Defense Attorney for Merchandise Quality Lawsuits

The First Two Weeks

1. Calendar the answer date. In the New York courts a defendant generally has 20 or 30 days after service to appear, depending on how the summons was served. A corporation or LLC served through the Secretary of State is served when the papers reach the Secretary, not when the forwarded copy reaches your mailbox, so part of that time may already be gone. Missing the date invites a default judgment, and vacating one requires both a reasonable excuse and a meritorious defense.
2. Decide on federal court quickly. A notice of removal must generally be filed within 30 days after you receive the complaint. Removal on diversity grounds requires complete diversity and more than $75,000 in controversy, and it is not available at all to a defendant that is a citizen of New York.
3. Tender the claim to your insurer. Product quality claims are often excluded, but not always, and a complaint that alleges damage to other property can trigger a duty to defend the entire action. Tender in writing, to every policy that might respond, before you spend your own money on the defense.
4. Put your supplier on notice. If you did not make the goods, the manufacturer may owe you everything the buyer is claiming. That right can be lost through silence. See the supplier section below.
5. Issue a litigation hold and preserve the goods. Do not scrap, rework, resell or return the remaining inventory from the same lot or shipment. Preserve the specifications, approved samples, inspection and QC records, certificates of conformity, shipping records, and every email and text about the order. Spoliation can turn a defensible case into an adverse inference or a struck answer.
6. Stop talking to the buyer about the dispute. Do not issue a credit, accept a return, promise a repair, or answer an online review about the dispute until you have advice. Each of these can be characterized later as an admission, a waiver, or an acceptance of the buyer's rejection.

Whose Terms Governed the Sale

Most business sales are made on exchanged forms: your quotation or order acknowledgment on one side, the buyer's purchase order on the other, each with its own fine print. When the forms conflict, UCC 2-207 decides which terms became part of the contract. Between merchants, additional terms in an acceptance generally become part of the contract unless the offer limited acceptance to its own terms, the other side objected, or the new terms materially alter the deal.

This is where many seller protections are won or lost. A warranty disclaimer or a limitation of remedies printed on the back of your invoice may never have become part of the contract, and the Court of Appeals has held that an arbitration clause added in an acknowledgment form is a material alteration that does not bind a buyer who did not agree to it (Matter of Marlene Industries Corp. v. Carnac Textiles, Inc., 45 N.Y.2d 327 (1978)). The reverse is also true. The buyer's purchase order may contain broad warranty and indemnity terms that did not survive the exchange either. The first job in every one of these cases is to reconstruct the documents in the order they were sent and work out what the contract actually says.

Did the Goods Conform?

The buyer has to prove a breach, and "we were unhappy with the goods" is not one. The questions are specific:

• Express warranty (UCC 2-313): What description, sample, model or specification became part of the basis of the bargain, and did the goods meet it? A buyer who approved a pre-production sample is generally held to that sample, not to a better product it later wished it had ordered.
• Implied warranty of merchantability (UCC 2-314): This arises only when the seller is a merchant in goods of that kind, and it requires goods fit for their ordinary purpose and passing without objection in the trade. It does not promise the best goods on the market.
• Fitness for a particular purpose (UCC 2-315): This requires proof that you knew the buyer's particular purpose and that the buyer relied on your skill or judgment to select the goods. A buyer that wrote its own specifications usually cannot show that reliance.
• Trade tolerances and usage (UCC 1-303): Course of dealing between the parties and usage of trade in the industry supply the meaning of terms like "first quality," and they often establish acceptable variances in color, dimension, weight and defect rate.

These are proved with documents and testing, not argument. We work with engineers, testing laboratories and industry experts, insist on joint inspection and testing protocols before anyone performs a test that alters or consumes the goods, and look closely at what happened to the goods after delivery: storage conditions, handling, installation, and modifications by the buyer or its customers.

Acceptance, Rejection, Notice and Cure

Article 2 gives the buyer a limited window to complain and specific ways to do it. Buyers who ignore those rules often lose remedies they would otherwise have had.

• Rejection (UCC 2-602) must be made within a reasonable time after delivery and is ineffective unless the buyer seasonably notifies the seller. A buyer that keeps using, processing or reselling the goods after "rejecting" them has generally accepted them under UCC 2-606.
• Notice of breach (UCC 2-607(3)(a)): once goods are accepted, a buyer that fails to notify the seller of the breach within a reasonable time after it discovered or should have discovered it is barred from any remedy.
• Revocation of acceptance (UCC 2-608) requires a nonconformity that substantially impairs the value of the goods to the buyer, and it must occur within a reasonable time and before any substantial change in the goods not caused by their own defects.
• Cure (UCC 2-508): in some circumstances a seller has the right to cure a nonconforming tender by making a conforming delivery. A buyer that refused a timely offer to cure may have forfeited its rejection.
• Installment contracts (UCC 2-612): where goods are delivered in separate lots, the buyer may reject an installment only if the nonconformity substantially impairs its value and cannot be cured. This is a far higher bar than the "perfect tender" rule buyers usually invoke.

The buyer's own emails usually decide these issues. That is why the complete correspondence file, including the messages your sales staff exchanged with the buyer's purchasing staff, is often the most valuable evidence in the case.

Disclaimers, Limited Remedies and Shortened Deadlines

Assuming your terms did become part of the contract, they may cap or eliminate the claim:

• Warranty disclaimers (UCC 2-316): a disclaimer of the implied warranty of merchantability must mention merchantability and, if written, must be conspicuous. "As is" language can exclude implied warranties, and there is no implied warranty as to defects that an inspection the buyer made, or refused to make, ought to have revealed.
• Exclusive remedies (UCC 2-719): a contract may limit the buyer to repair, replacement or refund. If that limited remedy fails of its essential purpose, for example because repeated repairs never work, the buyer regains the general Code remedies.
• Consequential damages exclusions are enforceable in commercial sales unless unconscionable, and between businesses they usually are enforced. They are often the single most important term in the case, because lost profits are usually the largest number in the complaint.
• Limitations period (UCC 2-725): four years, generally running from tender of delivery rather than from discovery of the defect. The parties' original agreement may shorten it to as little as one year.
• Consumer sales: for consumer products sold with a written warranty, the federal Magnuson-Moss Warranty Act restricts the disclaimer of implied warranties. The UCC rules above apply with that overlay.

What the Buyer Can Actually Recover

Damage claims in quality cases are frequently inflated. The Code measures them precisely:

• Goods the Buyer Kept

  Under UCC 2-714, the basic measure is the difference between the value of the goods as accepted and their value as warranted, at the time and place of acceptance. That is often a fraction of the price, not the whole of it.

• Goods Rightfully Rejected

  A buyer that properly rejects may recover the price paid and either the extra cost of reasonable substitute purchases (cover) or the difference between market price and contract price, under UCC 2-711 through 2-713. The buyer must actually have acted reasonably in covering.

• Consequential Losses

  Lost profits and claims by the buyer's customers are recoverable under UCC 2-715 only if you had reason to know of them at the time of contracting, the buyer could not reasonably have prevented them, and they can be proved with reasonable certainty. Where your terms excluded them, they may not be recoverable at all.

A buyer suing on goods it bought from someone else in the chain of distribution faces a further obstacle: New York generally requires a direct contractual relationship for implied warranty claims that seek only economic loss. And under Bocre Leasing Corp. v. General Motors Corp., 84 N.Y.2d 685 (1995), a buyer cannot recover in negligence or strict products liability for a product that simply failed to perform. Those losses belong to contract law, with all of its defenses.

When the Complaint Adds Fraud, GBL § 349, or the Owner Personally

Buyers add tort and statutory counts to a quality case to reach punitive damages, attorney's fees, a longer limitations period, or the personal assets of the company's principals. Each has limits that can be tested on a motion to dismiss:

• Fraud that duplicates the contract claim is routinely dismissed. The buyer must plead a misrepresentation of present fact collateral to the contract, or damages not recoverable in contract, and it must plead the circumstances of the fraud in detail under CPLR 3016(b). "The seller promised conforming goods and delivered defective ones" is a contract claim, whatever the complaint calls it.
• General Business Law §§ 349 and 350 reach only consumer-oriented conduct. A private dispute unique to two businesses does not qualify (Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20 (1995)). Where the statute does apply, it allows a successful plaintiff to recover attorney's fees and, for willful violations, enhanced damages, which is why a consumer case can be worth more to the plaintiff than the price of the goods.
• Owners and officers are not personally liable for the company's breach of contract unless the corporate veil can be pierced, which requires far more than the fact that the owner controlled the company. They can be liable for a fraud they personally committed, which is precisely why buyers plead one. See our page on piercing the corporate veil.

When an owner is named individually, whether the company and the owner can share a defense is a question of conflicts that we address before any answer is served. Their interests are usually aligned, but not always.

Your Supplier and Your Insurer

If you resold goods made by someone else, the defense of the buyer's claim and your claim over against the manufacturer are two halves of the same case.

• Claims Over Against the Manufacturer or Supplier

  Your rights against your own supplier are subject to the same notice rule the buyer faces: under UCC 2-607(3)(a), you must notify your seller of the breach within a reasonable time, or you may be barred from any remedy. Under UCC 2-607(5)(a), you may also give your supplier written notice of the buyer's lawsuit, inviting it to come in and defend. If the notice is properly worded and the supplier declines, it is bound in your later claim against it by the determinations of fact common to both cases. In the same action, CPLR 1007 permits a third-party claim against the supplier. Because contribution is generally unavailable where the only claim against you is for breach of contract, that claim usually has to rest on the supplier's warranty to you or on an indemnification agreement. Your own four-year limitations period against the supplier runs from its delivery to you, independently of the buyer's claim, and it can expire while the buyer's case is still pending.

• Foreign Suppliers and the CISG

  If your supplier's place of business is in another country that is party to the United Nations Convention on Contracts for the International Sale of Goods, as China, Germany, Italy, Mexico and Canada are, your purchase contract is likely governed by the CISG rather than by UCC Article 2, unless the contract expressly excluded it. A clause choosing "New York law" usually does not exclude it. The CISG has its own notice rule: the buyer must give notice specifying the nature of the defect within a reasonable time, and in any event within two years of delivery. Serving a foreign manufacturer under the Hague Service Convention can take many months. Collecting from one is a practical question we address at the outset, not after the fact.

• Insurance

  Commercial general liability policies commonly exclude damage to "your product," "impaired property," and product recall costs, and they do not insure the quality of what you sell. But a complaint alleging physical damage to other property, such as the buyer's equipment or finished products your goods were built into, may fall within coverage. In New York an insurer that owes a defense on any claim in the complaint must defend the entire action. Notice should go to every policy that could respond, including policies in force when the goods were sold and when the claim was made.

Your Counterclaim for the Price

Quality complaints and unpaid invoices usually arrive together, and it is not always clear which came first. Where the buyer accepted the goods, you may have a counterclaim for the price under UCC 2-709, together with contractual interest or statutory prejudgment interest. A buyer is permitted under UCC 2-717 to deduct its damages from the price still due, but only after notifying you of its intention to do so. A buyer that simply stopped paying and later announced a quality problem is in a weaker position than its complaint suggests. In federal court a counterclaim arising out of the same transaction must generally be asserted in the action or it is lost, so the counterclaim decision is made before the answer is filed. Our commercial collection practice handles unpaid invoices where there is no quality dispute.

How a Defense Proceeds

1. 1

   Documents and Deadlines

   We compute the response date, secure an extension where appropriate, tender to insurers, notify suppliers, and issue the litigation hold. We reconstruct the quotation, order, acknowledgment and invoice sequence and the correspondence about the goods.

2. 2

   Threshold Motions

   Where the facts allow it, we remove to federal court, move to compel arbitration or enforce a forum clause, or move to dismiss claims that are time-barred, disclaimed, duplicative of the contract, or outside GBL § 349.

3. 3

   Answer, Counterclaims and Claims Over

   We plead the affirmative defenses, including acceptance, lack of notice, disclaimer, limitation of remedy, limitations and failure to mitigate, assert the counterclaim for the price, and bring in the supplier.

4. 4

   Inspection, Testing and Discovery

   We arrange joint inspection and testing protocols, obtain the buyer's handling and resale records, and take the depositions that establish when the buyer knew about the claimed defect and what it did about it.

5. 5

   Resolution

   We pursue a negotiated resolution, mediation, or a formal offer to compromise under CPLR 3221 where that is to your advantage, and try the case when it is not.

These cases are heard in Supreme Court, including the Commercial Division where the amount in controversy meets the county's threshold, in the Civil Court of the City of New York for smaller claims, in federal court, and in arbitration where the contract requires it; see our arbitration practice.

What a Defense Costs

We defend these cases on an hourly basis under a written retainer agreement that sets out the scope of the engagement, the deposit, and how billing works before any work begins. We will also tell you plainly when the economics do not justify a full defense. In a quality dispute, discovery and expert testing can cost more than the amount the buyer is claiming. We give you an assessment at the outset and at each significant stage, so that you can weigh the cost of defending against the cost of resolving. Where the buyer's own conduct under Article 2 is weak, early motion practice can change that calculation considerably.

Frequently Asked Questions

• The buyer used the goods for months before complaining. Does that matter?

  Yes, often decisively. Continued use after discovering a problem is ordinarily an acceptance, which ends the right to reject. And a buyer that waited too long to notify you of the breach may be barred from any remedy under UCC 2-607(3)(a). What counts as a reasonable time depends on the goods and the trade, and it is fought out in the correspondence.

• Our invoice says "all sales final" and disclaims warranties. Are we protected?

  Possibly, but not automatically. The terms have to have become part of the contract, which is a UCC 2-207 question if the buyer sent its own purchase order. A disclaimer of merchantability must mention merchantability and be conspicuous. And no disclaimer protects against a claim that you misrepresented the goods.

• The buyer sued our owner personally. Is that proper?

  An owner is not liable for the company's contracts merely because of owning or running the company. The personal claim almost always depends on a fraud allegation, and fraud claims that restate a contract claim are regularly dismissed. Personal claims should be evaluated, and often moved against, at the outset.

• The goods came from our overseas factory. Can we make the factory pay?

  Often, if you give notice promptly and the contract and the factory's assets make recovery realistic. Check whether your purchase contract is governed by the CISG and whether it contains an arbitration clause, and preserve your correspondence with the factory. Your notice obligations to the factory run on their own clock.

• Should we just give the buyer a refund and move on?

  Sometimes that is the right business decision. But a refund, credit or accepted return offered without a written release resolves nothing. It can also be used against you as an admission, or as your acceptance of the buyer's rejection. If you resolve the dispute, resolve it in a signed settlement agreement.

• Will our insurance cover this?

  A pure claim that your product was defective is usually excluded. A claim that your product damaged other property may be covered, and if any claim is potentially covered, the insurer may owe a defense of the whole action. Tender first and let the insurer take a position in writing.