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UCC Breach of Warranty

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IICLE Business Actions Teleconference: Breach of Warranty under the UCC. March 23, 2010.

IICLE Business Actions Teleconference: Breach of Warranty under the UCC. March 23, 2010.

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UCC Breach of Warranty UCC Breach of Warranty Presentation Transcript

  • UCC Breach Of Warranty Christopher Tompkins Jenner & Block LLP March 23, 2010
    • ©2010 Christopher Tompkins and Jenner & Block LLP. 353 N. Clark St. Chicago, IL 60654-3456. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended to provide legal advice but to provide information on legal matters. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. The attorney responsible for this publication is Christopher Tompkins. Attorney Advertising. Prior results do not guarantee a similar outcome.
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations On Warranties.
    • Damages For Breach Of Warranty.
    • Defenses to Breach Of Warranty.
    • Pleading Checklist.
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations On Warranties.
    • Damages For Breach Of Warranty.
    • Defenses To Breach Of Warranty.
    • Pleading Checklist.
  • Potential Warranties Under The UCC
    • Express Warranties.
      • Representation regarding the quality or nature of goods that was part of the basis of the bargain. 810 ILCS 5/2-313.
    • Implied By Law.
      • Implied warranty of merchantability. 810 ILCS 5/2-314.
      • Implied warranty of fitness for a particular purpose. 810 ILCS 5/2-315.
      • Warranty of title and against infringement. 810 ILCS 5/2-312.
  • Express Warranties
    • Three ways to create express warranties:
      • An affirmation of fact or promise which relates to the goods and becomes part of the basis of the bargain. 810 ILCS 5/2-313(1)(a).
      • A description of the goods which is part of the basis of the bargain. 810 ILCS 5/2-313(1)(b).
      • A sample or model made part of the basis of the bargain. 810 ILCS 5/2-313(1)(c).
  • Sources Of Express Warranties
    • Oral representations
    • Contract documents
    • Catalogs
    • Brochures
    • Specifications
    • Plans & Blueprints
    • Product manuals
    • Correspondence
    • Inspection Reports
    • Appraisals
    • Packaging & Labels
    • Package Inserts
    • Material Safety Data Sheets
    • Advertisements
    • Models & Samples
  • Basis Of The Bargain
    • Focus is whether or not the claimed warranty was part of the bargain between the parties.
    • While some case law still carries over the requirement of reliance from the Uniform Sales Act, it is not necessarily required under the UCC.
    • Official Comment 3 to the UCC suggests that a seller’s affirmation of fact is presumed to be a part of the basis of the bargain and no particular reliance need be shown.
    • The “basis of the bargain” limitation has been read to exclude representations that could not have been part of the agreement, such as statements remote in time to the sale.
  • Specific Language; Fact Or Puffing?
    • Words such as “guarantee,” “warranty” or specific intent to create a warranty are not required. 810 ILCS 5/2-313(2).
    • However “an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.” Id .
  • Implied Warranty Of Merchantability
    • Unless disclaimed or modified, all sales of goods by a merchant of goods of that kind include an implied warranty of merchantability. 810 ILCS 5/2-314(1).
  • Merchantability
    • To be merchantable, the goods must:
      • pass without objection in the trade under the contract description; and
      • in the case of fungible goods, are of fair average quality in the trade under the contract description; and
      • are fit for the ordinary purpose for which such goods are used; and
      • run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
      • are adequately contained, packaged, and labeled as the agreement may require; and
      • conform to the promises or affirmations of fact made on the container or label if any. 810 ILCS 5/2-314(2).
    • Other implied warranties may arise from course of dealing or usage of trade. 810 ILCS 5/2-314(3).
  • Fitness For A Particular Purpose
    • If not disclaimed or modified, a sales contract may also contain an implied warranty of fitness for a particular purpose.
    • To establish the warranty of fitness for a particular purpose, the buyer must establish:
      • the seller had reason to know of the particular purpose for which the buyer bought the goods;
      • the seller had reason to know the buyer was relying on the seller’s skill or judgment to select suitable goods; and
      • the buyer actually relied on the seller’s skill or judgment. 810 ILCS 5/2-315.
  • Warranty Of Title & Against Infringement
    • The Seller warrants that it will convey good title, free from any security interest, lien or other encumbrance of which Buyer has no knowledge. 810 ILCS 5/2-312(1).
    • The warranty of title is not strictly an “implied warranty” and may only be disclaimed in accordance with the provisions of 810 ILCS 5/2-312(2), which requires language informing the buyer that the seller does not claim title and is selling only the right or title that he may have.
    • A merchant also warrants that goods will be delivered free of any rightful claim of infringement. 810 ILCS 5/2-312(3). However, a buyer must hold a seller harmless for infringement where it furnishes specifications. Id.
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations On Warranties.
    • Damages For Breach Of Warranty.
    • Defenses To Breach Of Warranty.
    • Pleading Checklist.
  • Potential Limitations On Warranties
    • Sellers can limit or modify warranty liability in one of two ways:
      • Disclaim or modify applicable warranties. 810 ILCS 5/ 2-316.
      • Modify or limit the remedies for breach of warranty. 810 ILCS 5/ 2-719.
  • Disclaimer Of Express Warranties
    • Words or conduct creating or negating express warranties are to be construed as consistent when possible but negations or limitations are inoperative if the provisions cannot be harmonized. 810 ILCS 5/2-316(1).
    • An integrated writing may exclude extrinsic evidence of other express warranties. 810 ILCS 5/2-202(b).
  • Disclaimer Of Implied Warranties
    • To exclude or modify the implied warranty of merchantability, the disclaimer must mention merchantability and must be conspicuous. 810 ILCS 5/2-316(2).
    • A disclaimer of the implied warranty of fitness for a particular purpose must be in writing and must be conspicuous. 810 ILCS 5/2-316(2).
    • Use of language such as “As Is” and “With All Faults” is also sufficient to disclaim implied warranties. 810 ILCS 5/2-316(3)(a).
  • Disclaimer of Implied Warranties
    • Implied warranties may also be disclaimed in other ways:
      • A buyer’s examination of the goods or a sample can exclude implied warranties for defects the examination ought to have revealed. 810 ILCS 5/2-316(3)(b).
      • Course of dealing, course of performance or usage of trade may exclude or modify implied warranties. 810 ILCS 5/2-316(3)(c).
  • Limitation Of Remedies
    • A seller can also limit warranty exposure by limiting remedies available for breach of warranty.
      • An agreement may provide for remedies in addition to or in substitution of those provided by the UCC, such as limiting remedies to repair or replacement or limiting damages to the purchase price. 810 ILCS 5/2-719(1)(a).
      • An agreement may limit or exclude consequential damages, unless that exclusion is unconscionable. 810 ILCS 5/2-719(3).
    • If the limited remedy “fails of its essential purpose” a buyer may resort to any UCC remedy. 810 ILCS 5/2-719(2).
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations On Warranties.
    • Damages For Breach Of Warranty.
    • Defenses To Breach Of Warranty.
    • Pleading Checklist.
  • Damages for Breach of Warranty
    • Buyer may recover any loss “resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.” 810 ILCS 5/2-714(1).
    • The standard formula for breach of warranty damages is the difference between the value of the goods accepted and the value the goods had they been as warranted, plus, in a proper case, incidental and consequential damages. 810 ILCS 5/2-714(2).
  • Buyer’s Incidental Damages
    • Buyer’s incidental damages are defined as “expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incidental to the delay or other breach.” 810 ILCS 5/2-715(1).
  • Buyer’s Consequential Damages
    • Buyer’s consequential damages are defined as “(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty.” 810 ILCS 5/2-715(2).
  • Special Circumstances
    • In “special circumstances” a buyer may establish losses that do not fit within the standard breach of warranty damage formula to ensure full compensation for its losses. 810 ILCS 5/ 2-714(2).
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations An Warranties.
    • Damages For Breach Of Warranty.
    • Defenses To Breach Of Warranty.
    • Pleading Checklist.
  • Potential Defenses
    • Unreasonable or unforeseeable use.
    • Lack of notice.
    • Lack of privity of contract.
    • Statute of limitations.
  • Unreasonable Use
    • Sellers are generally responsible for unknown defects.
    • A buyer’s unreasonable or unforeseeable use can be a defense to a breach of warranty claim.
    • Some cases recognize warranties do not extend to an unknown risk that affects only a small number of potential users.
  • Notice
    • A buyer who accepted goods must notify the seller of a breach of warranty within a reasonable time after discovery. 810 ILCS 5/2-607(3)(a).
    • Notice may not be required when the seller has actual knowledge of a product failure.
    • Filing a complaint may be sufficient notice in the case of personal injury.
  • Privity Of Contract
    • While subject to numerous exceptions, Illinois generally requires privity of contract to bring a claim for breach of warranty.
    • Privity is generally not required for personal injury.
    • Two classes of non-privity:
      • Persons in the distribution chain are referred to as being in “vertical” non-privity.
      • Persons who use or consume goods are referred to as being in “horizontal” non-privity.
  • Horizontal Non-Privity
    • The Illinois UCC extends warranty protection for personal injury to persons in the family or household of the buyer, or a guest in his home, if it is reasonable to believe such persons would use, consume, or be affected by the goods. 810 ILCS 5/2-318.
    • Some cases read section 2-318 narrowly citing a policy choice by the legislature, while other cases read section 2-318 more expansively.
  • Vertical Non-Privity
    • Section 2-318 addresses only horizontal non-privity and Official Comment 3 states that the section is not intended to restrict further case law development in the area of vertical non-privity.
    • Sellers often voluntarily provide express warranties to others in the distribution chain such as end-users.
    • Seller’s may be liable to persons in the distribution chain when Seller knows “the identity, purpose and requirements of the [buyer’s] customer and manufactured goods specifically to meet those requirements.”
    • Other statutes, such as federal Magnuson-Moss Warranty Act may extend warranties to others in the distribution chain.
  • Statute Of Limitations
    • A lawsuit on a contract for the sale of goods must be filed within four years after the legal claim has accrued. 810 ILCS 5/2-725(1).
    • The claim accrues when the breach of contract occurs, even if the aggrieved party does not discover the breach until later. 810 ILCS 5/2-725(2). For a breach of warranty case, the claim accrues when the seller tenders delivery of goods to the buyer, unless the warranty expressly states that it extends to future performance of the goods. 810 ILCS 5/2-725(2).
    • If the warranty extends to future performance, however, the claim will accrue when the buyer discovered or should have discovered the breach. Id.
  • Statute Of Limitations
    • The parties may include a statute of limitations in their contract that differs from the UCC statute, but they cannot
      • Reduce the limitations period to less than one year, or
      • Extend the limitations period beyond four years. 810 ILCS 5/2-725(1).
  • Agenda
    • Potential Warranties In A Sales Contract.
    • Disclaimers & Limitations On Warranties.
    • Damages For Breach Of Warranty.
    • Defenses to Breach Of Warranty.
    • Pleading Checklist.
  • Pleading Checklist
    • A sale of goods between plaintiff and defendant.
    • The date and place of the sale and delivery of the goods.
    • A description of the goods sold.
    • The price charged to and paid by plaintiff for the goods sold.
    • A statement that in consideration of and as part of the sale, a warranty arose.
    • If it is the case, that the Seller is a merchant with respect to goods of that kind.
    • A description of the warranty and how it arose (expressly given or stated, implied as part of the intended use of the goods, or implied as part of the ordinary course of business of the sale of the goods).
    • If an express warranty appears in a writing, it should be attached to the complaint.
    • Plaintiff’s reliance on the warranty in purchasing and paying for the goods.
    • A statement that the goods were not as warranted at the time of the sale and delivery.
    • A description of how the goods were not as warranted.
    • A statement of the damages resulting from the goods not being as warranted.
  • Questions?