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Implied Warranties

There are three implied warranties under the Uniform Commercial Code. Section 314 is the implied warranty of merchantability, section 315: warranty of fitness for a particular purpose and section 312: warranty of title. Most contracts courses will only focus on the first two. Here is what you need to know about them:

Implied warranty of merchantability

  • To be merchantable, the goods must be such as would “pass without objection in the trade” and as “are fit for the ordinary purposes for which such goods are used.”
  • In order to prove that a product is not merchantable, the complaining party must first establish the standard of merchantability in the trade.
    • Must first establish that the seller is a “merchant” with respect to the goods sold (regularly deals in goods of the kind or holds itself out as having particular knowledge about the kind of goods)

Implied warranty of fitness for a particular purpose

  • To establish an implied warranty of fitness for a particular purpose, the buyer must prove as a threshold matter that he made known to the seller the particular purpose for which the goods were required.
  • The elements to create an implied warranty of fitness for a particular purpose:
    1. Seller knows:
      1. Buyer will use goods for a particular purpose
      1. That the buyer is relying on their expertise
    1. Buyer actually relies on the seller’s skill or judgment
  • The warranty is created only when the buyer relies on the seller’s skill or judgment to select suitable goods for the buyer’s particular purpose and the seller has reason to know of this reliance
  • Liability under this warranty is not limited to merchant sellers
  • Breach of the warranty does not require a showing that the goods are defective in any way – merely that the goods are not fit for the buyer’s particular purpose. (Most courts also hold that the buyer’s particular purpose must be one other than the ordinary use of the goods).
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Pennsy Supply, Inc. v. American Ash Recycling Corp. of Pennsylvania

Case Name: Pennsy Supply, Inc. v. American Ash Recycling Corp. of Pennsylvania
Citation: Pennsylvania Superior Court; 895 A.2d 595 (2006)
Plaintiff/Appellant: Pennsy Supply, Inc.
Defendant/Appellee: American Ash Recycling Corp. of Pennsylvania

Issue: Whether consideration existed in the contract between the plaintiff and defendant when defendant allegedly avoided disposal costs by supplying plaintiff materials at no cost.

Key Facts: The plaintiff had secured a subcontractor job for the paving of driveways and parking lots. The project specifications included a notice of availability of a material known as AggRite that could be used for base aggregates and was available at no cost from the defendant. The plaintiff contacted the defendant, informed them on the amount it needed, picked it up, and used it for the paving work. Two months after the paving work was completed, there were substantial defects in the pavement and the plaintiff had to perform remedial work which cost the plaintiff $250,000. Furthermore, it incurred an additional $133,000 to dispose of the AggRite it had received from the defendant. The plaintiff filed a five-count complaint alleging (1) breach of contract, (2) breach of implied warranty of merchantability, (3) breach of express warranty of merchantability, (4) breach of warranty of fitness for a particular purpose, (5) promissory estoppel.

Procedural History: The defendant filed demurrers to all five counts and the trial court sustained the demurrers and dismissed the complaint. The trial court believed the defendant only made a conditional gift to the plaintiff and therefore the contract did not have consideration. They stated that the disposal costs were a mere condition of the defendant’s gift.

Holding: The trial court erred in its dismissal because if the alleged facts are proven, it would show consideration because the promise induced the detriment of incurring disposal costs and the detriment of those disposal costs induced the promise from the defendant.

Reasoning: If the complaint is true that the defendant “actively promotes the use of AggRite as a building material” to be used for purposes the plaintiff was engaging in, then by the defendant providing the materials free of charge, they are seeking others to dispose of the material in order to avoid incurring the disposal costs itself. The material provided by the defendant saved the defendant thousands of dollars in disposal costs it otherwise would have incurred.
The Superior Court also examined whether consideration is lacking because the plaintiff did not allege (or understand) the defendant’s avoidance of disposal costs during the bargaining process between the parties. The court did not believe this was necessary because for consideration to exist “the promise and the consideration be in “the relation of reciprocal conventional inducement, each for the other”” (O. Holmes).

Judgment: The Superior Court reversed the trial court’s decision of dismissing the Complaint and remanded it back to the trial court for further proceedings.

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Alaska Democratic Party v. Rice – 934 P.2d 1313 (1997)

Case Name: Alaska Democratic Party v. Rice
Citation: 934 P.2d 1313 (1997)
Plaintiff/Appellee: Kathleen Rice
Defendant/Appellant: Greg Wakefield and Alaska Democratic Party

Issue: Whether the doctrine of promissory estoppel can be invoked to enforce an oral contract that falls within the Statute of Frauds.

Key Facts: Ms. Rice contended that Mr. Wakefield (the chair-elect of the Alaska Democratic Party) offered her a two-year position as executive director of the party. Because of this offer she quit her current employment and moved from Maryland to Alaska.
No written contract was entered into between Rice and the defendants.
Rice brought two claims: (1) promissory estoppel and (2) misrepresentation

Procedural Posture: The jury awarded a total of $30,422 ($28,864 on her promissory estoppel claim and $1,558 on her misrepresentation claim)

Reasoning: “The purpose of the Statute of Frauds is to prevent fraud by requiring that certain categories of contracts be reduced to writing. However, it is not intended as an escape route for persons seeking to avoid obligations undertaken by or imposed upon them.”

Judgment: The court affirmed the claims but reduced the recovery to $28,864 – the amount that represents only lost wages and benefits.

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Princess Cruises, Inc. v. General Electric Co. – 143 F.3d 828 (4th Cir. 1998)

Case Name: Princess Cruises, Inc. v. General Electric Co.
Citation: 143 F.3d 828 (4th Cir. 1998)
Plaintiff/Appellee: Princess Cruises, Inc.
Defendant/Appellant: General Electric Co.

Issue: Whether the district court erred in applying the UCC to the contract and whether the jury erred in their award by not observing GE’s final price quotation.

Key Facts: The plaintiff submitted a purchase order (intended to be an offer) to the defendant to perform routine inspection services and repairs on one of its cruise ships. The defendant faxed back its own Fixed Price Quotation which had other terms and disclaimed any liability for consequential damages, lost profits, or lost revenue.
During the inspection, the defendant recommended that the ship be taken ashore for cleaning and balancing. During the cleaning the rotor became unbalanced, which the defendant attempted to correct. The imbalance caused further damage to the ship forcing additional repairs and the cancellation of two tend-day cruises. The plaintiff paid the defendant the full amount of the contract ($231,925).

Procedural History: A jury found GE liable for breach of contract and awarded the plaintiff $4.5 million in damages. Appealing, GE contends that the district court erred in denying its motion for judgment which required the court to vacate the jury’s award of incidental and consequential damages. GE argues that the district court erred because it applied UCC principles, rather than common-law, to a contract primarily for services.

Holding: The contract should not have been evaluated under the UCC because it was a contract for services and the jury should have only considered GE’s Final Price Quotation which restricted damages to the contract price and eliminated liability for incidental or consequential damages, lost profits, or revenue.

Reasoning: First, whether a particular transaction is governed by the UCC, rather than common or statutory law, hinges on whether the contract primarily concerns the furnishing of goods or the rendering of services. Princess’s actual purchase description requests a GE “service engineer” to perform service functions (the contract included incidental parts that were expensive).
Second, the jury should have only considered GE’s Final Price Quotation as the contract. The first purchase order submitted by Princess was rejected by a counteroffer (GE’s first price quotation) which in turn, was revoked and replaced by another offer (GE’s Final Price Quotation. Also, because Princess failed to discuss the conflicting terms of the two contracts, their inaction gave GE every reason to believe that Princess assented to the terms set forth in their final price quotation.

Restatement 19 – “The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.” Under the Restatement, a counter-offer destroys the offer.  The fact that the parties performed evidence that there was an acceptance. The phone call giving GE permission to proceed and that Princess brought their ship in to be repaired. Therefore, Princess intended to accept the last counter-offer by GE. This is called the last-shot rule. Whatever is left on the table is the contract. The only one that really matters is the last contract on the table. If the parties perform, then there is an acceptance.

Judgment: The circuit court reversed the district court’s decision and granted GE’s motion for judgment as a matter of law and remanded to modify the judgment according to common-law and the opinion of the court.

Why it was important to determine whether common law or the UCC applied: Common law only gives us two options in contract formation: Offer and Acceptance or Counteroffer. The UCC gives us a third option: acceptance with additional terms.

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Brown Machine, Inc. v. Hercules, Inc. – 770 S.W.2d 416 (1989)

Case name: Brown Machine, Inc. v. Hercules, Inc.
Citation: 770 S.W.2d 416 (1989)
Plaintiff: Brown Machine, Inc.
Defendant: Hercules, Inc.

Issue: Whether the parties had agreed to an indemnification provision in their contract.

Key Facts: The plaintiff, Brown Machine, sold the defendant, Hercules, a T-100 trim press. Prior to the sale, a proposal was submitted to the defendant which stated an indemnification clause. The defendant reviewed the proposal and spoke on the phone with the plaintiff but objected to the payment term in the proposal. The plaintiff contested that the proposal was an offer and this conversation was an acceptance.
The defendant then submitted a purchase order (actual offer) for the trim press which stated that it “limits acceptance to the terms stated…any additional or different terms proposed by the seller are rejected unless expressly agreed to in writing.”
The plaintiff then sent the defendant an order acknowledgement which again stated the indemnification clause. The defendant responded with a latter that stated a specification in the product needed to be changed but “all other specifications are correct.” The plaintiff contended that this constituted assent by the defendant to the indemnification clause but the judge said it was obvious that “specifications” only referred to the product and not the terms and conditions.

Procedural History: The trial court awarded the plaintiff for the defendant violating the indemnification provision.

Analysis: If this was common law, we would use the last shot rule. However, under the UCC we use acceptance with additional terms (Section 2-207).

Holding: The parties had not agreed to an indemnification provision.

Judgment: The court reversed the trial court’s decision.

See our helpful UCC 2-207 Flowchart

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Exceptions to the Statute of Frauds

As stated in the post on whether a contract is subject to the statute of frauds, when the statute of frauds is asserted as a defense against the enforcement of an alleged contract, one should ask the following questions:

1. Is the contract subject to the statute of frauds?

2. If it is subject, is the statute of frauds satisfied?

3. If it is not satisfied, do the factors invoke one of the exceptions to the statute of frauds?

If the answer to the first question is “yes” and the second question is “no,” then you need to look to see if one of the exceptions to the statute of frauds applies. Below is a list of the exceptions to the statute of frauds under common law and the UCC:

COMMON LAW EXCEPTIONS

  1. Part Performance (Restatement section 129). If it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement. This exception is very similar to promissory estoppel and only applies in situations where a transfer of interest in land exists and with specific performance. This exception also has no application in an action at law for money damages.
  2. Full Performance (Restatement section 130. As soon as any one party fully performs under the contract, then the SOF does not apply. This exception only applies to contracts that cannot be completed within one year
  3. Promissory Estoppel – Although this is not really an exception, promissory estoppel can be used anytime. A minority of jurisdictions bar promissory estoppel actions through the statute of frauds because they see it as an impermissible way to circumvent the statute of frauds.

 

UCC EXCEPTIONS

  1. Part Performance – Note: In an installment contract you need to show acceptance at every installment to show part performance.  Also if there is a partial payment figure out what the parties intended.
  2. Admissions Exception – If the party against whom enforcement is sought makes an under oath admission of facts that in the court’s view establish that such a contract was indeed made
  3. Special Manufacture Exception – If goods are specially manufactured for the buyer and “not suitable for sale to others in the ordinary course of  the seller’s business (e.g. making mugs for ACME, Inc. that has their logo and slogan.)
  4. Merchant Confirmation Exception – Here you will need something in writing that is signed but does not need to be signed by the person against whom enforcement is sought. It only needs to be signed by any party to the contract. However, the following must be present:
  1. Both parties must be merchants under the UCC
  2. The writing (confirmatory letter) has to be sent to and received by the party to whom enforcement is sought
  3. The party has ten days to objection. The objection has to be in writing .
    1. NOTE: You want to be careful that you are not creating a writing that satisfies the statute of frauds
    2. In order to do so, the objection should explicitly state or object to the terms
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When is a contract subject to the Statute of Frauds?

When the statute of frauds is asserted as a defense against the enforcement of an alleged contract, one should ask the following questions:

1. Is the contract subject to the statute of frauds?

2. If it is subject, is the statute of frauds satisfied?

3. If it is not satisfied, do the factors invoke one of the exceptions to the statute of frauds?

Below is the analysis that should be conducted under the UCC and Common Law to answer this first question, “Is the contract subject to the statute of frauds?”

The UCC presents the easier test as to whether a contract is subject to the statute of frauds. Under the UCC, the only thing we care about is whether the contract is for $500 or more.

Under common law we don’t care about the dollar amount of the contract. Restatement (Second) 110 states that “[t]he following classes of contracts are subject to the Statute of Frauds, forbidding enforcement unless there is a written memorandum or applicable exception:

  1. A contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision)
  2. A contract to answer for the duty of another (the suretyship provision)
  3. A contract made upon consideration of marriage (the marriage provision);
  4. A contract for the sale of an interest in land (includes leases) (the land contract provision);
  5. A contract that is not to be performed within one year from the making thereof (the one-year provision)”

The majority of these classes are self-explanatory but a few notes on the fifth class, the one-year provision. This class requires a contract not to be performed within one year from the date the contract is made to be in writing. The standard view is that a contract is not subject to the statutory provision if it is possible to be performed within a year, even if the prospect of such performance is remote or unlikely. Therefore, the question you should ask is, “At the time of the formation, could it have been completed within a year?” If the answer is “yes,” no matter how remote or unlikely it is, then most courts will deem that the contract fits this class and is not subject to the statute of frauds. Something to remember is that many courts are looking for reasons to exclude things from the statute of frauds.

 

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Consideration

Consideration is a crucial concept in understanding Contract Law. The making of a promise (offer and acceptance) is insufficient by itself to result in the formation of a contract.* The additional requirement is the presence of “consideration.”

The concept of consideration has developed over the years. In 1875 consideration was defined as:

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”

Consideration means not so much that one party is profiting as that the other abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise of the first. The idea behind consideration is determining the types of contracts we want to enforce. The main type of contract we don’t want to enforce is a gift.

The court now explains that consideration requires a benefit to the promisor or a detriment to the promise that is bargained for. In other words, benefit or detriment are insufficient to constitute consideration. However, according to Pennsy Supply the requirement that consideration be bargained for does not require actual bargaining between the parties.

The court uses the Homlesian test of “reciprocal conventional inducement, each for the other.” (Bargaining theory of consideration). “The promise must induce the detriment and the detriment must induce the promise.” Oliver Wendell Holmes, Jr.

The Restatement adopts the bargain theory of consideration and rejects any additional requirement of benefit or detriment.

*Note: International contract law recognizes that a contract can be formed without the additional requirement of consideration.