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The Hidden Case Killer: The Notice Provisions in the Uniform Commercial Code, Let the Buyer Beware!
by Craig G. Penrose
As is often the case in complex construction projects, a multitude of materials or goods are purchased through subcontractors and used in the construction and erection of a building. Defects in these materials or goods, however, whether it be leaky pipes or non-performing electrical equipment, or some other non-performing equipment, are usually not apparent before the materials are put to use in the finished building. Upon discovery of the non-performing goods, the buyer usually believes that it has plenty of time to contact the seller to fix the problem, or bring suit, and merely places the problem on a “to-do” list. Buyers have been counseled that the statute of limitations for construction defects is four years and for sale of goods , leaving the impression that they have plenty of time to follow up with the subcontractor.
Failing to resolve the problem, a lawsuit is filed and the seller immediately seeks to dismiss the lawsuit, even if it is filed within the statute of limitations, arguing that pre-litigation notice was not provided. The court summarily grants the motion and the buyer is left without a remedy. The buyer’s recovery has been “killed” due to the often overlooked notice provision of the Uniform Commercial Code (“UCC”), which exists in substantially the same form in every state. This hypothetical is played out in countless lawsuits across the country, catching an unwitting buyer of goods by surprise.
The following review provides a guide to the substance of the hidden notice provisions, and suggests some easy steps to avoid the above hidden “case killer” hypothetical.
The UCC’s Hidden Notice Provision: the Case Killer
The UCC applies to the sale of goods. While it typically will not apply to entities that provide services/labor on a construction project, it will most likely apply to suppliers that are primarily providing only materials or goods that will be installed or used by others in the construction of the project. While the common law generally left the buyer without a remedy if it accepted goods, the UCC allows for a potential breach of warranty claim that arises under the statute after the goods are accepted, if the goods turn out later to be defective. But in exchange for this statutory remedy, the buyer is required to follow the hidden notice provision in the UCC.
The critical notice provision of the UCC relating to the sale of goods appears in Section 2-607(3)(a) of the Uniform Commercial Code and states:
Where a tender has been accepted . . . the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy. . . .
These are not mere idle words–courts take the phrase “or be barred from any remedy” seriously. Many unwitting buyers fail to find or follow these provisions and are left without a remedy. In reviewing the reasons for enforcement of such a draconian provision, the Illinois courts have held that the purpose of the notice is (1) to give the seller an opportunity to cure a defect and minimize damages, Maldonado v. Creative Woodworking Concepts, Inc., 296 Ill.App.3d 935, 694 N.E.2d 1021 (3d Dist. 1998), (2) to protect the seller’s ability to investigate and gather evidence, and (3) to allow the seller to negotiate a possible settlement. Perona v. Volkswagen of America, Inc., 292 Ill.App.3d 59, 684 N.E.2d 859 (1st Dist. 1997).
In every lawsuit for breach of warranty, pleading that proper notice has been provided is an essential element, Branden v. Gerbie, 62 Ill.App.3d 138, 379 N.E.2d 7 (1st Dist. 1978), and the failure to allege sufficient notice may be a fatal defect in a complaint. Connick v. Suzuki Motor Co., 174 Ill.2d 482, 675 N.E.2d 584 (1996). This places the affirmative duty on the plaintiff to make allegations in the complaint to state exactly when the plaintiff told the seller of the specific problem. Thus, despite the fact that a plaintiff filed suit within the period of the statute of limitations, he must also provide adequate notice under section 2—607 or risk dismissal. Wagmeister v. A. H. Robins Co., 64 Ill.App.3d 964, 382 N.E.2d 23 (1st Dist. 1978). Failure to provide notice of breach under 2-607(3)(a) is not an affirmative defense which must be raised by the seller, rather, notice is a condition precedent to the buyer’s cause of action which must be pleaded and proved by the buyer in order to recover.
Numerous cases across the country have dismissed cases even when filed within the applicable statute of limitations, when there has been no notice prior to the lawsuit of the problems as required under 2-607. Perhaps there was no more compelling case for a court to avoid the strict application of the notice provisions than the Illinois Supreme Court Case of Berry v. G.D. Searle & Co. 56 Ill. 2d 548, 309 N.E.2d 550 (1974). In that case, a consumer brought an action for breach of contract after suffering permanent, partial paralysis as a result of cerebral vascular accident or, more commonly, a stroke. The stroke allegedly resulted from the purchase and ingestion of oral contraceptives manufactured and distributed by codefendants G.D. Searle & Co. and Planned Parenthood of Chicago. Considering the relative circumstances of the parties, it is easily imaginable that the compassion of the court would be with the injured consumer and that she would therefore have the benefit of a sympathetic construction of the law. Nonetheless, the consumer’s argument for exemption from the notice requirement was rejected. The court stood firm on the general principle that an action brought under the Uniform Commercial Code must be governed by all of its relevant provisions, even if applying that principle meant the injured consumer would be barred from any remedy because of failure to give the seller notice of the breach as required by section 2-607(3)(a). In sum, a notice must be provided as soon as reasonable or your case will be “killed.” This raises three additional questions – what constitutes adequate notice, how soon is “reasonable,” and who does the notice need to be sent to.
What’s In a Notice?
There is little doubt that notice itself must sufficiently identify the transaction or goods for which a breach is being claimed. If a buyer is purchasing different products or materials, the faulty goods must be identified, but courts have differed on whether the notice must go beyond a statement of dissatisfaction to include an express allegation of breach or assertion of a legal right.
The Official Comment 4 to Section 2-607 attempts to provide some guidance to the substance of the notice. “The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched… The notification which saves the buyer’s rights under this Article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.” These two statements within the Official Comment seem to prescribe two different standards on judging the contents of the notice. Notice that a transaction is “troublesome” as referenced in the first sentence appears to be a very lenient standard of the content of notice, while the last sentence of the Official Comment that states “the buyer must inform the seller that the transaction involves a breach” appears to apply a stricter standard.
A number of courts refuse to endorse the first sentence of Official Comment 4 suggesting a strict notice provision as an appropriate articulation of the standard. These courts focus instead on the last sentence of Comment 4 as authorizing a stricter standard by which to evaluate section 2-607(3) notice. See K & M Joint Venture v. Smith International, Inc., 669 F.2d 1106, 1113 (6th Cir.1982); Stevenson & Co., Inc. v. 81,193 Bags of Flour, 629 F.2d 338, 359-60 (5th Cir.1980); Eastern Airlines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 976 (5th Cir.1976). Other courts appear to allow a much lenient standard and appear to follow the first sentence and ignore the last sentence. See City Welding & Mfg. Co. v. Gidley-Eschenheimer Corp., 451 N.E.2d 734, 735-36 (Mass. 1983); Hepper v. Triple U Enters., Inc., 388 N.W.2d 525, 527, n.4 (S.D. 1986).
It seems doubtful that the drafters of Official Comment 4 intended to articulate conflicting standards by which to evaluate the adequacy of notice under section 2-607(3). A majority of the courts recognize as harmonizing factors the policies which underlie the section 2-607(3) notice requirement as detailed above in determining the adequacy of the notice. Speakman Co. v. Harper Buffing Machine Co., Inc., 583 F. Supp. 273 (D.Del.1984) (quality of notice need not achieve perfection so long as it satisfies the policies underlying the code provision). Courts agree that the adequacy of notice must be determined on a case-by-case analysis with attention to whether the buyer acted with commercial good faith. See Eastern Airlines, 532 F.2d at 976 (a buyer’s conduct under 2-607(3)(a) must satisfy the Code’s standard of commercial good faith) See also LaFayette Stabilizer Repair, Inc. v. Machinery Wholesale Corp., 750 F.2d 1290, 1294 (5th Cir.1985) (determination of whether notice complies with the legal requirement depends upon the reasonableness of the buyer’s efforts to communicate dissatisfaction) (citations omitted); Kopper Glo Fuel, Inc. v. Island Lake Coal Co., 436 F.Supp. 91, 96 (E.D.Tenn.1977) (notice analysis must be conducted with attention overall to questions of commercial good faith).
In sum, to quote the Illinois courts, “there are no particular words which must be used to constitute an adequate form of notice.” Overland Bond & Investment Corp. v Howard, 9 Ill. App. 3d 348, 358, 292 N.E.2d 168, 176 (1st Dist. 1972). The notice, in its simplest terms must apprise the sellers that (1) something is wrong with the materials or goods; (2) that the materials or goods are not performing as they should; and (3) the seller is in breach of the sale or bargain and should fix the problem so the materials or goods perform as expected. A notice that contains factual information in these three categories will likely be sufficient under any standard.
How Much Time Is Reasonable?
Perhaps the most perplexing question is how long a period after discovery of the problem until notice is given to the seller is considered reasonable. Section 1-204(2) of the UCC described what is reasonable by “looking at all the circumstances in light of the purposes to be served.” This statement does not provide much guidance. However, whether the time was reasonable under the circumstances is ordinarily a question for the jury, unless no inference could be drawn from the evidence but that the notice was unreasonable. Maldonado, 694 N.E.2d at 1026. Some judges have found that notice later than one year was simply too long and dismissed the case outright before a jury even gets to decide the issue. See K & M, 669 F.2d at 1115 (17 months); Hebron v. American Isuzu Motors, Inc., 60 F.3d 1095, 1098 (4th Cir.1995) (2 years); Wagmeister v. A.H. Robins Co., 64 Ill.App.3d 964, 382 N.E.2d 23, 25 (1st Dist. 1978) (30 months); Branden v. Gerbie, 62 Ill.App.3d 138, 379 N.E.2d 7, 9 (1st Dist. 1978) (15 months). There are even a few cases in commercial settings that find that a mere four month delay from discovery to notice is too long. Ice Bowl Inc v. Spalding Sales, 133 P.2d 846 (Cal. App. Court 1943).
Given the relative informality of the notice requirement, the safe bet is to provide notice the same day you find out the specific material or goods are not performing. Erring on the side of caution, even if the defect cannot be traced to a specific good within a system (such as heating, cooling, etc.), notice should be given to all potential material suppliers that could have provided defective parts.
What about Notice to Seller’s Seller?
As is the case in many complex construction projects, materials or goods may be delivered through several levels of a supply chain before ending with the ultimate buyer. The question arises whether a buyer needs to give the UCC notice to all sellers in the chain, from manufacturer, to wholesaler, to retailer of specific materials or goods. The majority of jurisdictions appear to require only notice to the immediate seller because Section 2-607 refers to “seller” in that context. However, Illinois courts appear to be with the minority of jurisdictions that require notice to every “seller” in the chain, particularly the manufacturer of the product that would most likely have given any written warranty in the first place. Berry v. G.D. Searle & Co. 56 Ill. 2d 548, 555-56, 309 N.E.2d 550, 554-55 (1974)(buyer must give even remote seller notice); Wagmeister v. A. H. Robins Co., 64 Ill.App.3d 964, 967, 382 N.E.2d 23, 25 (1st Dist. 1978). It is critical to have all pertinent information about the supply chain before any problems, arise so that any future notices can be sent without delay.
Better Safe than Sorry
The notice provision is hidden deep inside the UCC, leaving many owners and contractors (and their counsel) unaware of the devastating results that come from failure to adhere to the provisions. Given the relative lenient standards for the notice provision, owners and contractors would be well advised to give notice “early and often.”