Warranties and Limits on Sales Contracts - Module 3 of 5

Module 3: Warranties and Limits on Sales Contracts

After discussing the nature and formation of sales contracts under the UCC in the first two modules, we’ll now turn to warranties - either expressed or implied- in contracts for sales of goods. We’ll also cover the unconscionability rule, which limits the enforceability of a contract that may be unfair to one party. Disclaimers of warranties are often challenged on this ground. Finally, we’ll cover special issues of disclaimers, warranties and unconscionability, as applied to e-commerce and online transactions.

Express Warranties

Reasonable purchaser expectations based on assertions made by the seller during the transaction or in advertising its product constitute warranties.[1] Warranties may be found in what is said or written, the conduct of the parties or the type of transaction. When examining warranty issues, the courts must determine if there was a warranty and its meaning.The courts must further determine if the warranty became part of the agreement or if it was properly excluded by a disclaimer.[2]   

An express warranty is a seller’s representation that becomes part of “the basis of the bargain”[3] while an implied warranty is inferred from the transactional circumstances or the conduct of the parties.[4]   

An express warranty is a seller’s affirmation of a fact or promise that relates to the goods, the description of the goods or samples or models of the goods.[5] Prior to the UCC, buyers assumed the burden of showing that they relied on sellers’ promises in cases involving express warranty. Under the Code, reliance on warranties is generally assumed, though the seller can disprove reliance with evidence.[6]

In the course of negotiations, sellers often make promises. Some of these promises are mere opinions or commonplace exaggerations.These assertions, sometimes called “puffing,” do not necessarily constitute warranties. However, courts differ as to where to draw the line between an enforceable warranty promise and what is merely a sales gimmick. The factors a court can use to assess whether a promise constitutes an express warranty include the specificity of the claim, the context in which the claim was made, the nature of the defect that violates the warranty, the relative knowledge and sophistication of the parties, the seller’s choice of language and whether the claim was written or oral.[7]  Courts vary in their application of these factors and no one factor on its own determines the outcome.[8]

For example, assume Arthur buys a Ford truck from Robert Jackson, owner of Jackson’s Used Cars. Robert tells Arthur that a particular truck is the “best on the road” and “will last for many years.” He goes on to tell Arthur that the brakes and spark plugs are new. Arthur buys the truck, but the truck begins to malfunction over the next couple of weeks. When Arthur brings the truck to a mechanic, the mechanic informs him that the brakes are worn, and the spark plugs are misfiring.  A court would likely find that Robert’s claims that the truck is the “best on the road” and “will last for many years” are merely typically sales claims that do not constitute legally enforceable warranties. The claims pertaining to the brakes and spark plugs are sufficiently specific to constitute a breach of express warranty and even fraud if untrue.     

Another type of express warranty involves a description of the goods.[9] The description may incorporate industry standards or special terminology, or it may be very simple. A “car” evokes certain properties that can be construed as promises [10] It has wheels and is reasonably capable of transporting people and things. A vehicle that fails to function in this way may violate any express and implied promises that it would function as a “car.”   

Samples or models furnished by the seller may serve as promises as to what the seller is providing.[11]  A sample is a unit “drawn from the bulk of goods which is the subject matter of the sale.”[12] A model is a demonstration unit that is “offered for inspection when the subject matter of the sale is not available at hand and the demonstration unit is not from the bulk of the goods” that is the subject of the sale.[13]  So, if the product sold is substantially inferior to the sample or model provided to the buyer during the negotiation, this could constitute a breach of warranty.

Implied Warranties

There is the reasonable expectation that goods sold by merchants are of such quality that is normally associated with goods of that type.[14] Cars have to run, stoves have to cook and refrigerators have to refrigerate. To be merchantable, goods must be “fit for the ordinary purposes” for which they are used, adequately packaged and labelled and able to pass in the trade without objection.[15] This is called the “implied warranty of merchantability” and it applies to merchants only. A buyer is entitled to expect that goods from a merchant will conform to these requirements even without explicit claims by the seller. To determine whether goods are considered merchantable, a court may consider factors such as the parties’ course of performance and dealings, trade usage and custom, whether the goods are new or used, the price of the goods, characteristics of similar brands and government regulations and standards.[16]    

Similar is the warranty of “implied fitness for a particular purpose.” Where a buyer relies on the seller’s skill or judgment to acquire goods intended for a specific application, then the buyer can claim breach of warranty if the goods do not meet the buyer’s reasonable expectation for that endeavor.[17] An ordinary purpose (for which the implied warranty of merchantability applies) pertains to a purpose customary for those goods, while a particular purpose applies to a specific use peculiar to the nature of the buyer’s business. Unlike the warranty of merchantability, the warranty of a particular purpose may apply to non-merchants as well as merchants. However, also unlike the warranty of merchantability, the buyer must prove reliance on the seller’s expertise in making the purchase. The buyer must also show that the seller had reason to know of the use for which the buyer was buying the goods.[18]

For example, Arlene moves from Florida to Massachusetts and has never seen snow. She visits Robert Jackson of Jackson’s Used Cars and tells Jackson that she needs a truck to plow her driveway in snowstorms. Jackson sells to Arlene a Ford sport utility vehicle. When Arlene arrives home with her new purchase, she reads in the owner’s manual that the vehicle will not accommodate a plow attachment. Arlene can successfully sustain a claim against Jackson for breach of the warranty for fitness for a particular purpose even if Jackson never explicitly said the truck would be suitable for plowing snow. 

In resolving disputes, courts can also look to the knowledge and sophistication of the parties, as well as their conduct. Factors such as who initiated the transaction, oral or written claims and reliance and whether the buyer insisted on a particular brand help indicate whether or not there was an implied warranty.[19]   

In addition to the two warranties of quality, buyers are also entitled to a warranty of title.[20] That warranty guarantees that the seller is conveying good title to the goods as the rightful owner of the goods, that they are free from any third party claims, security interests or liens and that there are no undisclosed co-owners of the goods.[21]

Warranty Disclaimers

While the Code imposes upon the seller responsibility for ensuring that the products comply with the Code’s warranty standards, the Code also encourages freedom of contract and consequently allows sellers to invalidate those warranties in specific ways.[22] Still, warranties are often viewed with scrutiny by courts since they can deprive the buyer of his reasonable expectations regarding the performance of a product.

Express warranties (such as those made in advertising or negotiations) may be disclaimed under the UCC. However, language of disclaimers must be clear.To the extent possible, disclaimers must be interpreted consistently with other claims made, not to override them unless such is clear from the language of the disclaimer.[23] So, for example, a disclaimer from a car dealership that the car is sold “as-is” does not necessarily negate an advertised warranty that any used car sold on the lot has only had a single owner. While “as-is” is typical disclaimer language, it’s use doesn’t contradict a single-owner claim. As such, the single-owner claim can survive an “as-is” disclaimer.

Note that the parol evidence rule applies to warranties, which are terms in a sales agreement. For example, if a written sales contract makes no disclaimer, but the seller tells the buyer that the product is sold as-is, evidence of this oral disclaimer may be precluded by the parol evidence rule, especially when the written agreement is considered complete.

The implied warranties of merchantability and fitness for a particular purpose can also be disclaimed. The seller must provide the disclaimer using language that is “conspicuous,”[24] which means that it must be presented in a manner that is likely to be noticed, seen or heard by the buyer. The disclaimer need not necessarily be in writing, but it must use the word “merchantability.”[25] However, a disclaimer for the warranty for a particular purpose must be in writing but need not use the phrase “particular purpose.”[26]

It is common practice, therefore, for merchants to put, in conspicuous terms on their sales contracts, language such as “SELLER hereby disclaims all warranties, express or implied, including the implied warranty of merchantability and any implied fitness for a particular purpose.” While there are exceptions where such would be unconscionable, these tactics can, by and large, be effective.

Moreover, when a buyer has a chance to inspect the goods and where the language of the agreement or intent of the parties demonstrates that the buyer is independently inspecting the goods and relying on that inspection, such inspection may invalidate implied warranties. 

A further exception is an effective disclaimer based on the course of dealing, usage of trade or prior course of performance. The conduct of the parties, such as honoring disclaimers in the past, may be sufficient to give effect even to a disclaimer that does not meet the formal requirements of the Code. 

Injuries to Third-Parties

“Privity” refers to a party to an agreement. A non-privity party, or “third” party, is a person who is not a party to an agreement, but who wishes to make a claim under an agreement or warranty.[27] A third party can be a “vertical” non-privity party, which means a second-hand buyer who purchased the good from the original purchaser (and thus never dealt with the original seller) or a “horizontal” non-privity party, who never owned the product, such as a passenger in a car purchased by another person.[28] 

The issue with respect to sales contracts is whether these third parties have standing to claim breach of warranty against a seller. For example, can a passenger in someone else’s car sue the car’s manufacturer for a defect that caused her an injury?

The UCC provides that the answer is yes, but only in some cases. The drafters of the UCC provided three separate alternatives for how far sellers’ liabilities to third parties extend, and states are free to choose from among these possibilities. One alternative extends warranty protection only to family members or guests of the immediate purchaser. A second alternative extends warranty protection to anyone affected by the product to whom injury is reasonably foreseeable. This applies only to personal injuries. The broadest alternative extends warranty protection to anyone affected by the product who may be foreseeably injured and includes personal injury as well as property damage.

Unconscionability

Unconscionability in contracts is a common law doctrine that empowers a party to a contract to escape enforcement based on “procedural” or “substantive” unfairness. Procedural unconscionability involves the context in which the agreement is formed while substantive unconscionability pertains to the terms of the agreement.[29] 

For example, Arthur buys a car from Jackson’s Used Cars. Robert Jackson, the proprietor and seller rushes Arthur through the document signing process during which Arthur signs several documents with blanks. Robert tells Arthur that he will complete the forms after Robert leaves. Robert completes the forms after Arthur leaves and when Arthur gets them in the mail, he finds out that the financing terms and optional insurance are far more expensive than he was led to believe. 

While also possibly fraudulent, Robert’s actions may give Arthur grounds to refuse compliance with the contract based on procedural unconscionability because Robert rushed Arthur through the signing and later filled in the blanks with terms profoundly adverse to Arthur. Arthur may also succeed by claiming substantive unconscionability if the terms of the financing and insurance terms of the contract were oppressively one-sided. 

If found unconscionable, a court may refuse to enforce the agreement or enforce the remainder of the agreement without the unconscionable clause. Alternatively, it may limit the application of a clause that produces an unconscionable result.The Code further allows the parties to present evidence of the commercial setting, along with the purpose and effect of an unconscionable aspect of the agreement.[30]   

The Code assigns the determination of unconscionability to the judge and unconscionability is mostly raised as an affirmative defense to escape enforcement of the contract.[31] With respect to procedural unconscionability, courts must examine the relative bargaining power of the parties and their respective sophistication, the ability of the consumer to read, speak and understand the English language and the font and placement of the terms of an agreement.[32]  

Substantive unconscionability cases involve issues pertaining to excessive price terms and alteration of remedies. In one case,[33] the court held unconscionable the sale of goods and services worth $959, along with an $800 commission and an $809 finance charge. In another case[34] a Spanish-speaking purchaser who signed a contract in English without the benefit of any translation, bought a freezer that cost the seller $348, but cost the buyer $900 in a financing contract where the payments totaled $1,145.88. The court ruled that price to be unconscionable. Manipulation by contractual remedies may include oppressive liquidated damages clauses, unfair overly broad disclaimers of warranties and unfair repossession allowances.[35]

Electronic Transactions

Early software was frequently encoded on compact discs.The contractual terms that governed the rights and responsibilities of the parties were found in the license agreement that was included with the software, either electronically or physically on paper. The CD was wrapped in plastic and the user had to unwrap the CD in order to access the user agreement. The software license was therefore called a “shrinkwrap license.”[36]  An early issue for the courts to decide was therefore the enforceability of the terms of a license that the user could not access until after the purchase.[37] In general, the courts ruled that these agreements were enforceable.[38] The courts reasoned there are analogous situations where purchasers of goods and services commit to contracts without an opportunity to first review the terms of the agreement, such as insurance contracts.

Software licensing agreements took on a different form with the advent of the Internet. Shrinkwrap licenses became “browsewrap agreements” and “clickwrap agreements.”[39] Purchasers enter into agreements by clicking a mouse. The user then proceeds to tender payment and download the software over the Internet. “Browse” cases differ from “click” cases in that browse cases allow the user to browse the website before indicating acceptance to the terms of the agreement while “click” cases require the user to click on a box with an associated caption, such as “I Accept.” 

Courts in these types of cases must address whether the user has adequately indicated willingness to be bound to the agreement and the degree to which a purchaser should be bound to the terms of the agreement when there was limited access for review.[40] Clickwrap agreements have been held to be enforceable, almost without exception. Browsewrap agreements are more challenging.[41] In these situations, a mere hyperlink to the seller’s agreement is all that is available to the prospective purchaser. The placement and conspicuousness of the link may determine its enforceability because there is no unequivocal manifestation of the purchaser’s assent, as in clickwrap agreements. The principles of common law will often govern the outcome of disputes pertaining to these types of agreements.[42]            

In our next module, we’ll turn to performance and breach of sales contracts.