North American Lighting, Inc. v. Hopkins Manufacturing Corp.
37 F.3d 1253 (1994)
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Rule of Law:
Under UCC § 2-608, a buyer may revoke acceptance of goods if acceptance was induced by the seller's assurances that a non-conformity would be cured, and any delay in revocation is deemed reasonable if caused by the seller's continuous but failed attempts to cure. However, equitable principles may entitle the seller to an offset for the buyer's beneficial use of the goods prior to a timely revocation.
Facts:
- North American Lighting, Inc. (NAL), a manufacturer of headlamp assemblies, was required by federal safety standards to perform daily quality control testing on its products.
- In 1989, after its existing testing equipment failed, NAL sought a replacement.
- Hopkins Manufacturing Corporation (Hopkins) produced a Machine Vision System (MVS) and represented in a brochure that it could be adapted to perform the light intensity measurements NAL required.
- After testing a prototype that performed poorly, NAL purchased a permanent MVS in June 1989 based on Hopkins' repeated oral and written assurances that software upgrades would enable the machine to meet NAL's testing needs.
- The permanent MVS, delivered in August 1989, also performed inaccurately, with readings varying by over 100% and failing to test all required checkpoints.
- NAL continued to use the machine for many months while Hopkins repeatedly and unsuccessfully attempted to make good on its promises to fix the system with software upgrades.
- In July 1990, a Hopkins employee informed NAL that the MVS would never perform as promised, and the machine subsequently failed to power on at all.
- On June 19, 1991, NAL formally notified Hopkins that it was revoking its acceptance of the MVS.
Procedural Posture:
- North American Lighting, Inc. (NAL) sued Hopkins Manufacturing Corporation (Hopkins) in Illinois state court for a refund of the partial purchase price.
- Hopkins removed the case to the U.S. District Court and filed a counterclaim for the unpaid balance and other costs.
- NAL filed an amended complaint adding a claim for revocation of acceptance.
- The parties consented to a trial before a magistrate judge.
- The magistrate judge found for NAL, holding that it had timely revoked acceptance, and awarded NAL a full refund.
- Hopkins (as appellant) appealed the judgment to the U.S. Court of Appeals for the Seventh Circuit, with NAL as the appellee.
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Issue:
Does a buyer's use of a product for over a year, with knowledge of its initial defects, constitute a timely and effective revocation of acceptance under UCC § 2-608 when the buyer's acceptance and subsequent delay were based on the seller's continuous assurances that the defects would be cured?
Opinions:
Majority - Cudahy, Circuit Judge.
Yes. A buyer's use of a product for over a year does constitute a timely and effective revocation of acceptance if the buyer's acceptance and delay were reasonably induced by the seller's ongoing assurances that defects would be cured. The court reasoned that NAL's revocation was valid under the three-part test of UCC § 2-608. First, NAL's acceptance was reasonably induced by Hopkins' explicit assurances that the MVS could be modified to meet federal standards, and the ultimate non-conformity was not the initial flaws, but the undiscovered fact that the machine could never be fixed as promised. Second, the MVS's failure to perform its essential function constituted a substantial impairment of its value to NAL. Third, the delay in revocation was reasonable because it was caused by NAL giving Hopkins time to make good on its continuous promises to repair the system. However, the court also held that under the equitable principle of quantum meruit, Hopkins was entitled to a reasonable rental value for the beneficial use NAL derived from the machine before revocation. The case was affirmed regarding the validity of the revocation but reversed and remanded for a determination of the offset amount.
Analysis:
This case clarifies the 'reasonable time' for revocation of acceptance under UCC § 2-608, establishing that a seller's continuous assurances can significantly extend this period. It protects buyers in complex commercial transactions from being 'locked in' by sellers who make promises of future fixes they cannot fulfill. The decision creates a significant precedent by balancing the buyer's right to revoke with the seller's equitable right to compensation for the buyer's beneficial use of the goods pre-revocation. This prevents a windfall for the buyer and encourages a fair outcome in disputes over non-conforming goods that require a lengthy period of attempted repairs.
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