Supplier Disputes FAQ

Under the California Commercial Code Section 2601, buyers have the right to reject goods that fail to conform to the contract in any respect. This is known as the perfect tender rule, which allows rejection if goods do not meet contract specifications, warranties, or delivery terms. Upon receiving non-conforming goods, buyers must inspect within a reasonable time under Section 2513 and notify the supplier of rejection under Section 2602, specifying the defects. The buyer can reject the whole delivery, accept the whole, or accept some commercial units and reject others.

After rejection, the buyer must hold the goods with reasonable care for a time sufficient to permit the seller to remove them. Alternatively, buyers may accept defective goods and later revoke acceptance under Section 2608 if the non-conformity substantially impairs the value and acceptance was based on reasonable assumption the defect would be cured or the defect was not discoverable. Remedies include recovery of the purchase price, cover damages for purchasing substitute goods, and consequential damages for losses resulting from the breach.

Late delivery is a breach of contract under California law, and your remedies depend on whether time was of the essence in the contract and the severity of the delay. California Commercial Code Section 2711 provides buyer remedies when a seller fails to make timely delivery. If the delay is material and time was expressly or impliedly essential, you may cancel the contract, recover any amounts paid, and pursue cover damages by purchasing substitute goods elsewhere and recovering the difference between the cover price and contract price under Section 2712.

Even if you accept late delivery, you retain the right to recover damages for any losses caused by the delay under Section 2714. Consequential damages under Section 2715 can include lost profits, lost business opportunities, and additional costs incurred due to the late delivery, provided these losses were reasonably foreseeable at the time of contracting. To preserve your rights, document the agreed delivery date, promptly notify the supplier of the delay and its consequences, and keep records of any additional costs or losses incurred.

California Commercial Code provides both express and implied warranties for goods. Express warranties under Section 2313 arise from any affirmation of fact, promise, description, or sample that becomes part of the basis of the bargain, such as specifications in purchase orders, statements in marketing materials, or representations during negotiations. The implied warranty of merchantability under Section 2314 applies to merchants selling goods of that kind and requires goods to pass without objection in the trade, be fit for ordinary purposes, be adequately contained and packaged, and conform to promises on labels or containers.

The implied warranty of fitness for particular purpose under Section 2315 arises when the seller knows the buyer's particular purpose and the buyer relies on the seller's skill to select suitable goods. These warranties can be disclaimed under Section 2316, but disclaimers must be conspicuous and use specific language for implied warranties. Warranty claims must be brought within four years of delivery under Section 2725, unless the warranty explicitly extends to future performance.

California Commercial Code provides specific damage formulas for buyer remedies when suppliers breach. The primary remedy is cover damages under Section 2712, calculated as the difference between the cost of reasonably purchasing substitute goods and the contract price, plus any incidental and consequential damages, minus expenses saved due to the breach. If the buyer does not cover, Section 2713 allows market price damages measured as the difference between market price at the time the buyer learned of the breach and the contract price.

For accepted goods with defects, Section 2714 provides damages equal to the difference in value between goods as accepted and as warranted, commonly measured by repair costs. Incidental damages under Section 2715 include expenses reasonably incurred in inspection, receipt, transportation, and care of rejected goods, plus commercially reasonable charges in obtaining cover. Consequential damages cover losses resulting from the breach that the seller had reason to know at the time of contracting, including lost profits on resales and production shutdowns caused by defective or late supplies.

California law allows termination of supply agreements upon material breach, but the analysis depends on whether the breach is material and the specific contract terms. Under Commercial Code Section 2610, when either party repudiates the contract, the aggrieved party may await performance, resort to remedies for breach, or suspend their own performance. For non-repudiation breaches, you must determine whether the breach is material enough to justify termination.

Material breach analysis considers the extent of non-performance, likelihood of cure, adequacy of compensation for damages, and whether terminating party would receive substantially what they bargained for. Many supply agreements contain specific termination provisions requiring notice and cure periods, and courts will enforce these procedural requirements. Terminating without following contract procedures may itself constitute a breach. Before terminating, send written notice specifying the breach and allowing reasonable opportunity to cure if required. Document all communications and preserve evidence of the breach. Consider whether partial performance has been accepted and whether damages would adequately compensate for continuing the contract.

California Commercial Code Section 2725 provides a four-year statute of limitations for breach of contract claims involving the sale of goods, running from the date the cause of action accrues. Generally, a cause of action accrues when the breach occurs, which for delivery disputes is the date of tender, regardless of the buyer's knowledge of the breach. However, when a warranty explicitly extends to future performance and discovery must await the time of performance, the cause of action accrues when the breach is or should have been discovered.

The parties may contractually reduce the limitations period to not less than one year under Section 2725(1), but may not extend it beyond four years. For claims not governed by the Commercial Code, such as fraud or negligent misrepresentation claims related to supplier relationships, different limitation periods apply: three years for fraud under Code of Civil Procedure Section 338(d) with discovery rule tolling, and two years for negligence under Section 339. Oral contract claims have a two-year limitation under Section 339 if not covered by the Commercial Code.

Force majeure clauses excuse performance when extraordinary events beyond the parties' control prevent fulfillment of contractual obligations. California courts interpret force majeure clauses according to their specific language, giving effect to the parties' expressed intent. Common triggering events include natural disasters, war, government actions, and pandemics, but only events specifically listed or falling within general catch-all language are covered.

The party claiming force majeure must demonstrate the event was beyond their control, could not have been foreseen or planned for, and actually prevented performance rather than merely making it more difficult or expensive. Even without a force majeure clause, Commercial Code Section 2615 provides that non-delivery is not a breach if performance is made impracticable by an unforeseen supervening circumstance, the non-occurrence of which was a basic assumption of the contract. This impracticability defense requires more than increased cost; it requires genuine inability to perform. Suppliers must provide timely notice of force majeure events and take reasonable steps to mitigate the impact on their customers.

California provides multiple remedies for supplier quality issues depending on whether goods have been accepted or rejected. Before acceptance, buyers can reject non-conforming goods under Commercial Code Section 2601 and either cancel the contract or seek substitute goods. After acceptance, buyers can revoke acceptance under Section 2608 if the non-conformity substantially impairs value and was not discoverable upon reasonable inspection, or if acceptance was based on reasonable expectation of cure that did not occur.

Buyers who have accepted non-conforming goods can recover damages under Section 2714 measured by the difference between actual value and value as warranted, typically proved through repair costs, diminished resale value, or expert testimony. Consequential damages under Section 2715 may include lost profits from inability to use or resell goods, liability to third parties for defective products incorporated into other goods, and costs of recalls or repairs provided to end customers. When quality issues are ongoing, buyers should document each instance, provide proper notice, and consider whether cumulative breaches justify contract termination.

The battle of forms, governed by California Commercial Code Section 2207, determines which terms govern when buyer purchase orders and seller acknowledgments contain conflicting terms. Unlike traditional contract law's mirror image rule, Section 2207 allows contract formation despite different terms. Between merchants, additional terms in the acceptance become part of the contract unless they materially alter the agreement, the offer expressly limits acceptance to its terms, or the offeror objects within a reasonable time. Material alterations include disclaimers of implied warranties, limitation of remedies, and arbitration clauses.

When terms directly conflict, Section 2207(3) provides that contract consists of terms on which writings agree plus UCC gap-fillers for other terms. Many sophisticated buyers include provisions stating their purchase order terms exclusively govern and rejecting supplier's conflicting terms. Courts examine the parties' course of dealing and course of performance to interpret ambiguous terms. To control terms, businesses should clearly state their terms are exclusive, promptly object to conflicting terms, and establish consistent practices that demonstrate which terms govern.

Effective supplier dispute resolution begins with documentation and communication before formal legal action. Maintain detailed records of all orders, deliveries, inspections, and communications from the start of the relationship. When problems arise, promptly notify the supplier in writing, specifying the nature of the issue and requesting cure within a reasonable timeframe. Many supply agreements require mandatory negotiation or mediation before litigation, and courts will enforce these provisions.

Consider whether preserving the business relationship is important, which may favor negotiated settlements over adversarial proceedings. For disputes involving ongoing supply relationships, interim measures may include accepting goods under protest, establishing quality improvement plans, or negotiating pricing adjustments. When formal dispute resolution is necessary, review the contract for arbitration clauses and forum selection provisions. Commercial arbitration through organizations like AAA or JAMS may provide faster, more confidential resolution than litigation. Document your damages carefully, as you bear the burden of proving losses with reasonable certainty. Consider engaging experts for technical quality issues and forensic accountants for complex damage calculations.