Wednesday, December 21, 2011

Implied Warranties – What are they and why would a supplier want to disclaim them?

An implied warranty is one that that is not expressly stated in the agreement but is recognized or imposed by law based on the nature of the transaction. For example under the Uniform Commercial Code enacted in the U.S. there are two implied warranties – merchantability, and fitness for a particular purpose. The implied warranty of merchantability is that the item being sold is of merchantable quality. Merchantable quality is quality that is generally acceptable in the specific line of trade. An implied warranty of fitness for a particular purpose means that the item being sold is fit for the purpose for which the buyer is purchasing the item.

If all a supplier wanted to do is not be responsible for quality, they could simply state that the product is being sold on an as-is basis. In doing that they are making no representations as to the quality of the product. Most suppliers are less concerned with the warranty of merchantability than they are with the warranty of fitness for a particular purpose. That’s usually the implied warranty they want to avoid when they want to include a specific disclaimer against implied warranties.

For a supplier to be held to the warranty of fitness for a particular purpose the buyer must have disclosed the specific purpose to the supplier. If they did and the warranty of fitness for a particular purpose applied and the product was not fit for that purpose, the buyer could terminate the contract and sue for breach of the warranty and pursue damages. They could insist on the supplier correcting the problem at the supplier’s expense as an alternative to pursuing breach and damages. They could also keep the product and use the fact that it does not meet the implied warranty to collect damages for the diminished value or simply pay less.

Most suppliers simply want to sell products, they want buyers to determine what they need so that it’s the buyer’s problem if the product doesn’t meet their needs. What they don’t want is their sales to result in claims, lawsuits or damages if it isn’t fit for the buyer’s specific purpose. That’s why they want to include the disclaimer.

There can be a number of purchases where a buyer is definitely relying upon the supplier to provide them with a product or service that does meet a specific requirement or purpose. In those situations you would not rely upon an implied warranty. You would want to either make acceptance conditional upon proving that it does meet those requirement, make it an express warranty or both. In the acceptance and test requirement you would specify both the specific purpose it is required to meet and include acceptance terms that require that the item demonstrates that it does in fact meet that specific purpose. Your obligation to make payment should be conditioned upon that acceptance. That way if it doesn’t meet those requirements you can return the product and not make payment or you can work with the supplier to correct the problem. Including it as a warranty would protect you against the potential that it did meet the requirements at acceptance but later failed to meet those needs.

Without acceptance to prove it works or an implied or express warranty of fitness for a particular the rule “caveat emptor” applies. If there is a problem it’s your problem. What you can do will depend upon what return or restocking rights you have in the agreement or what the supplier decides they will do. With those terms it’s the supplier’s problem.

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