Chapter 23: Sales Contracts: Domestic and Global Aspects of Product Warranties

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 23:
Sales Contracts:
Domestic and Global Aspects
of Product Warranties

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Learning Objectives
• Describe various types of warranties.
• Explain limitations of warranties.
• Recognize remedies available in a breach of
warranty.
• Discuss how warranties apply to third parties.
• Compare strict liability and sales warranty
law.
• Understand warranty aspects of global sales
law.

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In the News
Woman sues Catskills resort over bedbug
attacks: http://bvtlab.com/8fTv3
A booking agent and her husband sued a Catskills
resort for $20 million, saying her body and mind were
scarred after she suffered some 500 bedbug bites
while staying there.
• What kind of warranties might be involved in this
case? Who gives the warranty?
• What made the award so high?
• What kinds of damages are usually allowed in cases
alleging a breach of warranty?

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23.1a Express Warranties
• Basis of the bargain between buyer
and seller
• Seller does not have to use formal
words such as warranty or guarantee.
• Statement of fact to buyer creates
express warranty.
• Statements of opinion do not give rise
to an express warranty.

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23.1a Critical Thinking (Slide 1 of 2)
Case: Jelinek
Questions whether statements in seed
brochures were opinion or an express warranty.
• Are you convinced the jury ruled correctly
regarding the issue of whether an express
warranty was created under the Code? Why?

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23.1a Critical Thinking (Slide 2 of 2)
Case: Jelinek
• Given this result, what advice would you
provide the seed company as to how they
could reduce the potential for violating the
express warranty provision of the Code?
• Would a change in the language of the
statements in the brochure help?

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23.1b Warranty of Title
• Seller warrants conveyance of good
title to buyer and has right to sell.
• Seller warrants that there are no
encumbrances or liens against the
property sold.
• Merchant seller warrants that goods are
free of the rightful claim of any third
person.

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23.1c Implied Warranty of
Merchantability
• A promise implied in a sale of goods by
merchants that the goods are reasonably fit
for the general purpose for which they are
sold
• Not based on the fault of seller but on social
policy to protect consumers
• Imposes a responsibility on the merchant-
seller to furnish goods of average quality

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23.1d Implied Warranty of Fitness
for a Particular Purpose
• Presumes a special relationship of trust or
reliance between the seller and buyer
• Requirement
– Seller has reason to know of specific purpose
for goods.
– Seller knows buyer is relying on judgment of
seller.
• Applies to merchants and non-merchants

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23.2a Express Disclaimers of
Warranties
• Limits seller’s liability by reducing the
circumstances the seller will be in breach
• Limitation of remedies clause restricts the
remedies available to the buyer.
• The parties may also limit or alter the
damages recoverable.
• The Code allows disclaimers and limits
based on reasonableness.

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23.2b Written Disclaimers of
Implied Warranties
• Must contain the word merchantability
• May be an oral agreement
• Can occur through course of performance
• If included in a written contract, it must be in
a conspicuous manner.
– Larger type or different color ink or indented
• Greatly limited by federal law
– Magnuson-Moss Warranty Act

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23.2b Critical Thinking
CASE: Wilson
Plaintiff purchased car “as is.” Merchant
argues it disclaimed warranty of
merchantability.
• What factors led the court to conclude that
the disclaimer was conspicuous?
• Why was there no contradiction between
the window sticker and the purchase
agreement?

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23.2c Other Exclusions of
Implied Warranties
• Seller may inform buyer goods are sold “as is”
• If buyer has examined the goods fully, there is
no implied warranty.
• If seller demands buyer to examine, but buyer
refuses, there is no implied warranty.
• Other exclusions:
– Course of dealing between the parties
– Course of performance
– Usage of trade

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23.2d Remedies
• The Code allows parties to limit the remedies
available for breach of warranty.
• Limit buyer’s damages to the repayment of
the price on return of the goods
• Contracts often allow seller to repair or
replace nonconforming goods.
• Clauses limiting liability of seller are subject to
the Code requirement on unconscionability.

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23.3a Notice
The Code requires buyer to give notice of
alleged breach of express or implied
warranties.
• Must be given within a reasonable time
• Three policies behind the notice requirement:
– Sellers right to cure
– Seller has an opportunity to prepare for
negotiation and litigation
– Provides some psychological protection for sellers
• Merchant-buyers are bound by a stricter
notice requirement.

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23.3b Third Parties (Slide 1 of 2)
• Breach of warranty historically required
privity of contract.
– Contractual connection between the parties.
• Horizontal privity
– To whom does the warranty extend?
• Vertical privity
– Against whom can action be brought for
breach of warranty?
• Law has generally abandoned strict privity
of contract requirements.

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23.3b Third Parties (Slide 2 of 2)
The Code prepared three alternative provisions
that states could adopt on horizontal privity
– Warranty extends to any person in the
family/household of buyer
– Extend warranties to any natural person who
may be reasonably expected to use, consume,
or be affected by the good.
– Warranty extends to any person injured by
good.
• The Code is neutral on vertical privity.

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23.3b Critical Thinking (Slide 1 of 2)
CASE: Hyundai Motor America
Questions whether vertical privity is a
requirement for asserting a cause of action for
breach of the implied warranty of
merchantability.
• Based on the courts review of the history of the
privity requirement, why was privity thought to be
a necessary component of an action for product
liability?

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23.3b Critical Thinking (Slide 2 of 2)
CASE: Hyundai Motor America
• Why did the court rule that no privity was
required between a consumer and a
manufacturer where the consumer is
asserting a breach of the implied warranty of
merchantability?

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23.3b Comparison of Strict Liability
and Sales Warranty Law (Slide 1 of 3)
Warranty of
Merchantability
Strict Tort Liability
Restatement
Conditions of
goods giving
rise to
liability
Not merchantable— not fit
for ordinary purpose
Defective condition,
unreasonably
dangerous
Character of
defendant
Must be seller who is a
merchant with respect to
goods of that kind
Must be seller who is
engaged in the
business of selling
such a product
Reliance No explicit requirement,
warranty “taken for
granted,” [2-314]; yet see
2-316(3)b
Cause of action is not
affected by any
disclaimer or any
other agreement

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Warranty of
Merchantability
Restatement
Notice Buyer, within a reasonable
time after he/she discovers, or
should have discovered, any
breach, must notify seller of
breach or be barred from any
remedy.
Consumer is not
required to give notice
to seller of his/her injury
within a reasonable time
after it occurs.
Causation Buyer may recover
consequential damages
from seller’s breach, including
injury to person or property
resulting from breach of
warranty.
Seller is subject to
liability for physical
harm caused;
contributory negligence
is not a defense.

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Warranty of
Merchantability
Restatement
Protected
persons
The third persons
protected depend on the
alternative of 2-318
adopted.
Ultimate user or
consumer.
Protected
injuries
Injuries to person or his/her
property.
Physical harm to
ultimate user or
consumer
or to his/her property.
Statute of
limitations
Four years from tender of
delivery.
State law varies (from
one to three years
from injury).

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23.4 Warranty Aspects of
Global Sales Law
• CISG warranty provisions have
similarity to analogous sections in the
Code.
• CISG captures the essence of the
warranty of merchantability and the
warranty of fitness for a particular
purpose under the Code.
• Trade usage is respected under the
CISG with regard to warranties.

Chapter 23: Sales Contracts: Domestic and Global Aspects of Product Warranties

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