A used-car dealer in Oklahoma told a customer she was getting a car in "A-1" shape and that it was "mechanically perfect." While most of us would listen to such a description with some skepticism, an Oklahoma court decided to hold the salesman to his word. It ruled that these statements, made to a young woman who was driving across the country to meet her serviceman husband, created an "express warranty" that the car would at least get her to her destination. When the car broke down, the used-car dealer had to pay damages.
By contrast, when a livestock salesman told a professional buyer that a bull calf would "put the buyer on the map" and that the calf's father was "the greatest living bull," a Minnesota court held that the buyer was out of luck when the bull calf later proved sterile. The court said these statements were not warranties at all, but were mere "puffing" and "sales talk." The buyer in this case was fairly sophisticated in the livestock trade. Some warranty experts think that's why the court said he had a duty to look beyond the assertions of the salesman and to investigate the product for himself.
These and hundreds of other cases illustrate one of the most complex and important fields of commercial business law -- the law of warranties.
Warranty rules are defined mainly by the Uniform Commercial Code, the legal basis for nearly all state sales laws. These rules, however, apply only to the sale of goods and products -- not to services. A service contract is covered by other laws of contract and injury.
Express warranties. There are two types of warranties in the Uniform Code -- express and implied. An express warranty is created by statements made by the seller either orally or in writing, or by samples and models. When an advertisement says, for example, that a watch will operate underwater, the seller is liable for damage or replacement if the watch stops when the buyer goes swimming. If a salesman adds orally that the casing is strong enough to withstand the pressures deep under the sea, that creates another specific express warranty. And even if no statements at all are made, but an ad depicts a diver wearing the watch underwater, then the silent "statement" of the ad creates a warranty.
Any sample of a product used in selling is an express warranty that the actual product will work like the model. These warranties apply to any product, from a box of soap to an expensive computer package.
Implied warranties. There are two kinds of "implied" warranties. These go along with any sale regardless of what the seller says, or doesn't say, about the product. The first is an "implied warranty of merchantability." This means simply that the product is fit at least for the ordinary uses of such goods. If the product is a small business computer, for example, it will be warranted to do simply inventory up to a reasonable level, but not to solve more complex research problems. If the computer fails to perform its ordinary, minimum tasks, the buyer has a right to sue even if he was made no express promise of the product's performance.
The second kind of implied warranty is the "warranty of fitness for a particular purpose." As the legal name suggests, this warranty applies to any product the buyer intends to use for a special purpose. For example, a businessman may depend upon a supplier to deliver a certain type of lubricating oil for his office equipment. If the supplier, knowing this, delivers the wrong kind of oil, the implied warranty of fitness will protect the buyer when the oil ruins his machines.
This warranty is particularly strong where buyers are relatively unsophisticated about the products. In the hightechnology field, for example, small businessmen depend on computer and equipment companies to deliver products for highly specialized uses. To qualify for the warranty of fitness for a particular purpose, however, a buyer must make his special needs clear to the seller.
Disclaimers. The number of warranties on a product affects its price, so the law allows buyers and sellers to negotiate both the express and the implied warranties. To escape liability, the seller must "disclaim" the warranties. Most disclaimers are contained in the contract for sale or appear on the product.
A seller can disclaim all but the bare descriptive warranty with a statement like the following, typed in capital letters and placed conspicuously on the front of a contract:
Seller hereby disclaims all warranties, express and implied, including all warranties for merchantability and all warranties of fitness for a particular purpose.
To disclaim the "implied warranty of merchantability," the seller must use the word "merchantability." The disclaimer must be easy to read and in a conspicuous place in the contract. A disclaimer of the "warrant of fitness for a particular purpose" must also be in a conspicuous place, though the law requires no "magic word" like "merchantability." The Uniform Commercial Code provides that the statement, "There are no warranties which extend beyond the description on the face hereof," disclaims any warranties of fitness.
The UCC also states that the words "as is" or "with all faults" can be enough to disclaim all implied warranties, if they clearly tell the buyer he is taking the product as he finds it, with no guarantees.
A specific disclaimer can limit any express warranties that may have arisen in the course of the sale.But here there are several quirks: If a form contract contains a disclaimer that conflicts with a specially typed description, the typed a description prevails over the printed disclaimer.
And even after all warranties -- express and implied -- have been disclaimed, a bare descriptive warranty may still be the basis for a lawsuit. If a computer software company sells an "inventory package" with all warranties disclaimed, it is still liable if the program is incapable of the basic task of sorting out inventories. Similarly, a contract for the sale of a "Model A" typewriter is breached if a "Model A-1" is delivered.
Damages. A buyer who successfully sues for breach of warranty is entitled to receive three different cumulative types of damages. First, he receives the difference between what he paid for and what he in fact received. If the computer he bought for $10,000 is worth only $6,000 because it regularly blows fuses, the buyer gets $4,000 in damages for the machine.
Second, the buyer is entitled to all "incidental" expenses caused by the defective product. If he had to rent a machine to replace the one he bought, that expense would be covered. So would the cost of repairing the old machine or searching for a new one.
Third, the buyer is entitled in some cases to so-called consequential losses. If he didn't get two regular accounts because he was unable to process orders on the defective computer, he may be able to recover the profits he would have earned from the lost business.
The remedies available to the buyer may be limited by agreement between the seller and the buyer. The usual limitation restricts the buyer to two options: He may either return the goods and get his money back or he may have the goods repaired at the seller's expense. Such limitations reduce the seller's liability for the consequential "lost profit" damages. Since such awards can be quite expensive, sellers frequently prefer to give a discount on the price of the goods to escape the risk of this liability.
As with the warranties, the law requires "magic words" to insure that both parties know what they are getting into. To limit remedies, the word "remedy" should appear in the section of the contract dealing with this item. The section should also state that the listed remedies are "exclusive." A successful remedy-limitation clause might read as follows:
The parties agree that the buyer's sole and exclusive remedy against the seller shall be for the repair or replacement of defective parts as provided herein. The buyer agrees that no other remedy, including incidental or consequential damages for lost profits, lost sales, injury to person or property, or any other loss, shall be available to him.
In general, the more specific the language used here, the more effective it is to limit remedies.
Even when the seller has dotted all his "i's" on the remedy clause, however, the buyer may still get full damages when the remedy "fails of its essential purpose." This means that the remedy simply does not provide the relief the contract called for.
A buyer, for example, bought a new automobile that carried with it a limitation of remedy to repair or replace defective parts. Within the first few weeks of ownership, the buyer found some 14 defects that needed repair in the car. Even after all this work, the car still didn't run properly. When the owner sued for his full loss, the court ruled in his favor because the remedy of repair had "failed of its essential purpose."