978-1285427003 Chapter 20 Lecture Note Part 3

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Disclaimers and Defenses

Sellers often include disclaimers and remedy limitations in the sales contract. A disclaimer is a

statement that a particular warranty does not apply. The Code permits the seller to disclaim most

warranties.

Question: What is the difference between a warranty disclaimer and a remedy limitation?

Answer:

Question: Give an example of each.

Answer:

Warranty disclaimer: “These 1,000 fishing reels are sold with no warranty of merchantability.”

merchantability warranty.

Remedy limitation: “In the event of any defect in the fishing reels, the buyer’s sole remedy is to

obtain repairs from the seller. No other remedy whatsoever is available to the buyer.” Among

Question: Sellers often include this language: “Sold as is.” What does that mean, legally?

Question: Remedy limitations that exclude consequential damages are common. Why do sellers

consider them so important?

Answer: The seller can probably anticipate a buyer’s compensatory damages; they are likely to be

expenses in obtaining repairs or replacement goods. But the seller may have no way of estimating

Question: The law prohibits one limitation on consequential damages. What is it?

Question: When is such an exclusion unconscionable?

Answer: Exclusions, like any contract clauses, are unconscionable if shockingly one-sided and

fundamentally unfair.

Question: Does that mean that if a consumer is injured, the company automatically has to pay?

Additional Case: CCB Ohio, LLC v. Chemque, Inc. 1

Facts: CCB Ohio specializes in upgrading power lines in a way that makes it possible to offer

broadband service over an electrical grid. Chemque manufactures Q-gel.

Transformers reduce the 100,000 or more volts flowing through a typical power line to the 120

volts that actually arrive at the outlets in your home. But unfortunately, transformers completely block

digital signals. And so, to offer broadband over an electrical grid, data must take a “detour” around

transformers. Couplers allow for this detour.

CCB and its contractors purchased Q-gel. This substance was supposed to create a waterproof seal

that would bind newly-installed couplers to power lines. Unfortunately, the gel did not gel, at least not

for long. Within 18 months, 40% of CCB Ohio’s couplers were leaking liquefied Q-gel. Ultimately,

90% of the couplers throughout the Cincinnati area leaked and caused millions of dollars in losses.

CCB Ohio sued for breach of warranty. Chemque argued that it had disclaimed all implied

warranties. It moved for summary judgment.

Issue: Did Chemque disclaim its warranties?

Excerpts from Judge Spiegel’s Decision: Defendant’s argument is that [it] disclaimed any

warranties, as its specification sheet states “all information is given without warranty or

guarantee.” Plaintiffs respond that several genuine issues of fact remain as to whether Defendant

effectively disclaimed all warranties. Specifically, Plaintiffs argue (that) facts remain as to

whether Plaintiffs ever received the specification sheet containing the disclaimer, whether the

disclaimer was conspicuous, and whether the disclaimer effectively disclaimed the implied

warranty of merchantability and Defendant’s express warranties.

The Court finds Plaintiffs’ argument well-taken that the record neither establishes they received

a disclaimer, nor that the disclaimer Defendant has proffered amounts to a conspicuous

disclaimer that a reasonable person ought to have noticed. The Court further concludes that

Defendant’s purported disclaimer that “all information is given without warranty or guarantee”

did not effectively disclaim the implied warranty of merchantability, as the disclaimer does not

mention merchantability. Finally, questions of fact exist as to whether Defendant’s disclaimer is

reasonable vis a vis its express warranties.

As such, the Court rejects Defendant’s motion for summary judgment as to Plaintiffs’ warranty

claims.

Privity; Economic Loss

When two parties contract, they are in privity. Where a product causes a personal injury, most states

permit a warranty lawsuit even without privity. If the buyer suffers only economic loss, privity may

still be required to bring a suit for breach of warranty.

Case: Reed v. City of Chicago2

Facts: J.C. Reed was arrested and brought to Chicago’s Fifth District Police Station. Police were

allegedly aware that he was suicidal, having seen him slash his wrists earlier. They removed his

clothing and dressed him in a paper isolation gown. Reed used the gown to hang himself. On his behalf

Reed’s mother sued the police for failing to monitor a suicidal inmate, and Cypress Medical Products,

the manufacturer of the isolation gown. She claimed that the gown should have been made of material

1 649 F. Supp. 2d 757, United States District Court for the Southern District of Ohio, 2009.

2 263 F.Supp.2d 1123 United States District Court for the Northern District of Illinois, 2003.

that would tear if someone attempted to hang himself with it. Cypress moved to dismiss the suit,

claiming that Reed had no privity with the company.

Issue: Could Reed maintain a lawsuit against Cypress despite lack of privity?

Holding: Defendant’s motion to dismiss denied. Excerpts from the court’s opinion:

The single issue we must decide is whether plaintiff, as a non-purchaser, can recover from the

manufacturer and designer of the gown for breach of warranty. Historically, Illinois law has

required plaintiffs suing for breach of warranty to prove horizontal and vertical privity. Lack of

vertical privity occurs when a consumer seeks to sue a remote manufacturer who was not involved

in the sale to the consumer. [The court cited UCC §2-318’s general requirement of privity.] The

Illinois Supreme Court has determined that privity is no longer an absolute requirement for breach

of warranty actions.

The vast majority of cases examining the limits of section 2-318 in Illinois have dealt with the

employment context, expanding the class of potential breach of warranty plaintiffs to employees of

the ultimate purchaser. [The court has treated an employee as essentially a third-party beneficiary

of the warranty of merchantability from the seller to the employer who purchased the goods.]

While no Illinois courts have expanded the plaintiff class for breach of warranty actions beyond

employees, we believe that the law requires us to do so here. The beneficiary of any warranty

made by the manufacturer and designer of the gown is necessarily a potentially suicidal detainee

like Reed. If protection is not provided to plaintiffs like Reed, any warranty as to the safety of the

gown would have little, if any, effect. Moreover, the safety of these detainees was necessarily a

part of the bargain, both implicitly and explicitly, between the seller and buyer. For these reasons, a

detainee of the City like Reed must be able to enforce the protections of any warranties made by

the manufacturer and designer of the gown.

Question: What is lack of horizontal privity?

Question: Why did the court extend protection of the manufacturer’s warranty to Reed, despite

that he was not the purchaser of the gown?

Answer: The court reasoned that if protection from the breach of the manufacturer’s was not

Question: So, although Reed lacked privity, he was allowed to sue; what other legal concept does

this resemble?

Buyer’s Misuse

Misuse by the buyer will generally preclude a warranty claim.

Multiple Choice Questions

1. CPA QUESTION On Monday, Wolfe paid Aston Co., a furniture retailer, $500 for a table. On

Thursday, Aston notified Wolfe that the table was ready to be picked up. On Saturday, while Aston

was still in possession of the table, it was destroyed in a fire. Who bears the loss of the table?

(a) Wolfe, because Wolfe had title to the table at the time of loss

(b) Aston, unless Wolfe is a merchant

(d) Aston, because Wolfe had not yet taken possession of the table

2. Sheri signs a contract with Farmer Charlie on February 1 Under the deal, she will pay $25,000 for

Charlie’s entire pumpkin crop on October 1. Charlie plants pumpkin seeds on March 1, and they

begin to sprout on April 1. When are the pumpkins identified?

(a) February 1

(b) March 1

(d) October 1

3. Sam obtains a Patek Philipe watch from Greg by fraud. It has a retail price of $10,000. He sells it to

Melissa for $9000. She believes he owns the watch. Melissa ________ a bona fide purchaser. Sam

disappears. If Greg discovers that she has the watch and demands that it be returned, Melissa

_________ have to give the watch to Greg.

(a) is; will

(b) is; will not

(d) is not; will not

4. CPA QUESTION Vick bought a used boat from Ocean Marina that disclaimed “any and all

warranties.” Ocean was unaware the boat had been stolen from Kidd. Vick surrendered it to Kidd

when confronted with proof of the theft. Vick sued Ocean. Who prevails?

(a) Vick, because the implied warranty of title has been breached

(b) Vick, because a merchant cannot disclaim implied warranties

(d) Ocean, because Vick surrendered the boat to Kidd

5. CPA QUESTION Which of the following conditions must be met for an implied warranty of

fitness for a particular purpose to arise?

I. The warranty must be in writing.

II. The seller must know that the buyer was relying on the seller in selecting the goods.

(a) I only

(b) II only

(d) Neither I nor II

Essay Questions

1. Franklin Miller operated Miller Seed Co. in Pea Ridge, Arkansas. He bought, processed, and sold

fescue seed, which is used for growing pasture and fodder grass. Farmers brought seed to Miller

who would normally clean, bag, and store it. In some cases the farmers authorized Miller to sell the

seed, in some cases not. Miller mixed together the seed that was for sale with the seed in storage

so that a customer could not see any difference between them. Miller defaulted on a $380,000 loan

from the First State Bank of Purdy. First State attempted to seize all of the seed in the store. Tony

Havelka, a farmer, protested that his 490,000 pounds of seed was merely in storage and not subject

to First State’s claim. Who is entitled to the seed?

Answer: First State gets it. UCC §2-326(3) creates a presumption in favor of creditors. When

goods are delivered to be sold, the goods are subject to the creditors’ claims unless the owner

(Havelka) takes one of the statutory steps to protect himself, such as posting a sign indicating that

2. Universal Consolidated Cos. contracted with China Metallurgical Import and Export Corp.

(CMIEC) to provide CMIEC with new and used equipment for a cold rolling steel mill. Universal

then contracted with Pittsburgh Industrial Furnace Co. (Pifcom) to engineer and build much of the

equipment. The contract required Pifcom to deliver the finished equipment to a trucking company,

which would then transport it to Universal. Pifcom delivered the goods to the trucking company as

scheduled. But before all of the goods reached Universal, CMIEC notified Universal it was

canceling the deal. Universal, in turn, notified Pifcom to stop work, but all goods had been

delivered to the shipper and ultimately reached Universal. Pifcom claimed that it retained title to

the goods, but Universal claimed that title had passed to it. Who is right?

Answer: Universal is right. UCC §2401 provides that when goods are being moved, title passes to

the buyer when the seller completes whatever transportation it is obligated to do. Pifcom

3. You Be the Judge: WRITING PROBLEM Construction Helicopters paid Heli-Dyne

Systems $315,000 for three helicopters that were in Argentina. Two were ready to fly and one was

disassembled for routine maintenance. The contract said nothing about risk of loss (the parties

could have saved a lot of money by reading this chapter). Heli-Dyne arranged for an Argentine

company to oversee their loading on board the freight ship Lynx. The two helicopters and 25 crates

containing the disassembled craft were properly loaded, but when the ship arrived in Miami, only

seven of the crates appeared. Heli-Dyne refused to supply more parts and Construction sued. Who

bears the loss? Argument for Construction: Construction had no control over the goods until they

reached Miami. Although we do not know exactly what happened to the crates, we know the one

party that had nothing to do with the loss: Construction. The company should not pay for damage it

never caused. Argument for Heli-Dyne: Because the contract failed to specify risk of loss, it is a

shipment contract. In such an agreement, risk of loss passes to the buyer when the seller delivers

the goods to a carrier. Heli-Dyne delivered the goods and has no further responsibility.

Answer: Because the contract did not specify risk of loss, and provided no FOB terms or other

language about delivery, it is deemed a shipment contract. The risk of loss therefore passed to the

4. Leighton Industries needed steel pipe to build furnaces for a customer. Leighton sent Callier Steel an

order for a certain quantity of “A 106 Grade B” steel. Callier confirmed the order and created a

contract by sending an invoice to Leighton, stating that it would send “A 106 Grade B” steel, as

ordered. Callier delivered the steel and Leighton built the furnaces, but they leaked badly and

required rebuilding. Tests demonstrated that the steel was not, in fact, “A 106 Grade B,” but an

inferior steel. Leighton sued. Who wins?

Answer: The one-line description of the steel, in Callier’s invoice, created an express warranty.

5. Boboli Co. wanted to promote its “California style” pizza, which it sold in supermarkets. The

company contracted with Highland Group, Inc., to produce two million recipe brochures, which

would be inserted in the carton when the freshly baked pizza was still very hot. Highland

contracted with Comark Merchandising to print the brochures. But when Comark asked for details

concerning the pizza, the carton, and so forth, Highland refused to supply the information. Comark

printed the first lot of 72,000 brochures, which Highland delivered to Boboli. Unfortunately, the hot

bread caused the ink to run, and customers opening the carton often found red or blue splotches on

their pizzas. Highland refused to accept additional brochures, and Comark sued for breach of

contract. Highland defended by claiming that Comark had breached its warranty of merchantability.

Please comment.

Answer: Highland lost. The merchantability warranty requires that goods be fit “for their ordinary

Discussion Questions

1. In the Bakalar case involving artwork stolen during World War II, do you agree with the court’s

decision? Should the heirs get a chance to recover the drawing that was stolen from their ancestor?

Or should Bakalar, who has owned the drawing for 50 years and knew nothing about its origin, be

able to keep ownership?

2. Imagine that your laptop gets a virus, and you take it to a local computer repair shop. The shop

sells your computer to Heidi. Under the entrustment rules in the UCC, Heidi is a buyer in the

ordinary course of business. And so, even if you find Heidi and demand that she return your laptop,

she gets to keep it. Is this fair? Does the law give too much protection to purchasers in this

situation, and not enough to victims?

3. You are about to move, and you take your furniture to a consignment shop. The shop’s creditors

seize everything in the store, including your furniture. You demand that the creditors give back

your stuff, but under UCC 2-326, they don’t have to. Is this fair? Should the law change?

4. A seller can disclaim all implied warranties by stating that goods are sold “as is” (or by using other,

more specific language). Is this fair? The UCC’s implied warranties seem reasonable – that goods

are fit for their normal purposes, for example. Should it be so easy for sellers to escape their

obligations?

5. After learning more about implied warranties and disclaimers, would you ever buy an item sold “as

is”? Imagine a car salesman who offers you a car for $8000, but who also says that he can knock

the price down to $6500 if you will buy the car “as is.” If you live in a state that does not give

consumers special protections, which deal would be more appealing?

Bonus Exam Strategy:

Question: Gina takes her diamond ring to Sparkle Jewelry to have the prongs holding the diamond

retipped and to have the ring cleaned. The clerk at Sparkle told Gina that she would have to leave

the ring and that it should be ready in about a week. When Gina returns in a week to get her ring,

she finds out that the ring has been sold. Does Gina have any recourse against the store?

Strategy: First, look at the relationship between Gina and the store. Entrustment is when the owner of

a good, in this case Gina voluntarily leaves that good with a merchant of the same goods, Sparkle

Jewelry. Next, what are Gina’s rights in this relationship: When there is an entrustment, the

merchant has the power, but not the right, to transfer all of the rights in the good to a buyer in the

ordinary course.

Result: Because Gina voluntarily left her ring with Sparkle Jewelry, a merchant, she has entrusted her

ring to the store. The store has the power, but not the right to sell her ring to a buyer in the

ordinary course. The question asks about Gina’s recourse against the store. In this case, Gina can

sue the store for the value of the ring.