Warranties can greatly increase the potential liability of a seller in a sale of goods if they are not narrowly tailored to the goods being sold.
By way of background, a warranty is a promise that a representation, or assertion of fact given by a seller to induce a buyer to enter a contract, is accurate. If a warranty is false, the warranty is considered breached and the recipient of the warranty is entitled to damages for breach of contract (among other potential remedies).
In addition to the warranties specifically bargained for by the parties, some warranties are implied by law. In particular, Article 2 of the Uniform Commercial Code creates warranties of merchantability, fitness for a particular purpose, and non-infringement in contracts for the sale of goods.[1] These implied warranties significantly expand the seller’s exposure for potential liabilities to the buyer.
Unless specifically excluded or modified, the warranty of merchantability provides that goods sold must:
- Pass without objection in the trade under the contract description;
- In case of fungible goods, be of fair average quality within the description;
- Be fit for the ordinary purposes for which they are used;
- Within variations permitted by the agreement, be of even kind, quality, and quantity within each unit and among all units;
- Be adequately packaged and labeled; and
- Conform to the promises or affirmation of facts on the container or label, if any.
Because the implied warranty of merchantability is based on such vague terms as “ordinary,” “fair,” and “adequate,” it easily can provide the basis for a breach of warranty claim for a dissatisfied buyer.
Whereas the implied warranty of merchantability applies to all goods, the implied warranty of fitness for a particular purpose is based on the specialized needs of the buyer. It applies when the seller knows or has reason to know both (a) the particular purpose for which the buyer is purchasing the goods and (b) that the buyer is relying on the seller’s skill and judgment to provide suitable goods. Sellers need to be particularly wary of the implied warranty of fitness for a particular purpose because equipment may be merchantable without fulfilling the particular purposes of the buyer. If so, the seller breaches the implied warranty of fitness for a particular purpose.
For example, truck tires may be merchantable for highway driving. The buyer, however, may need tires for off-road driving. The seller breaches the implied warranty of fitness for a particular purpose if (a) the seller is aware that the buyer needs tires suitable for off-road use; (b) the seller is aware that the buyer is relying on the seller’s expertise to recommend and sell suitable tires for off-road use; and (c) the tires do not provide sufficient traction for, or are not strongly enough constructed to sustain the abuse of, off-road use. Because buyers may be considering specialized or unusual uses when they buy goods, the implied warranty of fitness for a particular purpose can greatly increase a seller’s potential liability with respect to sold goods.
Under Article 2, if the seller is a merchant regularly dealing in goods of the kind sold, then there is an implied warranty that the goods will be delivered free from a third party’s claim of infringement, including infringement of patent, trademark and other intellectual property rights. Given the vagaries of intellectual property law, an implied warranty against infringement can expose a seller to claims for breaches of intellectual property rights over which they have little control.
Given the vastly increased exposure to sellers resulting from the implied warranties of merchantability, fitness for a particular purpose, and against infringement (as well as the other implied warranties under Article 2), it is customary for sellers to include a robust disclaimer of express and implied representations and warranties in any contract for the sale of goods, such as the following:
EXCEPT AS EXPRESSLY PROVIDED HEREIN, SELLER HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE GOODS, WHETHER EXPRESS OR IMPLIED, WHETHER WRITTEN OR ORAL, AND WHETHER ARISING AT LAW, IN EQUITY, BY CONTRACT, COURSE OF PERFORMANCE OR DEALING, USAGE OF TRADE OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, (A) THE WARRANTY OF MERCHANTABILITY, (B) THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (C) ANY WARRANTY OF TITLE,OR (D) ANY WARRANTY AGAINST INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY.
Such a disclaimer protects a seller against the heighted liability resulting from the broad and sometimes amorphous implied warranties under Article 2. In a subsequent article, we will discuss how, once the implied warranties have been disclaimed, the seller can use express warranties – such as a warranty that goods will conform to specifications – and specific remedies – such as an undertaking to repair or replace any non-conforming goods – to limit and control the seller’s potential liability for breaches of warranty.
[1] Article 2 also creates implied warranties of title, against interference, from courses of dealing, and from usages of trade.
This post was written by Matthew R. D’Ascenzo & Allyson Matvey.
