There is no way around it. The concept of revocation of acceptance is an odd one. If you pay for goods or services that turn out to be less than what you bargained for, your first thought might be to sue for damages for breach of contract. Alternatively, in some situations, you could actually reverse time and annul the transaction, even though you previously accepted the goods or services, and even though you may have used them in the interim.

The old term used for setting aside a completed contract is “rescission.” The goal was to place both parties, the buyer and seller, back into the identical position they had been in prior to the sale. In practice, this ideal goal could rarely be achieved, and a rescission nearly always hurts one side more than the other.

Problems with rescission also arose when applied to contracts for services, such as construction. How can both parties be placed back in their precontract position? For example, let’s say the wiring that was installed is inadequate for all of the homeowner’s electrical needs. Once the work has been done, the parties cannot be returned to the precontract conditions. Nevertheless, with services/construction, the federal government has developed some rules for its contracts.

Where the sale of goods is concerned, the situation is somewhat clearer. Some specific rules exist, and they are contained in the Uniform Commercial Code (UCC).

The UCC rules

I have discussed portions of the UCC and how it can affect electrical contractors before. Essentially, Article 2 of the UCC mandates certain purchase-order terms and conditions that can be varied by contractual agreement. (For those of you who are adept at Internet research, you should be able to download a copy of Article 2, as adapted by your state.)

Article 2-608, “Revocation of Acceptance in Whole or in Part,” established the procedures for this remedy. It is important to note that Article 2-608 is not exclusive. As emphasized in the Official Comment 1, “The buyer is no longer required to elect between revocation of acceptance and recovery of damages for breach. Both are now available to him.”

The focus of Article 2-608 is on the discovery of nonconforming goods (equipment, materials, supplies) after acceptance. The term “nonconforming” is not defined but can be interpreted as goods that substantially are not as required by or described in the contract. It also means there is a “substantial impairment of value to the buyer” (Official Comment 2). If the contract time of performance has not lapsed, the seller has the right to “cure” the error by substituting the correct product. After the contract term has expired, the seller still has a right to cure, if it is reasonably possible, but it must also pay damages for the breach (Article 2-508).

How do you revoke acceptance?

The buyer must notify the seller of the revocation in order for it to become effective. The notice should be in writing, with sufficient information about the nonconformity to reasonably permit a cure.

The time when the notice must be sent depends on when the defect was discovered or “should have been discovered.” This date of actual or constructive discovery is independent of any contractual time limits, such as in a warranty. A hidden (latent) defect might not make itself known for years after acceptance (e.g., a defect in a buried cable). Once discovered, revocation must be made within a reasonable time.

An issue can arise when the seller refuses to refund the price or substitute the goods. Can you still use the nonconforming materials? The answer is yes. “[I]f the seller fails to refund the price as required by this Article, the buyer may have no reasonable alternative but to use the goods …” (Official Comment 8).

Revocation of part of a contract

At first blush, revocation of acceptance of construction seems like a strange and unworkable procedure. “Substitution” may not be feasible, but under the federal government rules, revocation after acceptance is allowed, and the government is entitled to a refund plus damages for breach of contract.

Under the “Inspection of Construction” clause, acceptance of the work is final and conclusive except for latent defects, fraud or gross mistakes by the contractor that amount to fraud. The government can revoke using those three exceptions.

Unlike the supply of goods (a UCC question) where inspections of all equipment or supplies may not be the norm, construction is always being inspected by someone, whether for conformity to the specifications or for percent complete for payment purposes. Inadequate or nonexistent inspection, however, is not necessarily a defense for the contractor.

In one case, Jo-Bar Mfg. Corp., the board found that the government’s inspections were “inexcusably bad,” but revocation was still proper because the contractor’s mistakes were “gross amounting to fraud.”

For the “gross mistakes” exception to apply, the government does not need to prove a contractor’s intent to defraud. It is enough if there were misrepresentations or concealment of facts, inducing the government into accepting the work. (These circumstances can also give rise to violations of the False Claims Act.)

As with the UCC, once the defect is known or should have been known, the government must act within a reasonable time to issue a revocation notice, or the right is lost. Perhaps the main reason for prompt notice is to limit any continuing harm from accumulating because of the defect, but “mitigation of damages” is not a consideration in this area of the law.

In a recent case, American Renovation & Construction Co., ASBCA Nos. 53723, 54038 (2009), the government properly revoked acceptance of housing units under the gross mistakes exception because of foundation defects. Site problems were discovered over a year after completion. A government inspection report issued at that time resulted in some cure efforts by the contractor, but four months later, acceptance was revoked. This action was considered timely.

Conclusion

If acceptance of your work is revoked or you want to revoke acceptance of work done by others for you or materials, supplies, or equipment you have purchased, you and your attorney need to discuss the UCC and other contract law sources to determine your rights.

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, gwi@ittig-ittig.com and www.ittig-ittig.com.