Friday, October 11, 2013

Implied Warranties (Updated)

In the United States and in other jurisdiction, for transactions between businesses there may be implied warranties. For example under the Uniform Commercial Code enacted in the U.S. there are two implied warranties – merchantability, and fitness for a particular purpose. Below are the specific sections from the UCC that define these implied warranties:

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
(2) Goods to be merchantable must be at least such as
• (a) pass without objection in the trade under the contract description; and
• (b) in the case of fungible goods, are of fair average quality within the description; and
• (c) are fit for the ordinary purposes for which such goods are used; and
• (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
• (e) are adequately contained, packaged, and labeled as the agreement may require; and
• (f) conform to the promise or affirmations of fact made on the container or label if any.
(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

The first things to note is that these implied warranties apply to only goods. The sale must be from a merchant that sells those types of goods. If all a supplier wanted to 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. They may include a specific disclaimer against implied warranties or may disclaim only the warranty of fitness for a particular purpose.

As you can see from reading the section, for a supplier to be held to the warranty of fitness for a particular purpose the supplier must have reason to know the specific purpose, such as by having the buyer disclose the specific purpose to the supplier. If they did and the warranty of fitness for a particular purpose was not disclaimed, if the product was not fit for that purpose, the buyer would have a breach of that implied warranty. 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. If the supplier fails to correct it the buyer could follow procedures to terminate the contract for breach of the warranty and pursue damages. Most suppliers simply want to sell products. They want buyers to determine what they need so that becomes 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 most will want to include the disclaimer against the warranty of fitness for a particular purpose.

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 want to 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 proof that the item 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.
In the end you need to decide whose problem do you want it to be if it isn’t fit for the specific purpose. Since I’m paying I always want it to be the supplier’s problem. Either make it work, give me my money back or let me decide whether I want to keep it at a reduced price.
Even if you get a warranty that the good is of merchantable quality, most sellers will protect themselves by publishing product specifications that have detailed operating parameters and environments for use. In doing that if you use the product outside the parameters you will have breached the agreement or have voided the warranty. Many suppliers will also include use restrictions to avoid the buyer using them high-risk uses. If the Buyer used it in a prohibited manner they would have breached the agreement and when you breach the agreement the supplier no longer needs to honor other commitments in the agreement such as indemnities against personal injury or property damage. For example, they may make a product that could be used in a life support system, but do not want their product used there because of potential liability should it fail.