Battle of the Forms, Arbitration, and Consequential Damages for Defective Bushings
Harbor Machine Works sends Crestline Components a purchase order for 1,000 precision bushings at $12 each, delivery by March 1. The PO states: 'Acceptance is expressly limited to the terms on this order.' Crestline returns an acknowledgment on its own form, adding a clause requiring arbitration of 'any dispute' and a 30-day warranty. Harbor does not object and Crestline ships on February 25. Harbor uses 200 bushings before discovering that 250 are outside the specified tolerance; it notifies Crestline three weeks after delivery. Harbor had a contract to supply 500 assemblies to a customer at $200 each. Because of the defective bushings, that customer cancels a $40,000 order. Harbor buys replacement bushings at $18 each and demands $6,000 cover damages, $40,000 lost profits, and incidental costs. Crestline moves to compel arbitration and argues Harbor accepted the goods and lost all remedies by failing to notify promptly.
1. Did the parties form a contract, and is Crestline's arbitration clause part of it under UCC § 2-207?
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A contract formed when Crestline shipped, even though its acknowledgment added terms. Under UCC § 2-207, a definite expression of acceptance operates as an acceptance even with additional terms. Between merchants, additional terms become part of the contract unless they materially alter it, the offer expressly limits acceptance, or the offeror objects. Harbor's PO expressly limited acceptance to its terms, so Crestline's arbitration clause does not become part. The clause is also a material alteration because it waives a jury and changes the dispute forum; the better view is that it is not enforceable without clear assent. The 30-day warranty is also arguably material. The parties' conduct confirms the sale of the bushings on Harbor's terms. Crestline's motion to compel arbitration should therefore be denied, though a court might enforce arbitration if it found the clause was not material and Harbor knowingly accepted it.
2. Did Harbor's use and delayed notice destroy its remedies for the nonconforming bushings?
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Harbor accepted the goods by using 200 bushings after a reasonable opportunity to inspect, but acceptance does not wipe out remedies for nonconformity. Under § 2-607, the buyer must notify the seller within a reasonable time after discovering the breach. Three weeks after delivery, with 250 parts out of tolerance, is likely reasonable, especially if the defect was latent and Harbor needed testing. Harbor may recover the difference between cover price and contract price: 1,000 × ($18 − $12) = $6,000, plus incidental costs, if the replacement purchase was made in good faith and without unreasonable delay. Harbor cannot recover the full $40,000 lost profit unless the loss was foreseeable. Under § 2-715, consequential damages must be those the seller had reason to know at contract time. If Crestline knew Harbor was buying the bushings for a specific 500-unit assembly contract, the lost profit is recoverable; if not, it is not. The buyer must also mitigate.
3. How should the court analyze the $40,000 lost-profit claim and the 30-day warranty?
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The arbitration clause and the remedy questions are separate. Even if arbitration were enforced, Harbor's substantive claims survive. For the lost-profit claim, the key is foreseeability at the time of contracting. Harbor's PO did not mention the downstream customer or the $40,000 order. If Harbor can show that Crestline knew of the assembly contract-through prior dealings, a specification, or a statement-the loss is foreseeable and recoverable under § 2-715. If Crestline only knew that the bushings were for general manufacturing, the lost profit is too remote. Harbor can still recover cover damages and incidental costs. Harbor's use of 200 bushings does not bar the claim, but it may reduce damages if the used parts had value. Crestline's 30-day warranty would not necessarily displace the UCC's implied warranty unless it was clearly intended as the exclusive remedy.