UCC Is For You

IF YOU BUY OR SELL MATERIALS, THEN THE UCC IS FOR YOU

By: Robert S. Tanner, Esq.

Disputes involving the purchase and sale of materials and equipment will usually be governed by the terms of the purchase and sale agreement and the law applicable to the sale of goods. In this article, aspects of the important "express warranty" are reviewed.

In Matter of Bob Rigby, Inc., 62 B.R. 900 (M.D. Fla. 1986), Bob Rigby, Inc. ("Buyer") was engaged in the business of mining and selling fill dirt and shell material which was often used in road construction. Buyer engaged Eagle Crusher Company, Inc. ("Manufacturer") and one of Manufacturer's distributors, Linder Industrial Machinery Company ("Distributor") in negotiations for the purchase and sale of a rock crushing machine. During the negotiations, Buyer informed both Manufacturer and Distributor of its production requirements for the machine. Although small amounts of material from one of Buyer's sites was provided to Manufacturer, Manufacturer made clear that an adequate sample of the material to be handled by the machine was necessary before assurance that the machine was designed properly could be provided. The machine performed satisfactorily with the materials that were run through it, but an adequate sample was never provided to Manufacturer.

Buyer accepted Distributor's quotation. Distributor forwarded the purchase order to Manufacturer. The purchase order stated that Manufacturer warranted the machine to perform to Buyer's specifications. Manufacturer immediately notified Distributor, and Distributor informed Buyer, that the warranty could not be provided, stating that the capability of the machine was dependent upon several factors, including the moisture content of the material fed into it.

Manufacturer delivered the machine to a mining site operated by Buyer. Shortly thereafter, Distributor provided Buyer with the operating manual and a 90 day product warranty. That warranty required the submission of all claims to Manufacturer within 30 days of discovery of the defect.

The machine was put into use but had difficulties. Pursuant to a "field start-up service" provision in the purchase order, Manufacturer was frequently on site with the machine for a period of one month after delivery. When the machine operated satisfactorily for about another month, Buyer chose to accept the machine rather than return it. For approximately two more months, the machine had no problems and functioned substantially in accordance with its specifications.

On one particular day, the machine was placed near an embankment at a pit being mined. The machine toppled over and tumbled down the embankment, which resulted in significant damage. Rather than contact Manufacturer or Distributor to perform the needed repairs, Buyer performed them himself. After the accident the machine never functioned satisfactorily. After using the machine for another six months, Buyer took it out of service.

Two months after taking the machine out of service, and nearly one year after the machine was delivered for Buyer's use, Buyer notified Distributor that the machine failed to perform as represented. Buyer defaulted on the payments due under a financing agreement and then filed a lawsuit in which it alleged a claim for breach of express warranty, among others, against Manufacturer.

Claims for breach of express warranty in the sale of goods are governed by the Uniform Commercial Code ("UCC"), as enacted with modifications by the Florida legislature. One of the drafters' purposes for the model UCC was to offer the various states a consistent and comprehensive set of rules that would govern commercial transactions. Every state has adopted the UCC, although many have tweaked it.

As an initial matter, it is important to note that Buyer asserted a claim for breach of express warranty against Manufacturer, although Manufacturer was not the seller. Distributor had sold it to Buyer. The federal court noted that the applicable section of the statute "does not limit express warranty to the actual seller in spite of the fact that a literal reading of the Section might so indicate, but also extends the same to the manufacturer of the goods if, in fact, an express warranty arose by virtue of other means described in the Statute." So, manufacturers that make express warranties can be held liable for them, even if they are not in "privity" (even if they don't have a contract) with the buyer.

The determinative question for Buyer's express warranty claim against Manufacturer was whether Manufacturer had, in fact, given an express warranty. The court found that there was no question that Buyer had communicated its requirements for the machine. However, the court also found that Manufacturer on at least two occasions before Buyer purchased the machine had communicated that it would not guarantee a specific rate of production without an adequate sample of the material the machine was to process. An adequate sample had never been provided to Manufacturer. Accordingly, the court found that the Manufacturer had not given the express warranty that Buyer claimed.

Further, the court found that Buyer had not complied with the notice requirements of the UCC. Under the UCC, when a Buyer accepts a tender of goods, the Buyer must within a reasonable time after discovering a breach of warranty notify the seller of the breach "or be barred from any remedy." The court found that the notice Buyer gave nearly one year after delivery of the machine was not reasonable notice. Interestingly, the court's discussion on this point focused on the entire amount of time that Buyer had the machine, not the period between the alleged date of discovering the alleged breach and the date of the notice. The court also did not discuss the applicability of the Manufacturer's 30-day notice requirement in the 90-day product warranty issued to Buyer.

Based on its findings that Manufacturer had not given an express warranty (to the contrary, Manufacturer had stated there was no warranty) and Buyer had failed to give timely notice of the alleged breach, the court ruled against Buyer on its claim of express warranty.

Among the lessons buyers of goods might learn from this case are (a) to ensure that the seller's or manufacturer's conditions for an express warranty have been satisfied and (b) if, after accepting a seller's tender of goods, the goods fail to perform as the seller (or manufacturer) warranted, to promptly give notice of that failure. Sellers and manufacturers can also incorporate lessons from the case into their business practices. If it is intended that certain conditions must be met before a warranty becomes effective for the equipment or materials being sold, those conditions must be communicated to the buyer. It is also prudent to document the communication of those conditions, as well as any findings that the conditions have not been met.

Compliance with the rules governing your transactions in goods increases the likelihood of avoiding costly lawsuits and of winning any lawsuits that do get filed. A corporate culture of documenting that compliance enhances the likelihood of positive results. Compliance and documentation will add to your company's bottom line.