Modernizing Notice of Breach Rules to Preserve Contract Remedies

Document Type

Article

Publication Title

University of Michigan Journal of Law Reform

Abstract

Recently, the legal community has scrutinized the capacity of mandatory arbitration rules to deter or foreclose claims for breach of contract. But little attention has been paid to express and constructive notice of breach rules that are just as effective at foreclosing contractual remedies. While four-year statutes of limitations are typically viewed as the default cutoff time for breach of contract claims, contracting parties, particularly buyers ofgoods, must act much sooner to preserve their legal remedies. It is now common practice for sellers to require notice of breach within days or weeks of their performance as an express condition precedent to buyers' right to a remedy. Even in the absence of express notice rules, state laws require that buyers provide notice to sellers within a reasonable timeframe when they discover, or should have discovered, the breach. Failure to provide proper notice bars all buyers' remedies. In effect, failure to satisfy the technical requirement of notice routinely produces forfeiture of contract remedies for the buyer. Such a forfeiture is contrary to the foundational doctrinal promise of adequate remedies for breach, anti-forfeiture rules, and the substantial performance rule for constructive conditions. Judges adjudicating notice defenses rely on an antiquated legal framework, crafted more than a century ago in a vastly different commercial environment. When the notice requirement was codified in 1906, it impacted merchant buyers who contracted directly with sellers for specific goods. Caselaw shows that sellers raised a notice defense when they sued buyers for the contract price, and that buyers sought an offset to damages by arguing that sellers provided defective goods. In the early twentieth century, courts routinely granted the damages offset for breach of promise, even when notice was untimely. Now, notice issues often arise in adhesive transactions in which buyers contract with downstream sellers of mass-produced goods such as vehicles, food products, dietary supplements, drugs, and medical devices. Sellers are usually aware of the breach or face no repercussions from buyers' failure to provide notice. Product testing, customer complaints, post-sale audits, lawsuits, regulatory policing, and warranty software or warranty claims often give sellers actual notice oft heir defective performances. Yet judges continue to insist on individualized and particularized notice from each buyer. Judges theorize that sellers will be robbed of their legal rights to cure or settle claims, prepare defenses, or know their terminal point of liability, even though sellers' curative or defensive interests are unimpaired. This judicial insistence on notice in the current commercial environment ignores how sellers and buyers respond to breach events. It also incentivizes sellers to fabricate and market defective products because only a small percentage of buyers will complain, and even fewer will satisfy the notice rule. This Article proposes that judges adjudicate notice defenses within the broader framework of the parties' agreement, contract doctrine, and new commercial realities. Specifically, it proposes that judges require sellers to prove material harm when they seek to forfeit buyers' substantive remedies on technical notice-failure grounds. This new standard would provide uniformity in the law and replace the ad hoc exceptions judges have used to avoid the harsh effects of pre-suit notice. A notice-prejudice requirement would also encourage sellers to create better products and honor the warranties they provide when marketing their goods.

First Page

57

Last Page

107

Publication Date

Fall 2023

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