Manufacturer’s Corner: The Importance of Notice Provisions

An easily-overlooked portion of a contract for the sale of goods is the one that addresses what notice the buyer must give the seller in the event the goods do not conform to contract specifications or warranties.  These provisions warrant your close attention, however, because they can be outcome-determinative in the event of litigation over the alleged non-conformity.

Let’s assume for the moment that your contract includes no notice provision whatsoever.  What is required of the buyer?  Well, the Uniform Commercial Code says that if the buyer has accepted the goods, the buyer must give you notice of the non-conformity within a reasonable time or be “barred from remedy.”  On its face, this looks great for the seller: failure to give notice is fatal to an action for breach of the contract.  But, courts have mostly taken a very lenient view on what constitutes notice and, for the most part, lots of things can meet the standard: angry telephone calls, frequent service requests, things like that.

But that’s just the default outcome, and it can be varied by contract.  Say instead that you require that notice be given in writing and the notice specify each and every way in which the goods are non-conforming.  This is far better!  First, the buyer may fail to give proper notice, thus barring it from remedy.  Indeed, at least one court has found that buyer’s failure to comply with heightened notice provisions specified by the contract triggered the “barred from remedy” provision in the UCC.^[1]    Second, it gives you important information about the quality of your product and the reasons for customer dissatisfaction, so you can fix the problem going forward.

Let’s take this a step further.  Let’s say that your buyer turned around and sold your goods to a third party.  Would that third party be bound by the heightened notice requirements in your contract? 

Courts are split on whether that third party can sue you directly for, say, breach of implied warranty and, if so, the extent to which your contract with your immediate buyer binds the third party.  There is also a deep split on the related question of whether that third party would need to give you notice of the defect to avoid being barred from remedy (in fact, this issue is so divisive that courts within the same state disagree on it).^[2]  The answer to the question, therefore, is not clear and probably varies from state to state.

I think a court should hold that your heightened notice requirements would bind the third party.  For example, in June I wrote about a case from the Supreme Court of Texas.^[3]  There, the Court noted that disclaimers of implied warranty travel downstream with the product to subsequent buyers, which only seems fair if the implied warranty itself will also travel downstream to subsequent buyers.  The Wyoming Supreme Court has similarly held that contractual modifications, more generally, travel downstream along with warranties.^[4]  One can make the case that, just as other deviations from the standard UCC terms travel downstream to remote buyers, so would a heightened notice provision.

One court has reached this result, though it may not lend itself to extension far beyond its facts.  In Burns v. Winnebago Industries, Inc.,^[5] the plaintiff bought a recreational vehicle manufactured by the defendant from a third-party dealership.  The manufacturer gave an express warranty on the RV, and the document that set out the express warranty also stated that, as a prerequisite to obtaining warranty work, a buyer must notify the dealership and the manufacturer of the defect in writing.  Because the plaintiff only gave notice to the dealership, the Court entered judgment in favor of the manufacturer on the breach of warranty claim.

Of course, Burns arose in the context of a consumer sale^[6] where the express warranty (and the terms associated with it) was indisputably given to the consumer.  Not so in a case where your notice provisions are only provided to your immediate buyer and not to the end user.  See footnote 3 for some of the potential problems presented by that distinction.

Given the potentially preclusive effect of a failure to give notice, you should certainly take a hard look at the notice provisions in your contracts.  This is especially true when your goods are often resold downstream – you may find that your notice provision is what saves you from liability for a defect of which you had no notice whatsoever, reasonable or otherwise.