Warranties, Disclaimers & Limitation of Remedies ACC International Legal Affairs Committee Quick Hit: April 12, 2012

Presented by: Jeffrey S. Dunn Michael Best & Friedrich, LLP

Warranty of Title §  UCC 402.312 – 

Warranty of title and against infringements; buyer s obligation against infringement

§  CISG Article 41 – 

Seller must deliver goods free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim. •  However, if claim is based on industrial property or other intellectual property, the seller's obligation is governed by Article 42.

Warranty of Title – Disclaimer §  §402.316 likely does not apply §  Words such as "AS IS" or "WITH ALL FAULTS" will not disclaim the title warranty §  Would not alert a buyer that it is assuming the risk of defective title or infringement claims

Express WarrantiesIn General §  UCC 402.313 – 

any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise . . .

§  CISG Article 35 – 

Based on parties intent and understanding

Express WarrantiesIn General §  Includes any description of goods or any sample or model §  Can be verbal, in writing §  Cannot be disclaimed later §  No special or magic words are necessary (except for consumer warranties)

Express Warranties Drafting Considerations: §  §  §  §  §  §  § 

Duration Who does the warranty extend to? Transferable? Scope of warranty coverage Exclusions from warranty coverage Notice and return authorization requirements? Who pays for shipping the goods?

Express Warranties Drafting Considerations: §  Assignable OEM warranties & pass through as exclusive warranty §  Exclusive remedies for breach §  Disclaimer of all other express and implied warranties

Implied Warranties – In General §  UCC 402.314 – Merchantability §  UCC 402.315 – Fitness for Purpose §  CISG Article 35 –  Article 35(2) defines the attributes which, when met, show that the goods conform to the contract –  Similar to the UCC s implied warranties of merchantability and fitness for particular purpose (although the word implied is not used)

Implied Warranties – Merchantability A tacit representation from the seller that the goods will meet certain minimum standards 402.314(2) lists six criteria for determining if the goods are merchantable

§  §  § 

However, that Comment 6 states that subsection (2) "does not purport to exhaust the meaning of "merchantability.

Implied Warranties – Fitness §  Based on the fact that the buyer has relied on the skill and judgment of the seller §  Broader than the warranty of merchantability §  Generally speaking, it is not possible to breach the warranty of merchantability while satisfying the obligation to provide goods for the particular purpose . . .

Disclaimer of Warranties CISG

UCC

§  CISG permits a disclaimer of warranties so long as the parties have agreed in writing or orally

§  §2-316 §  Specific rules must be followed to exclude or modify express and implied warranties

Limitations of Remedies §  §2-718 Liquidation or limitation of damages; deposits §  §2-719 Contractual modification or limitation of remedy §  CISG Article 74 Damages

Limitations of Remedies § 

Be explicit

§ 

Determine what risks the client wants to control

§ 

Sole and exclusive remedy? Or cumulative?

§ 

Note the difference between damages and other remedies such as specific performance

Limitations of Remedies § 

Evaluate whether the prescribed remedy covers the expected loss? If not, adjust remedy accordingly

§ 

Because, freedom of contract is balanced against the Code s requirement that an aggrieved party be provided a fair quantum of protection.

Limitations of Remedies § 

For example, §402.718 provides that an unreasonably large liquidated damages amount is void as a penalty

Limitations of Remedies §  §2-719(2) – A court may void the contractual remedy where circumstances cause such remedy to fail of its essential purpose §  Phillips Petroleum Company v. Bucyrus-Eire Company, 131 Wis.2d 21, 338 N.W.2d 584 (1986)

Disclaimer of consequential & Incidental Damages §  Disclaiming Consequential Damages §402.719(3) –  Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable

Contact

Jeffrey S. Dunn [email protected] Michael Best & Friedrich, LLP 1000 Maritime Drive Manitowoc, WI 54220 920-686-2800 Please note that it is not exhaustive and may not address every issue that arises with your business. Contact Michael Best & Friedrich LLP if you have questions about specific issues.