Opinion ID: 1120022
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Heading: Isaacson's Third-Party Claim Against Armco

Text: On July 16, 1973, Christianson entered into a contract with the State of Alaska for the construction of the Nenana River Bridge at Windy, Alaska. State specifications called for specialized steel for the structural box girder and floor beam portions of the bridge. Isaacson, a Seattlebased steel fabricator, submitted a bid to Christianson on June 27, 1973, for the structural steel required for the bridge. Isaacson's bid was accepted on approximately August 2, 1973. The Isaacson-Christianson contract [1] required delivery of the steel to Cantwell, Alaska, by February 20, 1974. This was the latest date Christianson believed would permit construction of the bridge from the ice, and Christianson wished to save the added cost of a work bridge, which would be required if the river thawed. When Isaacson entered into its contract with Christianson, it apparently relied on certain communications with Phoenix Steel Company regarding the supply of the specially fabricated steel required for the project. Because of increasing demand for steel and consequent problems in obtaining timely shipments of steel, Isaacson placed two orders. It first placed an order with Phoenix for the specialized steel on August 23, 1973. Isaacson then placed an order with Armco for the same type of steel on August 30, 1973. Because of the February 20, 1974, delivery commitment to Christianson, the delivery date was a primary factor in Isaacson's negotiations with steel producers. Isaacson therefore planned to cancel whichever order produced the later delivery date. On September 17, 1973, Armco advised Isaacson that it had scheduled shipment from its Houston mill for the week of December 3, 1973. Armco's shipping dates were earlier than those which Phoenix had quoted Isaacson. Accordingly, Isaacson forwarded its written purchase order for the steel to Armco on September 18, 1973. After receiving additional verbal assurances from Armco of a December delivery, Isaacson cancelled the Phoenix order on October 5. On October 15 and 23, 1973, Armco sent acknowledgments to Isaacson. [2] On December 18, 1973, Armco advised Isaacson by telephone that the order was scheduled for shipment the week beginning January 6, 1974. On January 2, 1974, Armco's Los Angeles office wrote Isaacson indicating the shipping status of the order. Armco completed the Isaacson order in four separate shipments. The first was on December 31, 1973; the second, on January 2, 1974; the third, on January 21, 1974; and the final shipment, on February 18, 1974. Isaacson commenced fabrication after the final shipment arrived in Seattle on March 4, 1974, and expected to ship the steel to Christianson on April 4 and April 6, 1974. On April 1, 1974, however, a strike shut down the Isaacson plant. The strike ended on May 20, but the work force did not return completely until about June 1, 1974. The steel arrived in Cantwell between June 4, 1974, and August 22, 1974. The trial court concluded that, if Armco had delivered the steel on time, Isaacson could have completed the order in time to ship prior to the strike. The court further concluded, however, that, even if Armco had delivered on time, Isaacson could not have shipped the steel in time to permit winter erection from the ice. The court based its conclusion on the fact that off-ice construction would have been impossible due to the recurrence of a lead in the ice. The steel arrived too late in the summer to permit summer construction. Christianson, therefore, decided to erect the steel from the ice in the winter of 1974-1975, one year behind schedule. Christianson withheld approximately $280,000 from Isaacson for the price of the steel, claiming damages from the delayed delivery. It asserted these damages as a defense to Isaacson's action to recover the purchase price. Isaacson commenced its action on February 25, 1975. Prior to the commencement of the action, Christianson notified Isaacson by letter of its claim of damages predicated on delay of delivery. [3] Armco, however, received no notice of breach. Isaacson paid Armco's full purchase price of approximately $79,000 upon receipt of Armco's shipments in 1974. The filing of the third-party complaint against Armco on February 6, 1976, was the first information Armco received about a suit arising out of the transaction. On appeal, Armco alleges numerous grounds for reversal. We address only one of the issues raised by Armco since we find it to be dispositive: Did the superior court err in holding that lack of prejudice to Armco excused Isaacson's failure to notify Armco of breach, as required by AS 45.05.174(c)(1)? [4] We hold that Isaacson's failure to notify Armco of the breach was not excused and that this failure discharges Armco of any liability. [5] The superior court concluded that the Armco-Isaacson contract was formed pursuant to AS 45.05.062(c). [6] Accordingly, it found the terms of AS 45.05 to be implied terms of the contract. Among these terms is the notice requirement contained in AS 45.05.174(c)(1). [7] At no time did Isaacson give Armco notice of breach as required by AS 45.05.174(c)(1). [8] Isaacson was notified of Christianson's intention to hold it in breach of the Christianson-Isaacson contract as early as July 1974. Armco, however, did not receive any communication from Isaacson regarding any problem arising from the Armco-Isaacson contract until Isaacson filed its third-party complaint against Armco on February 6, 1976. The trial court, while suggesting that absence of prejudice is not conclusive, did in fact rely solely on that factor in deciding that Isaacson's failure to give notice was excused. [9] On its face the language of AS 45.05.174(c)(1) allows for no alternative to timely notice. The statute states that the buyer must ... notify the seller of the breach or be barred from any remedy... . (Emphasis added.) It provides for no excuse from notice such as lack of prejudice. Several of our decisions support a strict construction of AS 45.05.174(c)(1). In Prince v. LeVan, 486 P.2d 959 (Alaska 1971), we pointed out that a buyer who has accepted goods ... has no remedy at all unless he notifies the sellers of breach within a reasonable time as required by AS 45.05.174(c)(1). Id. at 963 (footnotes omitted). Similarly, in A & G Construction Co. v. Reid Brothers Logging Co., 547 P.2d 1207 (Alaska 1976), a construction company failed to object to the late delivery of construction materials. We held: Since A & G accepted the goods, and since there was no notification to Reid that the deliveries were insufficient or late, A & G must pay for the accepted goods at the contract price, and A & G is barred from any subsequent remedy... . Id. at 1219 (footnotes omitted). Our recent decision in Kelly v. Miller, 575 P.2d 1221 (Alaska 1978), also supports strict construction of the notice requirement. In Kelly we stated: The UCC does not cover every aspect of contract law and where a situation arises which calls for application of legal or equitable principles not displaced by Code provisions, courts are free to use these supplemental principles. AS 45.05.006. However, where the UCC does provide a specific and complete remedy for an actionable wrong, we will view its provisions as exclusive. See Prince v. LeVan, 486 P.2d 959, 962 (Alaska 1971) (where specific UCC provisions are available to deal with a case, they should be applied). Id. at 1224 (footnote omitted). Although Kelly refers to remedies, its rationale applies equally to the notice requirement in AS 45.05.174(c)(1). Isaacson has not cited any case law supporting the trial court's decision that lack of prejudice to the seller excuses the buyer's failure to give notice. [10] The cases from other jurisdictions that discuss the relevance of prejudice to the seller in connection with the notice requirement of U.C.C. § 2-607, the counterpart of AS 45.05.174(c)(1), do so in the context of determining the reasonableness of the time of giving notice. See, e.g., Pritchard v. Liggett & Myers Tobacco Co., 295 F.2d 292 (3d Cir.1961). In Pritchard the court commented: The question of reasonableness must be determined from the circumstances in the individual case... . One of the factors to be considered is, did the delay in giving notice or its form prejudice the seller? Id at 298 (emphasis added). Where no notice is given, however, the question of reasonableness does not arise. While there is authority supporting the proper consideration of lack of prejudice in evaluating the reasonableness of notice, we believe the superior court erred in finding that the lack of prejudice to the seller excused Isaacson's absolute failure to give notice. Strict adherence to the notice requirement is in keeping with one purpose of the Code set forth in Comment 4 to U.C.C. § 2-607: to defeat commercial bad faith. [11] This comment emphasizes both notification to the seller that the transaction is still troublesome and must be watched and the importance of opening the way for normal settlement through negotiation. U.C.C. § 2-607, Official Comment 4. [12] The purpose behind the notice requirement of U.C.C. § 2-607 was discussed in Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 972 (5th Cir.1976): As Comment 4 to section 2-607 indicates, the purpose of notice is not merely to inform the seller that his tender is nonconforming, but to open the way for settlement through negotiation between the parties. In the words of the California Supreme Court, the sound commercial rule codified in section 2-607 also requires that a seller be reasonably protected against stale claims arising out of transactions which a buyer has led him to believe were closed. Pollard v. Saxe & Yolles Development Company, 1974, 12 Cal.3d 374, 115 Cal. Rptr. 648, 525 P.2d 88 .... Early warning permits the seller to investigate the claim while the facts are fresh, avoid the defect in the future, minimize his damages, or perhaps assert a timely claim of his own against third parties. The overriding purpose of the notice requirement is to encourage consistent business practices and early settlement of disputes. We believe this purpose is best served by strict adherence to the literal requirements of the statute. In reaching this conclusion, we reject Isaacson's contention that the complaint it filed in its third-party action against Armco satisfied the notice requirement of AS 45.05.174(c)(1). There are very few cases which deal with this issue, and while a few courts have found pleadings in a lawsuit to be adequate notice under U.C.C. § 2-607, [13] there are also cases to the contrary. [14] The commentators, however, uniformly reject the view that pleadings satisfy the notice requirement. One treatise, for example, comments as follows: The notice of the breach of warranty that is contemplated by § 2-607(3) does not contemplate the buyer delivering a summons and complaint to the seller as constituting notice. Section 2-607(3) provides no remedy for a breach of warranty until the buyer has given notice, therefore, summons and complaint cannot constitute notice. ..... Except for one decision [ Silverstein v. R.H. Macy & Co., 266 A.D. 5, 40 N.Y.S.2d 916 (1943)], which equated the bringing of an action against the seller for breach of contract with sufficient notice, the general rule was, even under the Uniform Sales Act, that notice is a condition precedent to the buyer's right of action against the seller. ..... Like the Uniform Sales Act, the Code does not permit the filing of the law suit to constitute notice... . As a commonsense rule, it must be said that it is not within the spirit of fair play and liberal interpretation to consider the commencement of an action as the giving of notice under the Code. 3 A. Squillante & J. Fonseca, Williston on Sales § 22-11, at 308-10, 312-13 (4th ed. 1974) (footnotes omitted). See also id. at 301-02; id. § 22-11, at 53 (Cum.Supp. 1978); 2 R. Anderson, Anderson on the Uniform Commercial Code § 2-607:28 (2d ed. 1971); Annot., 17 A.L.R.3d 1010, 1111 (1968). We believe the commentators represent the better view. We therefore affirm the superior court's ruling that Isaacson's third-party complaint did not constitute notice within the meaning of AS 45.05.174(c)(1). [15] We agree with the trial court that to conclude that a complaint serves as notice would defeat one of the primary purposes of the notice requirement  settlement of claims and avoidance of litigation. The result produced by this decision is not as harsh as it may seem, for even if the pleadings were found to constitute notice, we believe that in this case such notice was not given within a reasonable time. The breach occurred in December, 1973, when Armco failed to deliver the steel as scheduled. As early as July 1974 Isaacson had notice that Christianson was claiming damages based on late delivery. [16] Armco, however, did not learn of any problems with the sale until Isaacson's complaint was filed in February 1976, over two years after the actual breach and a year and a half after Isaacson learned of Christianson's claim. Although the reasonableness of notice is generally a question of fact, where there is undisputed evidence of an unduly long delay in giving notice, a court may find that the notice was unreasonable as a matter of law. Jarstad v. Tacoma Outdoor Recreation, Inc., 10 Wash. App. 551, 519 P.2d 278, 283-84 (1974) (notice given fourteen months after discovery of inventory shortage in connection with sale of business was unreasonable as a matter of law). The nature of Armco's alleged liability in this case is purely contingent, depending solely on a determination that Isaacson is liable to Christianson. In such a situation it may be that a reasonable time for giving notice should be measured not from the time of breach (December 1973) but from the time Isaacson learned of Christianson's claim (July 1974). The superior court found in this case that Isaacson's duty to give notice to Armco did not arise until Isaacson became aware of Christianson's intent to claim damages for breach of contract. There appear to be very few cases and little commentary discussing the notice requirement in the context of a third-party claim. [17] In one case, however, the court found, without discussion, that a buyer had satisfied the notice requirement when it notified the supplier soon after buyer received complaints about the product from its customer. See Chemco Industrial Applicators, Co. v. E.I. duPont de Nemours & Co., 366 F. Supp. 278, 286 (E.D.Mo. 1973) (applying Arkansas law identical to U.C.C. § 2-607). In another case the court found that the plaintiff automobile manufacturer had failed to give reasonable notice to the defendant supplier. Columbia Axle Co. v. American Automobile Insurance Co., 63 F.2d 206 (6th Cir.1933) (applying Ohio version of Uniform Sales Act § 49). In that case the purchaser of an automobile was injured because of a defective axle, and he sued the automobile manufacturer. The manufacturer, however, did not notify the axle supplier of the problem until six months after the manufacturer first received notice of the complaint and one month after the purchaser's lawsuit was filed. Id. at 207. When the manufacturer subsequently sought indemnity from the supplier, the court found that the notice requirement was applicable to such a situation and that, as a matter of law, the notice given was not reasonable. Therefore, no recovery was allowed. Id. at 207-08. See also Redman Industries v. Binkey, 49 Ala. App. 595, 274 So.2d 621, 624-25 (1973) (third-party defendant entitled to notice within reasonable time of discovery of breach); Eaton Corp. v. Wright, 281 Md. 80, 375 A.2d 1122, 1127-28 (1977) (recognizing notice issue in third-party situation but finding it unnecessary to reach the issue because plaintiff had failed to establish a prima facie case of breach). Even assuming that reasonableness is to be measured from July 1974, when Christianson notified Isaacson of its dissatisfaction, rather than from the time of breach, we concluded that it was unreasonable not to give notice until February 1976. We also reject Isaacson's contention that it had no reason to notify Armco of the breach until the trial court rendered its decision finding Isaacson liable to Christianson for damages. Isaacson argues that it was not aware of the reasons for Armco's delays in delivery until May 1976, and that it therefore had no knowledge of the breach which occurred in December 1973. Failure to deliver as scheduled, however, was a breach of the contract, whether or not it might later be found to have been an excused breach. AS 45.05.174(c)(1) does not suggest that the buyer should know the cause of the delay before giving notice. Comment 4 to U.C.C. § 2-607 clearly states that the notice need not be a clear statement of all the objections that will be relied on by the buyer. It need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. As stated by Judge Learned Hand in American Manufacturing Co. v. United States Shipping Board Emergency Fleet Corp., 7 F.2d 565 (2d Cir.1925): The notice of the breach required is not of the facts, which the seller presumably knows quite as well as, if not better than, the buyer, but of buyer's claim that they constitute a breach. The purpose of the notice is to advise the seller that he must meet a claim for damages, as to which, rightly or wrongly, the law requires that he shall have early warning. Id. at 566. Isaacson knew of the breach in December 1973, and it knew in July 1974 that the transaction was still troublesome. At the very least, AS 45.05.174(c)(1) required Isaacson to notify Armco within a reasonable time after July 1974, but Isaacson did not. We find that Isaacson, having failed to comply with the notice requirement of AS 45.05.174(c)(1), is barred from any remedy against Armco. Accordingly, the judgment against Armco is reversed.