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Rainbow Industries, Inc. v. North Bay Apparel, Ltd.

A-5823-02T3 (N.J. Super. App. Div. 2004) (Unpublished)

CONTRACTS; WARRANTIES; DAMAGES—Where a supplier is aware that it shipped defective products and can’t cure the defects on a timely basis, its customer may acquire reasonable replacement goods for which the supplier must make up the difference in cost.

A company bought a large quantity of promotional items from a premium distributor. The distributor then hired a manufacturer to produce the items. After some were shipped, the buyer complained of a product defect to the distributor. The manufacturer told the buyer and the distributor that it would correct the problem at its own cost.

There was conflicting testimony as to whether the manufacturer initially told the buyer and the distributor that the defective products had to be returned in order to receive refunds or replacements. The items were never returned, so the manufacturer refused to give a refund. To replace the items that had been ruined, the distributor provided substitute products. The distributor then sued the manufacturer, alleged breach of contract and breach of the implied warranty of fitness.

The lower court held that the products were unfit for the purpose intended and that the distributor gave prompt notice to the manufacturer that they were not merchantable. It also found that the distributor was not aware of the defects when it received the products prior to sending them to its buyer. In addition, the lower court held that the distributor took reasonable steps to “cover” its loss within a reasonable time by purchasing substitute promotional items, and also held that its testimony about the need to return the defective products was not credible. Accordingly, the lower court found a breach of the contract, and awarded the distributor the difference between the costs of cover and the contract price. The Appellate Division affirmed.

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