978-1285860381 Chapter 22 Solution Manual Part 2

Unlock access to all the studying documents.

View Full Document

Implied Warranties

Implied Warranty of Merchantability

“Merchantability” is a concept most non-lawyers are not familiar with. It means that goods are fit for

their normal purposes.

Case: Goodman v. Wenco Foods, Inc.1

Facts: Fred Goodman bit into a Wendy’s hamburger and was injured by a triangular piece of cow

bone, about one-sixteenth to one-quarter inch thick and one-half inch long. The restaurant purchased

all of its meat from Greensboro Meat Supply Company (GMSC). Wendy’s specifications required its

meat to be chopped and “free from bone or cartilage in excess of 1/8 inch in any dimension.” GMSC

beef was inspected continuously by state regulators and was certified by the United States Department

of Agriculture. The USDA considered any bone fragment less than three -quarters of an inch long to be

“insignificant.”

Goodman sued, claiming a breach of the implied warranty of merchantability. The trial court

dismissed the claim, ruling that the bone was natural to the food and that the hamburger was therefore

fit for its ordinary purpose. The appeals court reversed this, holding that a hamburger could be unfit

even if the bone occurred naturally. Wendy’s appealed to the state’s highest court.

Issue: Was the hamburger unfit for its ordinary purpose because it contained a harmful but natural

bone?

Holding: Affirmed appeals court judgment reinstating Goodman’s merchantability claim. An injured

consumer of food may recover from the seller even though the substance that caused injury was

“natural” to the food, provided that the consumer would not reasonably anticipate the substance or

process that caused the injury. A triangular, one-half inch, inflexible bone shaving may be natural to

beef, but whether it is so natural to hamburger as to put a consumer on guard is a question for the jury.

Question: Does the ruling mean that Wendy’s has breached its implied warranty of

merchantability?

Answer: No. The trial court had dismissed the merchantability claim, preventing Goodman from

Question: If a defendant has breached the implied warranty of merchantability does it mean the

defendant has also been negligent?

Answer: No. As text states on p. 479, there are three theories on which plaintiffs bring claims of

Question: How could Wendy’s be in breach of its implied warranty when the meat it purchased

was inspected continuously by state regulators and certified by the USDA?

Answer: Remember that merchantability means the goods are fit for their normal purposes. The

Question: Bone is not a foreign substance in meat; it is not something that was accidentally added

during processing. How can it be in breach of the implied warranty of merchantability to serve a

food in its natural state?

Answer: Other things occur naturally in meat, too: cartilage, hair, horns, intestines. That does not

1 333 N.C. 1, 423 S.E.2d 444, 1992 N.C. LEXIS 671 Supreme Court of North Carolina, 1992

Question: How will a jury decide what a reasonable consumer would expect to encounter in food?

Question: This ruling creates a serious difficulty for Wendy’s and its lawyer, in terms of arguing

to the jury. What is that difficulty?

Update

When the remanded case went to trial, Goodman stated (out of court) that he had originally offered to

settle for $2,000, the cost of his dental bills, and that he still was not trying to capitalize on his

situation. The lawyer for Wendy’s argued that there was no neutral eyewitness who could testify that

there ever had been bone in the hamburger. Goodman claims that he gave the bone to the store’s

manager. Unfortunately, that manager had left Wendy’s and Goodman’s lawyer was unable to locate

him. Research located no report of a jury verdict or appeal, indicating that the parties probably settled.

Implied Warranty of Fitness for a Particular Purpose

Where a seller, at the time of contracting, knows about a particular purpose for which the buyer wants

the goods, and knows that the buyer is relying on the seller’s skill or judgment, there is (unless

excluded or modified) an implied warranty that the goods shall be fit for the purpose.

Two Last Warranties: Title and Infringement

Example: A Pair of Stolen Trucks

Pedro owns High Heat, a plumbing and heating company. He buys two new trucks, one red and one

blue, for his work crews to use. Each is worth $25,000. Three days later, Roger steals both of the

trucks. Roger sells the red truck to Mia and the blue truck to Jodie. Each buyer, believing that Roger

is the real owner, receives forged ownership documents. Jodie, in turn, sells the blue truck to Brianna.

Pedro discovers the two trucks and files suit against Mia and Brianna, demanding return of the

vehicles. Both of the defendants argue convincingly that they acted in good faith and should not suffer

the loss.

Question: What is the outcome?

Question: Why is Pedro entitled to both trucks?

Answer: A thief obtains no title (see Chapter 21, Ownership and Risk). Roger, the thief, had no title

Question: Does either Mia or Brianna have any remedy?

Question: Assume that Roger has absconded and cannot be sued. Does either Mia or Brianna have

any other remedy?

Question: What is Brianna’s remedy?

Question: What is the warranty of title?

Answer: The seller of goods (implicitly) warrants that

Question: Jodie never said anything to Brianna about a warranty of title. Does the warranty exist?

Question: How will Brianna use UCC §2-312?

Question: Suppose Jodie had doubts about Roger’s honesty and did not want to provide a warranty of

title. Was there anything she could have done?

Question: Why didn’t Jodie exclude the warranty of title, just to be on the safe side?

Warranty Disclaimers

The Code permits a seller to disclaim some express or implied warranties. A disclaimer is a

statement that a particular warranty does not apply

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.”

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

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

the buyer’s consequential damages; these damages may vary greatly from one buyer to another and

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.

Consumers: A court is virtually certain to ignore any remedy limitation imposed on a

Corporations: If the buyer and seller are corporations of roughly equal power, a court will

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

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 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 plantiffs 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: Did the court find privity between the gown manufacturer and the inmate?

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

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. CPA QUESTION Under UCC Article 9 on secured transactions, which of the following

statements is correct concerning the disposition of goods by a secured creditor after a debtor

defaults on a loan?

(a) A good faith purchaser of the goods for value and without knowledge of any defects in the sale

takes free of any security interest.

(b) The debtor may not redeem the goods after the default.

(d) The goods may be disposed of only at a public sale.

3. 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

4. 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

5. 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

6. 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

7. CPA QUESTION Under the UCC sales article, an action for breach of the implied warranty of

merchantability by a party who sustains personal injuries may be successful against the seller of

the product only when:

(a) The seller is a merchant of the product involved

(b) An action based on negligence can also be successfully maintained

(d) An action based on strict liability in tort can also be successfully maintained

Case 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. Round Tire Co. sells 1,000 tires to Green Rent-a-Car for use on Green’s fleet. The same day, it sells

one new tire to Betty Blue for use on her car. For both sales, Round uses a sales agreement that

includes: “LIMITATION OF REMEDIES. Round agrees to repair or replace any tire that Round

determines was defective, within 12 months or 25,000 miles, whichever comes first. Buyer agrees

that this is Buyer’s SOLE REMEDY; Buyer is not entitled to consequential or incidental damages

or any other remedy of any kind.” All of Round’s tires prove defective. Green is so disgusted, it

immediately purchases substitute tires from another manufacturer. Green loses $12,000 in extra tire

costs and $75,000 in lost rental payments because many of its cars must be off the road waiting for

tires. Betty Blue’s new tire blows out as she is driving to church, and Betty suffers broken bones.

Green and Blue both sue. Predict the outcomes.

Answer: Betty will win because the remedy limitation is unconscionable. Courts dislike the

limitations when they apply to consumer goods, especially in cases of personal injury. See Collins

v. Uniroyal, 64 N.J. 260, 315 A.2d 16 (1974) (tire blowout causes buyer’s death; sales agreement

3. You Be the Judge: WRITING PROBLEM United Technologies advertised a used

Beechcraft Baron airplane for sale in an aviation journal. Attorney Thompson Comerford was

interested and spoke with a United agent who described the plane as “excellently maintained” and

said it had been operated “under §135 flight regulations,” meaning the plane had been subject to

airworthiness inspections every 100 hours. Comerford arrived at a Dallas airport to pick up the

plane, where he paid $80,000 for it. He signed a sales agreement stating that the plane was sold “as

is” and that there were “no representations or warranties, express or implied, including the

condition of the aircraft, its merchantability or its fitness for any particular purpose.” Comerford

attempted to fly the plane home, but immediately experienced problems with its brakes, steering,

ability to climb, and performance while cruising. (Otherwise it was fine.) He sued, claiming breach

of express and implied warranties. Did United Technologies breach express or implied warranties?

Argument for Comerford: United described the airplane as “excellently maintained,” knowing that

Mr. Comerford would rely on that information. United bragged about §135 servicing, when that

was obviously a lie. The company should not be allowed to say one thing and put the opposite in

writing. Argument for United Technologies: Comerford is a lawyer, and we assume he can read.

The contract could not have been clearer. The plane was sold as is. There were no warranties. If

Comerford disliked the terms, he should have bargained for a different contract—or walked away.

He knew he was buying a risky plane, and it is his to keep.

Answer: United Technologies won. United had made express warranties but had effectively

4. John C. Clark, using an alias, rented a Lexus from Alamo Rent-A-Car in San Diego, California.

Clark never returned the car to Alamo and obtained a California “quick title” using forged

signatures. He then advertised in the Las Vegas Review Journal newspaper and sold the car to Terry

and Vyonne Mendenhall for $34,000 in cash. The Mendenhalls made improvements to the car, had

it insured, smog and safety tested, registered, licensed, and titled in the state of Utah. When Alamo

reported the car stolen, the Nevada Department of Motor Vehicles seized the auto and returned it to

Alamo. The Mendenhalls sued Alamo. The trial court concluded that the Mendenhalls had

purchased the car for value and without notice that it was stolen, and were bona fide purchasers

entitled to the Lexus. Alamo appealed. Please rule.

Answer: Clark was a thief. He obtained no title and could pass on no valid title to any purchaser.

“The lower court seemed to equate Clark’s fraudulently obtained but facially valid California

5. 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

6. 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 7 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.

7. 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.

8. 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. ETHICS Myrna and James Brown ordered a $35,000 motor home from R.V. Kingdom, Inc. The

manufacturer delivered the vehicle to R.V. Kingdom, with title in the dealer’s name. The Browns

agreed to accept the motor home, but they soon regretted spending the money and asked R.V.

Kingdom to resell it. The motor home stayed on R.V. Kingdom’s lot for quite a few months, but

when the Browns decided to come get it, they learned that R.V. Kingdom had illegally used the

vehicle as collateral for a loan and that a bank had repossessed it. The Browns filed a claim with

their insurance company, State Farm. The insurer agreed that the vehicle had been stolen and

agreed that the Browns’ policy covered newly acquired vehicles. But the company refused to pay,

claiming that the Browns had not taken title or possession to the goods and therefore had no

insurable interest. The Browns sued. Please rule on their case.

Let us also look at the ethics of the case by creating a contrasting hypothetical. Suppose that

among the insurance company’s thousands of customers was Arvee, a recreational vehicle

dealership similar to the one in the real case. Imagine that Arvee had taken in an automobile for

resale from a customer named Parker and kept the vehicle on its lot. If Parker’s auto were stolen,

what argument would the insurance company be making? How would the company define insurable

interest in that case?

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. Greg manufactures and sells t shirts. As a seller, would he be better off if his contracts indicated

“FOB (place of shipment)”, or “FOB (place of destination)”. Explain your answer.

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 $8,000, but who also says that he can knock

the price down to $6,500 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?