United States: A Promise to Replace Defective Goods for Free is not a Contract

In order to have a contract for the sale of goods, whether the agreement is oral or in writing, the Uniform Commercial Code ("UCC") requires .consideration.. Consideration is a bargained-for exchange of benefits and detriments.

A recent case addressed whether a promise to replace defective windows for free had the consideration necessary to make it a binding contract under the UCC. An individual ("Homeowner") ordered 60 windows from a window manufacturer ("Manufacturer"), which were paid for and installed. After three years, 56 of the windows suffered from "obvious decay". Manufacturer replaced 33 of the windows for free. The remaining windows, Manufacturer orally promised, would be replaced for free at a later time. After another seven years, the remaining windows still had not been replaced. Manufacturer concluded that the windows were in an advanced state of decay, and informed Homeowner that if he wanted replacement windows, he would have to purchase the windows.

Homeowner sued Manufacturer for breach of contract, alleging Manufacturer had a binding obligation to replace the remaining defective windows. The court held that because Manufacturer offered the windows for free, the promise lacked consideration, and therefore Manufacturer's oral promise was never in fact a contract. The court explained that "not every benefit is consideration". Homeowner's benefit, and Manufacturer's corresponding detriment, is clear: replacement of decaying windows for free by Manufacturer. Manufacturer's benefit, and Homeowner's corresponding detriment, is not clear. Homeowner contended that Manufacturer's improvement in reputation would suffice as a benefit. The court disagreed, holding that a hypothetical and tangential benefit to Manufacturer's reputation is not sufficient to make Manufacturer's promise a binding contract. Had the original contract provided that Manufacturer would replace defective windows for no cost, however, the court would have probably found consideration in the fee Homeowner paid to Manufacturer.

When a purchased good does not meet the buyer's standards, the UCC provides the buyer with several alternatives, including (1) rejecting the non-conforming good, (2) recovering damages from the seller, (3) deducting damages from the purchase price, or (4) some combination thereof.

In a recent case, a contractor had an agreement with the State of Vermont to install a sprinkler system in a state-owned building. The contractor arranged for a maker of custom pipes to install the fire-sprinkler pipes. The pipe maker performed the installation, but the State complained that the pipes were "full of rust inside and out". This put the contractor in a difficult position, because the pipes did not meet the State of Vermont's reasonable expectations and the pipe maker did not have any new pipes available to replace the rusty pipes. Rather than waiting for the maker to produce new pipes, on four separate occasions the contractor removed the pipes, attempted to remove the rust, and reinstalled the pipes.

The contractor never paid the pipe maker and the pipe maker sued the contractor for the purchase price. The contractor claimed that because the goods did not conform to the contract (i.e., the pipes were rusty), there was no obligation to pay for the pipes under the UCC. The pipe maker argued that the contractor accepted and used the goods, so the contractor could not claim that the goods did not conform to the contract. The court found for the contractor, noting that the contractor gave the pipe maker adequate notice of the defect. Thus, a buyer's notice to the seller that goods do not conform may relieve the buyer of any duty to pay the seller the purchase price when curing a defect costs the buyer more than the product.

There are two concurrent bodies of commercial law: sale of goods law (generally governed by the UCC) and sale of services law (generally governed by case law). Unfortunately, many sales do not fit neatly into one category. For example, consider the painting of a house, which involves both a service (the painting) and a good (the paint). Contracts that involve both the sale of goods and services are dubbed "mixed goods and services contracts". Because courts do not have a third body of law for these mixed contracts, most courts determine whether the sale is predominantly for the service or predominantly for the good. In our painting example, the sale is predominantly for the service of painting a house. Thus, the law for sales of services is applied. There are often critical differences between the two bodies of law.

The overlap between goods and services came to a head in a recent case. A company purchased a crane with a boom lift. Soon after the purchase, the crane collapsed and the boom was damaged. The company took the crane to a repair shop, and the repair shop determined that it would have to order and reassemble a replacement boom.

The repair shop and the company assumed the repair costs would be covered under warranty, so neither party attempted to put the repair agreement in writing. The repair shop disassembled the broken boom and began installing a replacement boom. After the repair work had begun, the parties learned there was no warranty. Because the boom was no longer considered "under warranty," the repair shop required the company to pay for the repair shop's already-completed services. The company refused to make any payments, citing the lack of a contract, and the company arranged for the crane (including the replacement boom installed by the repair shop) to be sent to the boom dealer where the boom was purchased.

The repair shop sued the company for the cost of the repair work, including parts and labor. Under the UCC, which governs the sale of goods, any contract for a good that costs more than $500 requires a written contract unless the good is received and accepted by the buyer. Under services law, however, there must be a "meeting of the minds," ascertainable from a reasonable third party's perspective. In this case, there was not a written contract, nor was there a legitimate meeting of the minds since both parties mistakenly believed the work was covered by a warranty. Therefore, the court could find an enforceable contract only if the repair of the crane was a sale of goods, and the company received and accepted the repair work.

The court concluded that the heavy equipment repair work in this case was in fact a sale of goods since the transaction predominantly involved the sale of the replacement boom, evidenced by the fact that almost 80% of the invoice was attributable to the cost of the replacement boom and only 20% was attributable to labor performed by the repair shop. Acceptance of a good occurs when the possessor does any act inconsistent with the ownership of that good. The court found that the company .accepted. the partially-repaired crane when it had the crane and replacement boom removed from the repair shop to a different location. Because the transaction was found to be a sale of goods, and because the company received and accepted the partially-repaired crane, there was an enforceable contract between the company and the repair shop, and the company was therefore responsible for the cost of the repairs.

Contracts must provide terms for foreseeable events such as a possible breach of contract or potential late monthly payments. Additionally, drafters of contracts should attempt to include provisions for the unthinkable, albeit in a bit more general language. For example, a "force majeure" clause, or a clause that excuses performance due to "an act of God," is very general, but it provides a specific excuse in many situations.

In a recent case, a Chicago-based purchaser of used railroad rails sued its German distributor for failure to perform. Both parties agree that they had a contract for delivery by the distributor to purchaser of 18,000 metric tons of used railroad rails on December 31, 2002. Unfortunately, that is about all upon which the two parties agreed.

The German distributor typically used railroad rails from the former USSR. The distributor scheduled used rails for shipping in November of 2002 from St. Petersburg, Russia. By November, the St. Petersburg port was ice bound, preventing any ships from entering or departing. The contract did not have a force majeure clause, but the contract was based on the Convention on Contracts for the International Sale of Goods (CISG). The adjudicating American court noted that no American courts had interpreted the CISG before. However, the American system has a similar provision under the UCC. Thus, the court applied that rationale.

Under the UCC, "three conditions must be satisfied before performance is excused: (1) a contingency has occurred, (2) the contingency has made performance impracticable, and (3) the nonoccurrence of that contingency was a basic assumption upon which the contract was made". The parties agreed that the contingency had occurred (i.e., that the port was ice bound). However, the parties disagreed as to the second requirement, the impracticability of performance, and the third requirement, which hinges on whether the event was foreseeable. If the event was foreseeable, performance is not excused. If the event was not foreseeable (and the other two elements of the test are met), performance is excused.

The purchaser explained that it was indeed foreseeable that the port would freeze over since it did so every year. In the purchaser's own words, "it hardly could come as a surprise to any experienced shipping merchant (or any grammar school geography student) that the port in St. Petersburg might become icy and frozen in the Russian winter months." Because the event was foreseeable, the purchaser argued that performance should not be excused.

The court, to a certain extent, disagreed. The court had evidence that this particular winter was the worst winter in St. Petersburg in almost 60 years. Additionally, while the port typically freezes, it usually does so in January, not November. Further, even when the port is frozen, such freezing usually does not impede shipping. Thus, the extreme winter was an unforeseen event. As a result, the court allowed the excuse defense. The entire trial could have been easily and inexpensively avoided if the distributor had included a force majeure clause in the initial contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.