My Vendor or Supplier Breached Our Contract. What Are My Options?

Start with what kind of contract it is

The answer depends on whether the vendor sold you goods or services. A contract for goods (equipment, materials, inventory, components) is governed by Chapter 2 of the Texas Business and Commerce Code, Texas's version of UCC Article 2, which has detailed rules for rejection, cure, revocation and damages. A contract for services (software development, logistics, staffing, maintenance, marketing) is governed by the common law of contracts and by whatever the contract says. A mixed contract follows whichever element predominates.

The second thing to read is the contract's remedies section. Commercial vendor agreements commonly limit the buyer's remedy to repair, replacement or credit, exclude consequential damages, cap liability at the contract price, and require written notice within a stated period. Those clauses are generally enforced between businesses, and they shape every option below.

Goods: rejection, cure and revocation

Rejection. Under section 2.601, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial units and reject the rest. Rejection must be within a reasonable time after delivery and the buyer must seasonably notify the seller (section 2.602). A buyer who rejects must hold the goods with reasonable care for the seller to retrieve, and in some cases follow the seller's reasonable instructions.

Cure. Section 2.508 gives the seller a right to cure a nonconforming tender if the time for performance has not yet expired, by notifying the buyer and making a conforming delivery within the contract time. If the seller reasonably believed the tender would be acceptable, it may have a further reasonable time to substitute a conforming tender even after the deadline. A buyer who refuses a timely, proper cure can lose its remedies.

Revocation of acceptance. If you accepted the goods and later discover a nonconformity that substantially impairs their value to you, section 2.608 allows revocation of acceptance, provided acceptance was on the reasonable assumption the defect would be cured or the defect was difficult to discover. Revocation must occur within a reasonable time after you discovered or should have discovered the defect, and before any substantial change in the goods not caused by the defect.

Goods: cover and damages

Once the seller has failed to deliver, repudiated, or you have rightfully rejected or revoked, the UCC's buyer remedies in sections 2.711 through 2.715 apply. You may recover any part of the price already paid. You may "cover" under section 2.712 by purchasing substitute goods in good faith and without unreasonable delay, and recover the difference between the cover price and the contract price, plus incidental and consequential damages, less expenses saved. If you do not cover, section 2.713 allows the difference between the market price when you learned of the breach and the contract price.

Incidental damages (section 2.715) include the costs of inspecting, transporting and caring for rejected goods and the reasonable costs of arranging cover. Consequential damages include losses from your general or particular requirements that the seller had reason to know of at contracting and that you could not reasonably have prevented by cover, and injury to property proximately resulting from a breach of warranty. Lost profits on your downstream sales fall into this category and are subject to the foreseeability and reasonable certainty requirements discussed in what damages a business can recover for breach of contract in Texas. Many vendor contracts exclude consequential damages altogether.

Services: the common law and the contract

A services vendor who does not perform, performs late, or performs badly has breached, and the remedies are the common-law ones: the cost of obtaining the service elsewhere above the contract price, the cost to correct defective work, and foreseeable consequential losses proved with reasonable certainty. There is no statutory rejection or cure procedure, so the contract's terms carry more weight. Look for:

• Service level commitments and the remedy for missing them (often credits only).
• Notice and cure provisions, which usually require written notice of the breach and a cure period before you may terminate.
• Acceptance procedures for deliverables, which define when the vendor's work is deemed accepted.
• Termination rights, for cause and for convenience, and what is owed on termination.
• Limitation of liability and consequential damages waivers.

Following the contract's procedure is not optional. A buyer who terminates without the required notice has breached, even if the vendor's performance was poor.

Example

Suppose a Garland food manufacturer contracts with a packaging supplier for printed cartons, with monthly deliveries and payment net 30. A shipment arrives with the wrong color and a misprinted ingredient panel, which makes the cartons unusable for the product. The manufacturer inspects on arrival, emails the supplier the same day with photographs identifying the defects, rejects the shipment, and asks for a conforming replacement by a stated date. The supplier says it cannot reprint for three weeks. The manufacturer orders cartons from another printer at a 30 percent premium with a rush charge, and keeps the rejected cartons available for pickup. Its claim: the price premium and rush charge as cover damages, the inspection and storage costs as incidental damages, and, if the supplier knew of the manufacturer's retail delivery schedule, any late-delivery charges from the retailer as consequential damages, subject to the contract's remedy clause. The same-day written notice is what makes all of this recoverable.

Can you withhold payment?

For goods, section 2.717 allows a buyer, on notice to the seller of its intention, to deduct all or part of the damages resulting from a breach of the same contract from the price still due under it. The notice requirement matters. For services, withholding is justified only if the vendor's breach was material enough to excuse your performance, or the contract permits withholding, or you have a liquidated and undisputed offset. Withholding payment over a minor breach is itself a breach, and withholding on one contract for a breach of a different contract is risky in either setting. The materiality question is covered in material breach versus minor breach.

Warranties

A goods claim is often a warranty claim as well. The UCC implies a warranty of merchantability from a merchant seller (section 2.314) and a warranty of fitness for a particular purpose where the seller knew the buyer's purpose and the buyer relied on the seller's skill (section 2.315), in addition to any express warranties in the contract or the sales literature. Vendors routinely disclaim the implied warranties in conspicuous language, and Texas enforces proper disclaimers. Warranty claims between businesses are addressed in breach of warranty claims between businesses in Texas.

Deadlines

A claim on a sale of goods must be brought within four years of the breach under section 2.725, and for warranty the breach occurs on tender of delivery regardless of when the defect was found, unless the warranty explicitly extends to future performance. The parties may have shortened the period in the contract to as little as one year. Services contract claims carry the general four-year period from breach under the Civil Practice and Remedies Code, subject to any valid contractual shortening. The short, contract-based notice periods are the ones that catch buyers.

Steps to take now

1. Pull the contract, the purchase order, the vendor's terms and any acknowledgments; identify the remedy, notice and warranty clauses.
2. Document the nonconformity with dates, photographs, inspection reports and the people who observed it.
3. Send written notice to the vendor describing the breach and what you require, within the contract's notice period and in any case promptly.
4. Decide whether to accept a cure, reject, or revoke, and say which in writing.
5. Arrange substitute performance without unreasonable delay and keep the invoices.
6. Preserve the rejected goods and every communication.

A supplier dispute with a solvent vendor, clean notice and documented cover is a strong claim, and many resolve in a negotiated credit once the notice is on the record. Tina Wysk represents Dallas businesses in supply, vendor and services disputes in state and federal court and in arbitration, on the buyer's side and the vendor's.