The Uniform Commercial Code (UCC) § 2-725 establishes a default statute of limitations of 4 years for actions arising from a breach of a sales contract (i.e., contracts for the sale of goods under UCC Article 2). This means that if one party breaches the contract, the other party has 4 years from the date the cause of action accrues (typically when the breach occurs) to file a lawsuit. For example, if a buyer fails to pay for goods delivered on January 1, 2025, the seller has until January 1, 2029, to sue for breach of contract.
However, UCC § 2-725(1) allows the parties to reduce this 4-year period by mutual agreement, as long as the reduced period is not less than 1 year. This gives the parties flexibility to shorten the time frame in which claims can be brought, which can be advantageous for limiting exposure to lawsuits. On the other hand, the UCC does not permit the parties to extend the statute of limitations beyond the 4-year default. This restriction ensures that claims are resolved within a reasonable time and prevents indefinite liability.
Strategic Consideration: Shortening the Limitation Period
The UCC’s provision allowing a shorter limitation period can be a strategic tool, particularly for sellers. By reducing the statute of limitations to, say, 1 year, a seller can limit the window in which a buyer can bring claims for issues like defective goods or non-conformity. This can help the seller manage risk by encouraging the buyer to inspect goods and raise issues promptly, rather than waiting years to file a claim.
However, the seller may want to carve out an exception for certain claims, such as those for money owed on an open account. An open account is a type of credit arrangement where the buyer purchases goods over time, and the seller keeps a running balance of the amounts owed, which the buyer is expected to pay periodically. Claims for money on an open account often involve ongoing transactions, and the seller may want more time to pursue these claims, especially if payments are delayed or disputed.
Recommendation: Protecting Your Business When Buyers Pay Later
Why Include an Exception for Open Account Claims?
By including an exception for claims on an open account, the seller ensures that the shortened limitation period (e.g., 1 year) applies only to other types of claims (like breach of warranty or non-delivery), while preserving the full 4-year statute of limitations for collecting unpaid balances on an open account. This is important because open account claims may involve a series of transactions over time, and the seller may not immediately know when a buyer will default on payment. Preserving the longer 4-year period for these claims gives the seller more flexibility to recover money owed.
Example to Illustrate
Let’s consider a scenario involving a seller, ABC Electronics, and a buyer, XYZ Retail, who enter into a sales contract for the delivery of electronic components.
- The Contract Terms:
- ABC Electronics and XYZ Retail agree to a contract for the sale of $50,000 worth of components, to be delivered on March 1, 2025.
- The contract includes a clause reducing the statute of limitations for any cause of action related to the agreement to 1 year, as permitted by UCC § 2-725.
- However, the contract also includes an exception: claims for money owed on an open account will retain the default 4-year statute of limitations.
- XYZ Retail has an open account with ABC Electronics, meaning they can order goods on credit, and ABC keeps a running balance of what XYZ owes.
- Scenario 1: Breach of Warranty Claim (1-Year Limitation Applies):
- On March 1, 2025, ABC Electronics delivers the components, but XYZ Retail discovers that some of the components are defective.
- Under the contract’s shortened 1-year statute of limitations, XYZ Retail must bring any claim for breach of warranty (e.g., defective goods) within 1 year—by March 1, 2026.
- If XYZ Retail waits until April 2026 to file a lawsuit, their claim will be time-barred because the 1-year limitation period has expired. This benefits ABC Electronics by limiting the time frame in which they can be sued for issues with the goods.
- Scenario 2: Claim for Money on an Open Account (4-Year Limitation Applies):
- XYZ Retail orders additional components on credit through their open account, accumulating a balance of $20,000 by June 1, 2025.
- XYZ Retail fails to pay the $20,000, and ABC Electronics decides to pursue a claim for the unpaid amount.
- Because the contract includes an exception for claims on an open account, the default 4-year statute of limitations under UCC § 2-725 applies to this claim. This means ABC Electronics has until June 1, 2029, to sue XYZ Retail for the unpaid $20,000.
- Without this exception, the 1-year limitation period would apply, and ABC Electronics would have only until June 1, 2026, to file a claim—potentially cutting short their ability to recover the money if XYZ Retail delays payment for a long time.
Why This Matters
- For the Seller (ABC Electronics): The shortened 1-year limitation period for most claims reduces their exposure to lawsuits over issues like defective goods, encouraging XYZ Retail to raise concerns quickly. However, the exception for open account claims ensures ABC Electronics has the full 4 years to pursue unpaid balances, which is critical for managing cash flow in a credit-based relationship.
- For the Buyer (XYZ Retail): The 1-year limitation period means they must be proactive in inspecting goods and raising issues, or they risk losing their right to sue. However, they benefit from clarity on the time frame and may face less pressure on open account payments, knowing the seller has a longer period to pursue those claims.
Practical Takeaway
When drafting a sales contract under the UCC, parties should carefully consider the statute of limitations. A seller might strategically reduce the limitation period to 1 year to limit exposure to claims, but include an exception for open account claims to preserve the full 4-year period for collecting unpaid balances. This balances the seller’s need for protection with the practical realities of ongoing credit relationships. However, parties must ensure the reduced period is not less than 1 year, and they cannot extend the limitation period beyond 4 years, as per UCC § 2-725.
Disclaimer:The information provided in this article is for general informational and educational purposes only and does notconstitute legal advice. Readers are strongly encouraged to consult with a qualified attorney to obtain advice tailored to their specific situation, including the applicability of statutes of limitations, contract terms, and any exceptions such as claims on an open account.
