The Battle of the Forms and a Cure That Arrives One Day Early
Buyer, a New Mexico manufacturer, has bought precision housings from Seller, an Ohio machine shop, for nine years. Every order follows the same pattern: Buyer faxes a purchase order stating quantity, price, a June 15 delivery date, and a legend that Seller's acceptance is expressly limited to the terms of the order. Seller returns an acknowledgment form disclaiming all consequential damages and capping total liability at $10,000. Buyer never signs, never objects, and on two prior occasions Seller invoked the cap after late shipments and Buyer paid the reduced invoices without protest. This year Buyer ordered 4,000 housings at $60 each, a $240,000 contract. Seller shipped June 10, but the housings were machined to the wrong tolerance. Buyer inspected and rejected them by phone and email on June 12. Seller immediately acknowledged the defect and shipped conforming housings, which arrived June 14 - one day before the contract date. Buyer refuses delivery, has bought substitute housings elsewhere for $330,000, and sues for that sum plus $500,000 in losses from a production shutdown, arguing that its rejection ended the contract and that the liability cap never became part of the bargain.
1. Did Seller's $10,000 liability cap become part of the contract? Analyze under UCC §§ 2-207 and 1-303, including the significance of Buyer's 'expressly limited' legend and the nine-year course of dealing.
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Probably not, though the course-of-dealing argument makes this closer than it first appears.
Step one is § 2-207(1). Seller's acknowledgment would ordinarily operate as an acceptance even though it added terms - unless it was expressly made conditional on assent to those terms. Here the conditional language is in Buyer's purchase order, not Seller's. That converts the sequence: Buyer made an offer expressly limited to its own terms, and Seller's acknowledgment was a counteroffer, not an acceptance.
Step two: silence is not assent. Buyer never signed or agreed to Seller's form, so no contract formed under § 2-207(1). But the parties performed, so § 2-207(3) supplies the contract: the terms on which the writings agree, supplemented by UCC gap-fillers. The cap and the consequential-damages disclaimer appear in only one writing. A limitation of remedy is a material alteration under § 2-207(2)(b) - it shifts risk of loss and cuts off the buyer's principal remedy - so it is knocked out. The same is true of the consequential-damages disclaimer, though it would fail separately under § 2-719 if unconscionable (it is not, in a commercial sale).
Step three is Seller's best argument: § 1-303 makes a course of dealing relevant to giving "particular meaning to and supplementing or qualifying" the agreement, and nine years of unbroken practice plus two invocations of the cap that Buyer honored is powerful evidence. The counter is that a course of dealing illuminates and fills gaps in the parties' agreement; it does not manufacture assent to a term that § 2-207(3) excluded. Expect the court to exclude the cap while allowing the dealing evidence on the meaning of other terms.
2. Was Buyer's June 12 rejection effective, and does Seller's June 14 delivery obligate Buyer to accept the conforming goods?
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Buyer's rejection was rightful when made, but it was undone by a valid cure, and Buyer must now accept and pay.
Under § 2-601 the buyer may reject goods that fail in any respect to conform to the contract - the perfect-tender rule. Wrong-tolerance housings are nonconforming, and Buyer rejected promptly after a reasonable inspection, so as of June 12 Buyer had no obligation to pay and had no duty to cover.
Section 2-508(1) changes the outcome. Where the buyer rejects nonconforming goods and the time for performance has not yet expired, the seller may cure by (1) seasonably notifying the buyer of an intention to cure and (2) making a conforming delivery within the contract time. All three conditions are met: the contract date was June 15, Seller notified Buyer the same day it learned of the rejection, and the conforming shipment arrived June 14.
Because the cure was effective, Buyer's refusal to accept the June 14 shipment is itself a breach. Buyer cannot recover the $330,000 cover differential, because cover under § 2-712 is available only after a breach, and a properly cured rejection produces no breach. Buyer's remedy is confined to damages for the delay and for any incidental loss suffered between June 10 and June 14 under §§ 2-714 and 2-715. If Seller had delivered on June 16, or if the cure shipment had also been nonconforming, § 2-508(1) would not apply, and Buyer's rejection would have stood.
3. Assume the court holds the cap unenforceable and the cure only partially effective, so that Buyer's cover is proper. What may Buyer recover, and what obstacles stand in the way of the $500,000 shutdown claim?
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Buyer recovers the cover differential as a matter of course and the shutdown losses only if foreseeability and mitigation are proved.
The cover differential is straightforward: § 2-712 gives the buyer the difference between the cost of cover and the contract price, plus incidental and consequential damages less expenses saved. That is $330,000 − $240,000 = $90,000. Buyer must show its cover purchase was made in good faith and without unreasonable delay.
Consequential damages go through § 2-715(2): losses resulting from general or particular requirements of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover. The shutdown claim is where the case is won or lost. Buyer's strongest evidence is nine years of just-in-time ordering and the nature of the part: if the housings feed a continuous production line and Seller knew it, a shutdown is the classic foreseeable consequence of nonconforming parts. Buyer's weakest point is that a nine-year supplier relationship also suggests Seller knew Buyer's volumes and scheduling, which may support a finding that Buyer should have carried safety stock or covered faster.
Obstacles Buyer will face: (a) proving the shutdown was caused by the missing housings rather than independent production problems; (b) proving mitigation, since a manufacturer that waits weeks to arrange cover cannot recover losses it could reasonably have prevented under § 2-715(2)(a); and (c) the rule that recovery is limited to losses that were a foreseeable consequence at the time of contracting, not at the time of breach. Without documentary proof of the production schedule, the $500,000 figure is unlikely to survive a motion for judgment as a matter of law.