16.3 UCC Performance: Tender, Rejection, Cure, Revocation, Installments & Risk of Loss

16.3 UCC Performance: Tender, Rejection, Cure, Revocation, Installments & Risk of Loss

Article 2 has its own performance rules, and NCBE's outline tests them alongside the common-law rules on conditions and breach. For a sale of goods, ask what the seller had to tender, whether the buyer rightfully rejected or accepted, whether the seller could cure, and—if the goods were lost or damaged—who bore the risk.

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1. UCC Article 2 Performance: The Perfect Tender Rule & Exceptions

For transactions in goods, UCC Article 2 explicitly rejects the Common Law substantial performance doctrine in favor of the Perfect Tender Rule.

A. The Perfect Tender Rule (UCC § 2-601)

Under UCC § 2-601, unless otherwise agreed under an installment contract, if the goods or the tender of delivery fail in any respect to conform to the contract (whether in quality, quantity, packaging, or manner of delivery), the buyer has three statutory options:

1. Reject the whole shipment;
2. Accept the whole shipment; OR
3. Accept any commercial unit(s) and reject the remainder.

MBE Watchword: Under the Perfect Tender Rule, there is no requirement that the non-conformity be material. If Buyer orders 1,000 blue pens and Seller tenders 999 blue pens and 1 red pen, Buyer has the statutory right under § 2-601 to reject the entire shipment.

B. The Seller's Right to Cure (UCC § 2-508)

The harshness of the Perfect Tender Rule is balanced by the seller's statutory right to cure non-conforming tender in two distinct scenarios:

                      ┌────────────────────────────────────────┐
                      │     SELLER'S RIGHT TO CURE (§ 2-508)   │
                      └───────────────────┬────────────────────┘
                                          │
                ┌─────────────────────────┴─────────────────────────┐
                ▼                                                   ▼
   ┌──────────────────────────┐                        ┌──────────────────────────┐
   │  § 2-508(1): Time for    │                        │  § 2-508(2): Time for    │
   │  Performance NOT Expired │                        │  Performance HAS Expired │
   ├──────────────────────────┤                        ├──────────────────────────┤
   │1. Seasonable notice to   │                        │1. Seller had reasonable  │
   │   buyer of intent to cure│                        │   grounds to believe     │
   │2. Tender conforming goods│                        │   tender acceptable      │
   │   within original time   │                        │2. Seasonable notice      │
   │ABSOLUTE RIGHT to cure    │                        │3. REASONABLE EXTRA TIME  │
   └──────────────────────────┘                        └──────────────────────────┘

1. Cure Before the Performance Deadline (UCC § 2-508(1)):
   • If the seller tenders non-conforming goods before the agreed delivery date, and the buyer rejects, the seller has an absolute right to cure.
   • Requirements: The seller must seasonably notify the buyer of their intention to cure, and must deliver a conforming tender within the contract time remaining. The buyer must accept the conforming cure.
2. Cure After the Performance Deadline (UCC § 2-508(2)):
   • Even if the contract delivery date has passed, the seller gets reasonable additional time to cure IF the seller had reasonable grounds to believe the tender would be acceptable, with or without a money allowance.
   • How Reasonable Grounds Are Established: Prior course of dealing, trade custom, or where the seller supplied an updated/superior model believing it would satisfy the buyer.
   • Example: Buyer orders Model X laptop. Seller ships Model Y (an upgraded replacement model with superior specs) because Model X was discontinued. Buyer rejects. Because Seller had reasonable grounds to believe the upgrade was acceptable, Seller has a reasonable time beyond the deadline to procure and tender Model X.

C. Acceptance of Goods & Revocation of Acceptance

1. How Acceptance Occurs (UCC § 2-606)

A buyer accepts goods when, after a reasonable opportunity to inspect, the buyer:

• Signifies to the seller that the goods are conforming or that they will be retained despite non-conformity;
• Fails to make an effective rejection within a reasonable time; OR
• Does any act inconsistent with the seller's ownership (e.g., alters, uses, or resells the goods).
• Payment Alone is NOT Acceptance: Paying for goods before inspection (e.g., in a C.O.D. contract) does not constitute acceptance or impair the right to inspect and reject.

2. Revocation of Acceptance (UCC § 2-608)

Once a buyer accepts goods, the buyer can no longer reject them under § 2-601. However, the buyer may revoke acceptance, which has the same legal effect as a rejection. Revocation requires a higher threshold:

1. Substantial Impairment: The non-conformity must substantially impair the value of the goods to the buyer (an objective and subjective test);
2. Grounds for Acceptance: The buyer must have accepted the goods:
   • On the reasonable assumption that the non-conformity would be cured, and it was not seasonably cured; OR
   • Without discovery of the non-conformity, where acceptance was reasonably induced by the difficulty of discovery before acceptance or by the seller's assurances; AND
3. Timeliness: Revocation must occur within a reasonable time after the buyer discovers or should have discovered the defect, and before any substantial change in condition of the goods not caused by their own defects.

D. Installment Contracts: The Major Exception to Perfect Tender (UCC § 2-612)

An installment contract is defined under UCC § 2-612(1) as one which requires or authorizes the delivery of goods in separate lots to be separately accepted.

• The Perfect Tender Rule does NOT apply to installment contracts.
• Rejecting a Single Installment (§ 2-612(2)): The buyer may reject an individual installment ONLY IF the non-conformity substantially impairs the value of that installment and cannot be cured.
  • If the non-conformity does not substantially impair the installment, or if the seller gives adequate assurance of cure, the buyer must accept the installment.
• Breaching the Entire Contract (§ 2-612(3)): Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract, there is a breach of the whole.
  • But the aggrieved party reinstates the contract if they accept a non-conforming installment without seasonably notifying of cancellation.

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2. Tender, Inspection & Rejection Mechanics

The Seller's Tender

• Tender of delivery (§ 2-503): The seller must put and hold conforming goods at the buyer's disposition, give reasonable notice, and make them available at a reasonable hour for a reasonable period.
• Shipment contracts (§ 2-504): The seller must deliver the goods to a carrier, make a reasonable contract for their transportation, obtain and deliver any documents the buyer needs, and promptly notify the buyer. A failure to make a proper transportation contract or to notify the buyer is a ground for rejection only if material delay or loss results.
• Shipment or destination? A contract that requires or authorizes shipment is presumed to be a shipment contract unless it requires the seller to deliver at a particular destination. "F.O.B. [seller's city]" creates a shipment contract; "F.O.B. [buyer's city]" creates a destination contract (§ 2-319).
• Payment: Unless otherwise agreed, the seller's tender is a condition of the buyer's duty to pay, and the buyer's tender of payment is a condition of the seller's duty to deliver (§§ 2-507, 2-511). Payment by check is conditional and is defeated if the check is dishonored.

The Buyer's Inspection and Rejection

• Right to inspect (§ 2-513): The buyer may inspect goods before paying or accepting, at a reasonable place and time, except when the contract calls for payment on delivery (C.O.D.) or against documents.
• How to reject (§ 2-602): Rejection must occur within a reasonable time after delivery or tender and is ineffective unless the buyer seasonably notifies the seller. After rejection, the buyer may not use the goods as its own.
• Care of rejected goods: A buyer in possession must hold rejected goods with reasonable care for a time sufficient to let the seller remove them. A merchant buyer must also follow the seller's reasonable instructions and, if there are none, make reasonable efforts to sell perishable goods for the seller's account (§ 2-603). A buyer that receives no instructions may store, reship, or resell the goods for the seller's account (§ 2-604).
• Stating defects (§ 2-605): A buyer who fails to state a defect that a reasonable inspection would reveal cannot rely on it to justify rejection if the seller could have cured the defect had it been stated, or, between merchants, if the seller made a written request for a full statement of defects.
• Security interest: A buyer who rightfully rejects or revokes has a security interest in goods in its possession for any payments made and reasonable expenses of inspection, receipt, care, and custody (§ 2-711(3)).
• Effects of acceptance (§ 2-607): A buyer who accepts must pay at the contract rate, may no longer reject, must notify the seller of any breach within a reasonable time (see Section 15.2), and bears the burden of proving a breach.

3. Identification & Risk of Loss

Identification (§ 2-501)

Goods are identified to the contract when the contract is made, if they already exist and are identified; for future goods, when the seller ships, marks, or otherwise designates them; for crops, when they are planted; and for unborn animals, when they are conceived. Identification gives the buyer a special property and an insurable interest in the goods.

Who Bears the Risk?

1. Agreement: The parties may allocate risk of loss however they choose.
2. Breach (§ 2-510):
   • If a tender or delivery so fails to conform that the buyer may reject, the risk remains on the seller until cure or acceptance.
   • A buyer who rightfully revokes acceptance may treat the risk as having rested on the seller from the beginning, to the extent the buyer's insurance does not cover the loss.
   • If the buyer repudiates or otherwise breaches as to conforming goods already identified to the contract, the seller may treat the risk as resting on the buyer for a commercially reasonable time, to the extent the seller's insurance does not cover the loss.
3. Goods shipped by carrier (§ 2-509(1)): In a shipment contract, risk passes to the buyer when the goods are duly delivered to the carrier. In a destination contract, risk passes when the goods are duly tendered at the destination.
4. Goods held by a bailee without being moved (§ 2-509(2)): Risk passes when the buyer receives a negotiable document of title, when the bailee acknowledges the buyer's right to possession, or after the buyer receives a nonnegotiable document or written direction to deliver and has had a reasonable time to present it.
5. All other cases (§ 2-509(3)): If the seller is a merchant, risk passes when the buyer receives the goods; if the seller is not a merchant, risk passes on tender of delivery.

Sale on Approval and Sale or Return (§§ 2-326, 2-327)

• Sale on approval (goods delivered primarily for the buyer's use): title and risk stay with the seller until the buyer accepts, and returning the goods is at the seller's risk and expense.
• Sale or return (goods delivered primarily for resale): risk passes to the buyer as in an ordinary sale, and return is at the buyer's risk and expense.

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Comparison: Common Law Performance vs. UCC Article 2 Tender