Back to the Connecticut Supreme Court’s decision in RBC Nice Bearings, Inc. v. SKF USA, Inc., a fun UCC read for any law junky. You can read my first post on this case here. Manufacturers (if there are any left in Connecticut…) should pay attention to this case. This case is really, really interesting. If you remember, the plaintiff was the seller under two long-term contracts to sell ball bearings to the defendant-distributor, a lot of ball-bearings. Both contracts required the defendant to purchase a minimum amount each year. There were two contracts because after a few years under the first contract, the parties negotiated a new contract that superseded the first one, and included some provisions acknowledging market conditions and lowering the purchase minimums. Every year the defendant failed to meet the minimum purchase requirements. And every year the plaintiff let the defendant off-the-hook, never, ever clearly telling the defendant “hey, we demand strict performance with the contract or we will terminate it.” Sure, the plaintiff “reminded” the defendant that it was failing to keep its promise to purchase minimum quantities of ball bearings, but it never invoiced the defendant for the shortfall in orders, and never held the defendant to its purchase obligation. Like most merchants acting in “good faith,” it tried to keep the business relationship together.
Then, after 3 years of defendant not meeting its purchase obligations, plaintiff invoiced the defendant for the shortfall in the prior year, unilaterally terminated the contract, and sued the defendant. The defendant sued back, because it discovered that the reason plaintiff was letting things go on so long was because it was covertly setting up its own supply network to sell directly to users, eliminating the defendant. HA! So much for good faith.
The case establishes, through a discussion of the UCC terms-of-art “course of performance” and “course of dealing” that if there is a continuing waiver by one party to a contract, meaning that party does not require the other party to strictly perform its end of the bargain, that waiver can only be “undone” by an “effective retraction” of the waiver. This means you demand strict performance of the other party’s obligations under the contract. Importantly, even repeatedly reminding the other party that they are not performing, or complaining about it, does not mean a court cannot find a “continuing waiver.” Scary stuff for merchants, who generally try to work with each other. But remember, in this case, the plaintiff chose to stop cutting the defendant breaks only when it became more profitable for it to end the relationship and sell directly to end-users. That’s just not very nice.
In addition to an express retraction of the waiver, there’s another way under the UCC the plaintiff could have protected itself (presuming it didn’t have the same improper motive. But that’s for next time.
Plaintiff lost its case, and the defendant won its countersuit, including its claim for unfair trade practiceswhich allows it to recover its attorneys fees, which I’ve blogged about here. Wow. Talk about karma.
Remember, no matter how much you want to work with a business partner and give them breaks under contracts, it’s still business under the UCC.