Put the buyer in a "box"

How often has your company been faced with a scenario where a buyer has a large delinquent balance, and after ignoring requests and demands for payment, the buyer claims that the goods were "defective" and that the invoices will not be paid? How can a seller best protect itself through terms in a sales contract? When the parties agree to the sale of goods, whether verbally or through written agreement, a contract of sale is created. Sales contracts are governed by the Uniform Commercial Code (UCC). This code has been enacted in nearly all states, with the exception of Louisiana, which has only enacted pertinent portions of the UCC.

When the buyer claims that the goods were "defective" long after the goods were delivered, the issue created is commonly known as the "402.607 problem," named after the applicable UCC section. In general, this section provides that a buyer has accepted the goods if the buyer, after a reasonable opportunity to inspect them, fails to reject the goods.

However, what may appear to be a "reasonable" amount of time to a seller will often not constitute a "reasonable" amount of time to a buyer. The issue involved and interpretation required can often become difficult and expensive to decide.

To best confront this issue, sellers should consider placing a reasonable time frame, in specified days, in their sales contracts, requiring the buyer to inspect the goods and make a timely and effective rejection, or the goods are to be deemed accepted. This may help eliminate a later dispute on the issue of what constitutes a "reasonable opportunity" for the buyer to inspect the goods. It is clearly defined in the contract.

Particular Purpose

There are times when a buyer may claim that goods were "defective" because they did not fit the buyer's particular purpose. Later, the seller learns that the buyer is using the goods for a purpose other than the use that had been expected by the seller. The seller was completely unaware of the new "particular purpose" that was never communicated to the seller.

One solution to this problem is to specifically articulate in the sales contract the particular purpose for which the goods are to be used. The contract can provide, if that purpose changes, that the buyer must notify the seller in writing as to the new purpose. The seller must then have the opportunity to consider this differing use and ratify selling the goods to the buyer for this new and particular purpose.

It is essential to address this issue. The UCC provides that, unless otherwise agreed, the seller warrants that goods are: 1) fit for the ordinary purpose for which they are being used; and 2) fit for any purpose for which the seller knows the goods will be used, if the buyer relied on the seller to select the goods. Specifically describing the intended use in the contract will help avoid possible future controversy between seller and buyer.

Clearly, with a bit of planning prior to the sale by using a written sales contract, a seller can materially reduce disputes and a buyer's frivolous allegations, because the buyer's cash flow is inadequate, and the buyer is looking for ways to avoid paying for the goods sold.

These considerations are intended to be general guidelines. Consultation with an attorney about your particular issues and factual scenario is mandatory for an appropriate solution.