender rule to the extent of permitting a buyer to reject goods for any nonconformity. Nonetheless, that rejection does not automatically terminate the contract. A seller may still effect a cure and preclude unfair rejection and cancellation by the buyer.
Now the buyer who keeps the goods. Go back to the sawmill in Arkansas from last lecture. The mill owner never rejected the oil. He used it for two and a half years. So he accepted it, and his remedy is not cancellation but damages for accepted goods, under two dash seven fourteen.
The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. And in a proper case any incidental and consequential damages under the next section may also be recovered.
The Eighth Circuit saw that the ordinary formula was useless there. The ordinary measure of damages for breach of warranty is not applicable, since the plaintiff-buyer did not pay a price exceeding the value of the goods delivered. The oil was worth what he paid. The loss was in the pumps and the lost production. So the case turned on consequential damages under two dash seven fifteen.
Consequential damages resulting from the seller's breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise, and injury to person or property proximately resulting from any breach of warranty.
Were lost profits recoverable? Mobil relied on older Arkansas cases requiring that the seller have tacitly agreed to bear them. The court answered that the Code's comment rejects that test. The question essentially is whether lost profits are damages which the seller had reason to know of at the time the contract was made.
Where a seller provides goods to a manufacturing enterprise with knowledge that they are to be used in the manufacturing process, it is reasonable to assume that he should know that defective goods will cause a disruption of production, and loss of profits is a natural consequence of such disruption.
But the court cut the award back in two places. First, the mill owner claimed profits for two further years after the oil was changed, because the breach had left him nearly bankrupt and unable to run at full capacity. The failure to produce at full capacity during the period when he was not using Ambrex 810 was not due to a breach of warranty but was clearly due to the plaintiff's capital resources.
The defendant is not in the business of extending credit to manufacturing enterprises.
Second, avoidance. Only losses which could not reasonably be prevented by cover or otherwise are recoverable. Should he have hired an independent expert sooner? The court left that to the jury, because the buyer had kept Mobil informed and Mobil kept supplying the same oil. Throughout this period, defendant continued to supply plaintiff with Ambrex 810, knowing both of his reliance on it to supply the proper oil and his difficulties in operation. The duty to mitigate damages is not an unlimited one.
And notice. A buyer who accepts must notify the seller of breach within a reasonable time or be barred from any remedy. How much notice? The court quoted the Code's comment. The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. The mill owner's repeated questions to the dealer were enough.
Put the two cases side by side. Ramirez, goods rejected before acceptance for small defects, the seller given time to cure, no cure, the contract cancelled and the price returned. Lewis, goods accepted and used, no rejection possible, damages for the accepted goods, measured through consequential loss the seller had reason to foresee, less what the buyer could have avoided and what the breach did not cause. One question divides them. Did the buyer accept?
Now let's change one fact. On the fourteenth of August the couple had taken the van, driven it home, and used it for their vacation, and only then complained about the scratches and the cushions. Choose an answer before I go on.
Then they accepted it. Taking and using the van after inspection signified that they would retain it despite the nonconformities. They could no longer reject. To undo the sale they would have to revoke, and revocation requires a nonconformity that substantially impairs the van's value to them. Scratches, hubcaps and cushions almost certainly do not. They keep the van and recover the cost of the defects as damages for accepted goods.
Change one fact again. On the third of August, the date set for delivery, the salesman had said, give me until the end of the day, and by five o'clock the hookups and hubcaps were on and the paint was touched up. Choose.
Then the dealer cured, and the couple must take the van. Within the time set for performance in the contract, the seller's right to cure is unconditional. The rejection of the morning did not end the contract. A conforming tender within the contract time does exactly what the contract required.
Change one fact a third time. The camper had been delivered and accepted without complaint, and three weeks later the frame was found to be cracked, a defect no one could have seen on the lot, making the van unsafe to tow. Choose.
Now the couple may revoke. The acceptance was without discovery of the non-conformity, and was reasonably induced by the difficulty of discovery before acceptance. A cracked frame substantially impairs the van's value to them. They must revoke within a reasonable time after discovery and before any substantial change in the van not caused by its own defects. Revocation then gives them the same rights as if they had rejected.
Here is what people get wrong here, and why it is tempting. The first mistake is to think the Code abolished the perfect tender rule. It did not. Before acceptance a buyer may reject for any nonconformity. What the Code added is cure, which makes rejection the start of a conversation rather than the end of a deal. The second mistake is to apply the substantial impairment test to rejection. It belongs to revocation, after acceptance.
The third mistake is to forget notice. A buyer who has accepted and says nothing may lose every remedy, though the notice need only tell the seller that the transaction is still troublesome and must be watched.
Here is the rule, in one breath. Before acceptance a buyer may reject goods that fail in any respect to conform, by seasonable notice, but the seller may cure within the contract time, and beyond it for a reasonable time if he reasonably believed the tender would be acceptable, and only an uncured rejection lets the buyer cancel and recover the price.
Acceptance ends the right to reject, obliges the buyer to pay and to notify the seller of breach, and puts the burden of proving breach on him. He may revoke only for a nonconformity that substantially impairs the value to him, and otherwise recovers damages for the accepted goods, including foreseeable consequential loss he could not reasonably avoid. Now, five questions.