Saturday, November 21, 2009

Contracts/Sales: Accepting & Rejecting Non-Conforming Goods

Question:

When a buyer receives both conforming and non conforming goods, is it possible for him to keep the conforming goods, reject the non conforming goods and pay only for the conforming goods? Or does he have to keep/reject the shipment as a whole?

Response:

It's important to distinguish between single delivery contracts (when all goods are delivered at once, and installment contracts (when goods are delivered in separate installments).

First, single delivery contracts: If the goods fail to conform to the specifications in the contract, then the buyer has the right to reject all (even if some units conform), accept all, or accept some, and reject the rest. If the buyer decides to accept all or some of the non-conforming goods, he can then sue for damages. If he decides to reject, he can either cancel the contract, or sue for damages.

In an installment contract, it's a bit different. In these situations, the buyer can reject an installment only if the non-conformity substantially impairs the value of that specific installment, and if the non-conformity cannot be cured by the seller. If the non-conformity not only substantially impairs the value of that specific installment, but also substantially impairs the value of the entire contract, then the whole contract is breached, and in that case, the buyer can either sue for damages, or cancel the contract.

So be sure to distinguish between these two types of deliveries (single vs. installment) when analyzing this issue.