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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
(c) Wolfe, unless Aston breached the contract
(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
(c) April 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
(c) is not; will
(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
(c) Ocean, because of the disclaimer of 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
(c) Both I and II
(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.
