REJECTED CUSTOM GOODS & SELLER’S REMEDIES
Rejected Order? In a time when you can sell or purchase products from virtually anywhere in the world, there are many potential problems you can run in to as a seller, especially when you produce customized products. For example, let’s say you’re a seller of custom goods. You don’t have a formal written contract with your buyer, but you do have a purchase order and the specifications for the custom product. You make the customized product and everything looks good, so you ship the goods to your client. But the day after you shipped the goods, the buyer cancels the order: rejects the order.
What now? Does the buyer have to pay? Can you demand the goods returned? Does the buyer get to keep the goods because they rejected / cancelled their order before payment was due? If they already paid, can they get a refund? There are many possible questions you might have about what to do in this situation.
Here’s the gist of where you’re starting. The Uniform Commercial Code (UCC) controls the sale of goods. However, the sale of goods worth $500 or more must be in writing. UCC 2201. There may not be a formal written contract, however, a purchase order and specifications will usually satisfy the writing requirement, provided the material provisions are present, such as the parties (the names of the buyer and seller), the goods to be sold, and the price. UCC 2201.
However, there may be special rules that apply if you are considered a merchant under the UCC. A merchant is someone who deals in goods of the kind being sold, or otherwise holds himself out as having knowledge of skill peculiar to the practices or goods involved in the transaction. UCC 2104(1). For example, a widget manufacturer is considered a merchant when he contracts to sell his widgets. He is not a merchant when he contracts to sell his car.
Generally, a contract for the sale of goods is terminated by either party when he or she puts an end to the contract. Termination discharges all obligations that are executory on both sides but does not affect any right that is based on prior performance or breach. UCC 2106(3).
Let’s return to our hypothetical. You’ve shipped your goods and the very next day you find out the buyer wishes to cancel the order. Your custom product is rejected. What do you do?
You’re in luck as there is a provision of the UCC that deals with this kind of scenario.
Under the UCC, even if there is not a sufficient writing, the contract will still be held as enforceable if “the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement.” UCC Section 2201(3)(a).
As long as the goods are specially manufactured, or customized, and you’ve made either a substantial start on their manufacture or commitments for procuring the goods, then you don’t need such a formal writing and your agreement will still be enforceable. Therefore, if you seek to enforce the agreement and make the buyer pay for the custom goods, a court will see your agreement as valid and should allow you to seek remedies to a rejected / cancelled order for custom goods.
Remedies include withholding delivery of the goods involved, stop delivery by any bailee, reselling the goods, or recovering damages or the price for nonacceptance. UCC 2703. Keep in mind, if you choose to stop delivery, you will be responsible for any costs and liabilities associated with such a stoppage. UCC 2705.
Where the buyer has the goods, the seller is entitled to the contract price. UCC Section 2709. The seller may also be entitled to recover if the goods are identified in the contract and the seller is unable after reasonable effort to resell them at a reasonable price. Keep in mind that the statute of limitations in contracts for sale lasts only four years. UCC 2725.
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Of course, this is a basic introduction of what rights a seller has in such circumstances. Your State may have additional nuances and hurdles for you to navigate. Obviously, it is important to thoroughly address the facts of your case with an attorney. At Cartee, LC, we have counseled businesses in both domestic and international disputes, in state and federal courts, and in arbitration. If your business faces the issues discussed above, we would be happy to assist. Call us at (714) 942-2225.