Ch. 22 Ownership, Risk, and Warranties

destination contract,

, the seller is responsible for delivering the goods to the buyer, and risk passes to the buyer when the goods reach the destination.

warranty

A contractual assurance that goods will meet certain standards.

Implied Warranties explained

A seller may disclaim the implied warranty of merchantability provided he actually mentions the word merchantability and makes the disclaimer conspicuous. Courts demand to see the specific word merchantability in the disclaimer to be sure the buyer realized she was giving up this fundamental protection. If the word is there, and the disclaimer is conspicuous enough that the buyer should have seen it, she has forfeited the warranty. A seller may disclaim the implied warranty of fitness with any language that is clear and conspicuous. To make life easier, the Code permits a seller to disclaim all implied warranties by conspicuously stating that the goods are sold "as is" or "with all faults." Notice the tension between this provision and the one just discussed. A seller who wants to disclaim only the warranty of merchantability must explicitly mention that term; but a seller wishing to exclude all implied warranties may do so with a short expression, such as "sold as is." Many states, though, prohibit a seller from disclaiming implied warranties in the sale of consumer goods. In these states, if a home furnishings store sells a bunk bed to a consumer, and the top bunk tips out the window on the first night, the seller is liable. Even if the sales contract clearly stated "no warranties of merchantability," the court would reject the clause and find that the seller breached the implied warranty of merchantability.

Notice that there is one major restriction on limitation of remedy clauses

An exclusion of consequential damages is void if it is unconscionable. The word unconscionable means that a remedy restriction is shockingly one-sided and fundamentally unfair. If the buyer is a consumer, a court will be likelier to consider such an exclusion unfair since the typical consumer will not understand the terms and may never even notice them. If the buyer is a consumer who suffers a personal injury, a court is nearly certain to reject an exclusion for consequential damages. It is unfair for a corporation to market defective goods and escape liability because an unsuspecting consumer failed to understand contract language. owever, when the buyer is a corporation, courts assume it had adequate legal advice and an opportunity to reject unacceptable terms. When two companies agree to a remedy limitation, they are allocating the risk of loss as one part of their bargain

Affirmation of Fact or Promise

Any affirmation of fact—or any promise—can create an express warranty. An affirmation of fact is simply a statement about the nature or quality of the goods, such as "this scaffolding is made from the highest grade of steel available at any price" or "this car will accelerate from 0 to 60 in 5.3 seconds." A promise can include phrases such as, "we guarantee you that this air conditioning system will cool your building to 72 degrees, regardless of the outdoor temperature." A common problem in cases of express warranty is to separate true affirmations of fact from mere sales puffery or seller's opinion, which creates no express warranty. "You meet the nicest people when you ride a Honda motorcycle," is mere puffery. If you purchase a Honda and meet only deadbeats, the manufacturer owes you nothing.

Description of Goods

Any description of the goods can create an express warranty. The statement can be oral or written. A description might be a label on a bag of seed, referring to the seed as a particular variety of tomato; it could be a tag on airplane parts, assuring the buyer that the goods have met safety tests. Wherever the words appear, if they describe the goods as having particular characteristics or qualities, the seller has probably created an express warranty.

Sample or Model

Any sample or model can create an express warranty. A sample can be a very effective way of demonstrating the quality of goods to a customer. However, a seller who uses a sample is generally warranting that the merchandise sold will be just as good.

limitation of remedy clause

Contract clause allowing parties to limit or exclude applicable UCC remedies.

Consequential damages

Contract damages resulting as an indirect consequence of the breach.

The parties can quickly and easily allocate the risk of loss by using common shipping terms that the Code defines. FOB means free on board; FAS indicates free alongside a ship; and CIF stands for cost, insurance, and freight. By combining these designations with other terms, the parties can specify risk in a few words:

FOB place of shipment. The seller is obligated to put the goods into the possession of the carrier at the place named. The seller bears the expense and risk until they are in the carrier's possession. From that moment onward, the buyer bears the risk. FOB place of destination. The seller must deliver the goods at the place named and bears the expense and risk of shipping. CIF. The price includes in a lump sum: the cost of the goods and the insurance and freight to the named destination. C&F. The price includes in a lump sum: the cost of the goods and freight, but not insurance.

Strumlauf v. Starbucks Corp. 2016 U.S. Dist. LEXIS 87574; 2016 WL 3361842 United States District Court, N.D. California, 2016

Facts: A latte (which means "milk" in Italian) is a coffee drink made with milk and often topped with milk foam. According to the Starbucks menu, its Grande (which means "big" in Italian) lattes contained 16 fl. oz. Starbucks lovers argued that the Grandes were not as "grande" as promised. Sean Wandzilak/ Shutterstock.com A group of heated Grande-latte-drinkers sued Starbucks for breach of express warranty, alleging that the coffee company consistently underfilled its lattes by 25 percent. That is, they claimed, the Grande-sized lattes contained only 12 ounces of coffee topped with about an inch of foam, instead of the promised 16 ounces of liquid coffee. The plaintiffs offered the following evidence: Starbucks provided baristas with pitchers that had "fill to" lines that were too low for the finished product to actually be 16 oz. Additionally, the latte recipe instructed baristas to "leave at least 1/4 inch of space below the rim of the serving cup." But the serving cup's capacity was exactly 16 oz., which meant that the Grande lattes could not possibly contain the promised amount. Starbucks filed a motion to dismiss, arguing that the plaintiffs should just relax and get another cup of coffee. You Be the Judge: Did Starbucks breach an express warranty by underfilling its lattes? Argument for Plaintiffs: Your honors, the Starbucks menu clearly represented that its Grande lattes contained 16 fluid ounces. Any reasonable consumer would understand that statement as a promise to deliver 16 ounces of liquid coffee, not 12 ounces of coffee with a 4-ounce foamy filler on top. My clients would not have paid as much as they did for the latte if they had known it was only 12 ounces of actual coffee. Starbucks breached its express warranty and injured my clients, who received much less than what was promised. Moreover, Starbucks knew what it was doing because its company-wide policy instructed baristas to underfill latte cups. Starbucks needs to stand by its word. Argument for the Defendant: Your honors, Starbucks did not expressly warrant that it would deliver 16 ounces of liquid coffee. Instead, it promised to deliver a 16 ounce latte—and that is exactly what it did. The definition of a latte is a milk-based coffee drink topped with milk foam. Any reasonable latte-drinker knows that the foam added to the top of the coffee is part of the drink and counts toward the total fluid ounce measurement. If a consumer does not want foam in her coffee, she is free to drink an Americano, a macchiato, or the drip coffee of the day.

Harmon v. Dunn 1997 Tenn. App. LEXIS 217; 1997 WL 136462 Tennessee Court of Appeals, 1997

Facts: Bess Harmon owned a two-year-old Tennessee Walking Horse named Phantom Recall. Harmon, who lived in Tennessee, boarded her horse with Steve Dunn at his stables in Florence, Alabama. Dunn cared for Phantom Recall and showed him at equestrian events. Harmon instructed Dunn to sell the horse for $25,000, and Dunn arranged for his friend Scarbrough to buy the colt. On June 30, Dunn delivered Scarbrough's $25,000 check to Harmon, who handed over the horse's certificate of registration and a "transfer of ownership" document. That night at a horse show, Dunn told Scarbrough that he had delivered the check and had the ownership papers in his car. Dunn did not actually give the documents to his friend. Scarbrough knew that Phantom Recall was at Dunn's stable, where Scarbrough had boarded other horses. Sadly, the colt developed colitis and died suddenly, on July 4. Scarbrough stopped payment on his check, and Harmon sued for her money. The trial court found for Harmon, and Scarbrough appealed. Issue: Which party bore the risk of Phantom Recall's death? Excerpts from Judge Farmer's Decision: [UCC §2-509 states:] Risk of loss in the absence of breach ... 2. Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer: on his receipt of a negotiable document of title covering the goods, or on acknowledgment by the bailee of the buyer's right to possession of the goods, or after his receipt of a non-negotiable document of title or other written direction to deliver ... Phantom Recall died of colitis—but that was just the beginning of the drama. Michael Wade/Icon SMI/Newscom We conclude that the facts before us clearly establish a bailor-bailee relationship between Harmon and Dunn. It is not disputed that the latter was the agent of the former. Here, it was agreed that Dunn would train and care for Phantom Recall at the Dunn Stables in Florence, Alabama. He was also responsible for transporting the horse to various shows. The record establishes that prior to the horse's death, he had been entered and shown by Dunn himself in three separate events. Having established Dunn a bailee for purposes of [§2-509(2)] and in the absence of any prior arrangement with Dunn or Harmon that the horse be delivered elsewhere upon purchase from the latter, we find that the risk of loss passed to Scarbrough if and when the applicable provisions under subsection (2) occurred. Subsection (2)(a) and (b) provide that the risk of loss passes to the buyer "on his receipt of a negotiable document of title covering the goods; or on acknowledgment by the bailee of the buyer's right to possession of the goods." We find that Scarbrough received the ability to control possession of the horse no later than July 1 irrespective of the fact that he did not actually receive physical possession of the ownership documents at that time. The documents which were necessary for transfer of ownership and taking possession of the horse were already in the hands of the bailee. We find an actual physical back and forth exchange between the two unnecessary under these facts where the bailee and the seller's agent are one and the same. Certainly Scarbrough had the ability to control possession of the horse no later than July 1 when he was made aware that Dunn had the transfer papers. [Affirmed.]

Goodman v. Wenco Foods, Inc. 333 N.C. 1 North Carolina Supreme Court, 1992

Facts: Fred Goodman and a friend stopped for lunch at a Wendy's restaurant in Hillsborough, North Carolina. Goodman had eaten about half of his double hamburger when he bit down and felt immediate pain in his lower jaw. He took from his mouth a one-half-inch piece of cow bone, along with several pieces of his teeth. Goodman's pain was intense, and his dental repairs took months. The restaurant purchased all of its meat from Greensboro Meat Supply Company (GMSC). Wendy's 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 (USDA). 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 ruling, holding that a hamburger could be unfit even if the bone occurred naturally. Wendy's appealed to the state's highest court. What did the trial decide and why? Answer the trial court dismissed the claim because the bone in the hamburger was natural to the food and therefore fit for its ordinary purpose. What did the appellate court decide and why? Answer The appellate court reversed because a hamburger could be unfit even if the bone occurred naturally. Who appealed it to the Supreme Court of North Carolina and why? Answer Wendy's did because they lost on appeal. Issue: Was the hamburger unfit for its ordinary purpose? Excerpts from Justice Exum's Decision: We hold that when a substance in food causes injury to a consumer, it is not a bar to recovery against the seller that the substance was "natural" to the food, provided that the substance's presence should not reasonably have been anticipated by the consumer. A one-half-inch, inflexible bone shaving is indubitably "inherent" in or "natural" to a cut of beef, but whether it is so "natural" to hamburger as to put a consumer on his guard—whether it "is to be reasonably expected by the consumer"—is, in most cases, a question for the jury. We are not requiring that the respondent's hamburgers be perfect, only that they be fit for their intended purpose. It is difficult to conceive of how a consumer might guard against the type of injury present here, short of removing the hamburger from its bun, breaking it apart and inspecting its small components. Wendy's argues that the evidence supported its contention that its hamburger complied with [legal] standards. Wendy's reasons that [regulators permit] some bone fragments in meat and that its hamburgers are therefore merchantable as a matter of law. What does it mean to be merchantable and what was Wendy's argument that the hamburger was merchantable as a matter of law? Did the courts agree? Answer To be merchantable means that the goods are fit for the ordinary purposes for which they are intended. Wendy's argument was that the hamburger was merchantable because it complied with federal and state standards. State and federal standards allow some bone fragments in meats. No. The appellate court rejected this argument and the Supreme Court of North Carolina agreed. They do not expect consumers to have to tear apart their hamburger prior to consuming to check for bone fragments. The court of appeals rejected this argument, noting that compliance "with all state and federal regulations is only some evidence which the jury may consider in determining whether the product was merchantable." We agree. We thus conclude, as did the court of appeals majority, that a jury could reasonably determine the meat to be of such a nature and the bone in the meat of such a size that a consumer should not reasonably have anticipated the bone's presence. The court of appeals therefore properly reversed the directed verdict for Wendy's on plaintiff's implied warranty of merchantability claim. The Supreme Court of North Carolina affirmed the appellate court. Does this mean that Goodman wins? Answer It only means that this case can now proceed to trial so that a jury can determine if the hamburger was merchantable.

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

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. Sadly, Reed used the gown to hang himself. Reed's mother, on his behalf, sued the police (for failing to monitor a suicidal inmate) and also Cypress Medical Products, the manufacturer of the isolation gown. The claim was 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? Excerpts from Judge Moran's Decision: The single issue we must decide is whether plaintiff, as a nonpurchaser, can recover from the manufacturer and designer of the gown for breach of warranty. Historically, Illinois law has required privity. Lack of privity occurs when a user of the product, beside the purchaser, is injured. Section 2-318 of the Uniform Commercial Code (UCC), as adopted by the Illinois legislature, contains mandatory exceptions to the general requirement of privity: A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. The Illinois Supreme Court has determined that privity is no longer an absolute requirement for breach of warranty actions. While section 2-318 lists specific exceptions to the privity requirement, Illinois courts have noted that this list is not necessarily exhaustive. 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. In [a case called Whitaker,] plaintiff was injured while using a bandsaw that had been purchased by his employer. The court determined that the employee was essentially a third party beneficiary to the sale in that the employee's safety while using the bandsaw was "either explicitly or implicitly part of the basis of the bargain when the employer purchased the goods." In cases examining the limits of section 2-318 in other contexts, courts have been reluctant to find additional exceptions to the privity requirement. In [a case called Hemphill,] the court refused to allow a breach of warranty claim by a university football player against the manufacturer of his helmet. 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. In designing and manufacturing the gown, defendants contemplated that the users of the gown would be detainees. Moreover, the safety of these detainees was necessarily a part of the bargain, whether explicitly or implicitly, 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. For the foregoing reasons, defendants' motion to dismiss is denied.

Valley Forge Insurance Co. v. Great American Insurance Co. 1995 Ohio App. LEXIS 3939; 1995 WL 540128 Ohio Court of Appeals, 1995

Facts: On a Friday afternoon, Karl and Linda Kennedy went to John Nolan Ford to buy a new Mustang. The parties signed all necessary documents, including a New Vehicle Buyer's Order, an Agreement to Provide Insurance, and credit applications. The Kennedys made a down payment, but they could not arrange financing before the dealership closed. John Nolan Ford determined that the Kennedys were creditworthy and allowed them to take the car home for the weekend. That evening, Karl Kennedy permitted his brother-in-law, Cella, to take the car for a drive, along with a passenger named Campbell. Cella wrecked the car, injuring his passenger. Campbell sued, and the question was which insurance company was liable: John Nolan Ford's insurer (Milwaukee Mutual), Cella's insurer (Valley Forge), or Kennedy's insurer (Great American). The trial court ruled that title had never passed to Kennedy and found Milwaukee Mutual liable. The insurance company appealed. Issue: Had title passed to Kennedy at the time of the accident? Excerpts from the Per Curiam Decision: Milwaukee argues that the risk of loss and insurable interest had passed because the car had been delivered. Further, Milwaukee states that the Kennedys explicitly agreed to provide insurance. Great American counters that the parties had "otherwise explicitly agreed" in the New Vehicle Buyer's Order that any interest in the car would not pass until "either the full purchase price is paid in cash or a satisfactory deferred payment agreement is executed by the parties[.]" No financing had been arranged at the time of the accident. Two terms of the New Vehicle Buyer's Order apply to the situation at bar. Under the "Agreement" provision, the contract states that "it is expressly agreed that the purchaser acquires no right, title or interest in or to the property which he agrees to purchase hereunder until such property is delivered to him and either the full purchase price is paid in cash or a satisfactory deferred payment agreement is executed by the parties hereto[.]" Milwaukee also argues that the Kennedys explicitly agreed to provide insurance by signing the "Agreement to Provide Insurance." While the agreement does state that the Kennedys agreed to provide insurance, it is not clear when the Kennedys were to obtain the insurance. In fact, because the agreement refers to an "instalment [sic] contract," it is possible that the Kennedys were to provide insurance once a financing agreement was reached. In light of the fact that the agreement is ambiguous, we construe the contract strictly against the drafter and hold that any agreement to provide insurance was to take effect after financing was obtained. We hold that because the parties had otherwise agreed that interest in the car, including insurable interest, would not pass until the financing was complete, John Nolan Ford still had the risk of loss and the insurable interest when the accident occurred. [Affirmed.]

Identification

Goods must be identified to the contract before title can pass. This means that the parties must have designated the specific goods being sold. Often, identification is obvious. The parties may agree in their contract how and when they will identify the goods. They are free to identify them to the contract in any way they want

Existence

Goods must exist before title can pass. Although most goods do exist when people buy and sell them, some have not yet come into being, such as crops to be grown later or goods that have not yet been manufactured.

Legal Interest and Title

Historically, courts settled disputes about legal interest by looking at one thing: title. But the drafters of the UCC concluded that "title" was too abstract an answer for the assorted practical questions that arose. It sometimes could be hard to prove exactly who did have title, and it made no sense to settle a wide variety of business problems with one legal idea. Today, title is only one of several issues that a court will use to resolve conflicting interests in goods. Identification and insurable interest have become more important, and title has diminished in significance.

If the parties do not specify any particular method, identification will occur according to these rules:

Identification occurs when the parties enter into a contract if the agreement describes specific goods that already exist. If the Dealer agrees to sell a yacht and the parties include the ID number in their contract, the goods are identified (even though the parties never use the term identify). For unborn animals, identification generally takes place when they are conceived; for crops, identification normally happens when they are planted. For other goods, identification occurs when the seller marks, ships, or in some other way indicates the exact goods that are going to the buyer.

Economic Loss

If the buyer suffers only economic loss, privity may still be required to bring a suit for breach of warranty. If the buyer is a business, the majority of states require privity. By contrast, when the buyer is a consumer, more states will permit a suit against the manufacturer, even without privity.

Implied Warranties

Implied warranties are those created by the UCC itself, not by any act or statement of the seller.

Statute of Limitations and Notice of Breach

It is right that a seller be responsible for the goods it places in the market. On the other hand, a seller should not face potential liability forever. A company cannot be a perpetual insurer for goods that it sold decades earlier. So, the UCC imposes two important time limits on a buyer's claim of breach. The Code sets a four-year statute of limitations. This means that the buyer must bring any lawsuit for breach of a warranty no later than four years after the goods were delivered. The Code puts an additional burden on a buyer asserting a breach of warranty. The UCC requires that a buyer notify the seller of defects within a reasonable time. The purpose here is to enable the seller to cure, by repairing or replacing, any problems with the goods. Ideally, a seller that receives notice of a potential breach will fix the problem and there will be no lawsuit. The circumstances will determine what is a "reasonable" amount of time.

A statement is more likely to be an affirmation of fact if:

It is specific and can be proven true or false. Suppose the brochures of a home builder promise to meet "the strictest building codes." Since there is a code on file, the builder's work can be compared to it, and his promise is binding. It is written. An oral promise can create an express warranty. But promises in brochures are more likely to be taken seriously. Statements in a written contract are the likeliest of all to create a binding warranty. Defects are not obvious. If a used car salesman tells you that a car is rust-free when the driver's door is pockmarked with rust, you should not take the statement seriously—since a court will not, either. Seller has greater expertise. If the seller knows more than the buyer, his statements will be more influential with buyer and court alike. If your architect assures you that the new porch will be structurally sound, the law recognizes that you will naturally rely on her expertise.

Buyer's Misuse

Misuse by the buyer will generally preclude a warranty claim. Common sense tells us that the seller only warrants its goods if they are properly used.

Passing of Title

Once goods exist and are identified to the contract, ownership can pass from one person to another. Title may pass in any manner on which the parties agree (UCC §2-401). Once again, the Code allows the parties to control their affairs with commonsense decisions. The parties can agree, for example, that title passes when the goods leave the manufacturer's factory or when they reach the shipper who will transport them or at any other time and place. If the parties do not agree on passing title, §2-401 decides.

express warranty

One that the seller creates with his words or actions.

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.

Implied Warranty of Fitness for a Particular Purpose

The other warranty that the UCC imposes on sellers is the implied warranty of fitness for a particular purpose. This cumbersome name is often shortened and referred to as simply the warranty of fitness. Where the 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. Here are the key points: Particular purpose. The seller must know about some special use that the buyer plans for the goods. For example, if a lumber salesman knows that a builder is purchasing lumber to construct houses in a swamp, the UCC implies a warranty that the lumber will withstand water. Seller's skill. The buyer must be depending upon the seller's skill or judgment in selecting the product, and the seller must know it. Suppose the builder says to the lumber salesman, "I need four-by-eights that I will be using to build a house in the swamp. What do you have that will do the job?" The builder's reliance is obvious, and the warranty is established. By contrast, suppose that an experienced Alaskan sled driver offers to buy your three huskies, telling you she plans to use them to pull sleds. She has the experience and you do not, and, if the dogs refuse to pull more than a 1-pound can of dog food, you have probably not breached the implied warranty of fitness. Exclusion or modification. Once again, the seller is allowed to modify or exclude any warranty of fitness.

Deals in Goods of That Kind

The purpose of the section is to protect innocent buyers who enter a store, see the goods they expect to find, and purchase something, having no idea that the storekeeper is illegally selling the property of others. Shoppers should not have to demand proof of title to everything in the store. Further, if someone has to bear the risk, let it be the person who has entrusted her goods; she is in the best position to investigate the merchant's integrity. But this protection does not extend to a buyer who arrives at a vacuum cleaner store and buys an $80,000 mobile home parked in the lot.

Most contracts require the seller to arrange shipment of the goods. In a shipment contract, the seller must deliver the goods to a carrier, which will then transport the goods to the buyer. The carrier might be a trucking company, railroad, airline, or ship, and is generally located near the seller's place of business. In a shipment contract,

The risk passes to the buyer when the seller delivers the goods to the carrier.

Remedy Limitations

The seller may also limit the buyer's remedy, which means that, even if there is a breach of warranty, the buyer still may have only a very limited chance to recover against the seller.

Two Last Warranties: Title and Infringement

The seller of goods warrants that her title is valid and that the goods are free of any security interest that the buyer knows nothing about, unless the seller has clearly excluded or modified this warranty. The same Code section imposes what it calls an infringement warranty. This warranty means that, unless otherwise agreed, a seller who is a merchant warrants that the goods are free of any rightful claim of copyright, patent, or trademark infringement.

Basis of Bargain

The seller's conduct must have been part of the basis of the bargain. To prove an express warranty, a buyer must demonstrate that the two parties included the statements or acts in their bargain. Some courts have interpreted this to mean that the buyer must have relied on the seller's statements. There is logic to this position. For example, suppose a sales brochure makes certain assurances about the quality of goods, but the buyer never sees the brochure until she files suit. Should the seller be held to an express warranty? Some courts would rule that the seller is not liable for breach of warranty. Other courts, however, have ruled that a seller's statement can be part of the basis of the bargain even when the buyer has not clearly relied on it. These courts are declaring that a seller who chooses to make statements about his goods will be held to them unless the seller can convince a court that he should not be liable. This is a policy decision, taken by many courts, to give the buyer the benefit of the doubt since the seller is in the best position to control what he says.

Implied Warranty of Merchantability

This is the most important warranty in the UCC. Buyers, whether individual consumers or billion-dollar corporations, are more likely to rely on this than any other section. Sellers must understand it thoroughly when they market goods. Unless excluded or modified, a warranty that the goods are merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Merchantable means that the goods are fit for the ordinary purposes for which they are used. This rule contains several important principles: Unless excluded or modified means that the seller does have a chance to escape this warranty. We later discuss what steps a seller may take if she wants to sell goods that are not merchantable. Merchantability requires that goods be fit for their normal purposes. To be merchantable, a ladder must be able to rest securely against a building and support someone who is climbing it. The ladder need not be serviceable as a boat ramp. Implied means that the law itself imposes this liability on the seller even if it is not written down. A merchant with respect to goods of that kind means that the seller is someone who routinely deals in these goods or holds himself out as having special knowledge about such goods. When selling vehicles, a car dealer is acting as a merchant, but an accountant who sells his used car by listing it online is not.

Written Express Warranties

This is the one type of warranty that is almost impossible to disclaim. If a seller includes an express warranty in the sales contract, any disclaimer is definitely invalid. The Code will not permit a seller to take contradictory positions in a document. The goal is simply to be fair, and the UCC assumes that it is confusing and unjust for a seller to say one thing to help close a deal and the opposite to limit its losses. What if the express written statement is in a different document, such as a sales brochure? The disclaimer is void if it would unfairly surprise the buyer.

Existence and Identification

Title in goods can pass from one person to another only if the goods exist and have been identified to the contract.

When Neither Party Breaches

To settle these cases, we need to know whether the contract obligated the seller to ship the goods or whether the goods were handled in some other way. There are three possibilities: the contract required the seller to ship the goods, or the contract involved a bailment, or other cases.

1. Which party had title to the car?

UCC §2-401: Title to goods may pass in any manner on which the parties agree.

2. Did the seller have an insurable interest in the car?

UCC §2-501: The seller retains an insurable interest in the goods as long as it holds title to or a security interest in them.

Oral Express Warranties

Under the Code, a seller may disclaim an oral express warranty.

When One Party Breaches

We now look at how the Code allocates risk when one of the parties does breach. Again there are three possibilities: seller breaches and buyer rejects; seller breaches, buyer accepts, but then revokes; or buyer breaches.

Seller Breaches, Buyer Accepts, but Then Revokes

When a buyer accepts goods but then rightfully revokes acceptance, the risk remains with the seller to the extent that the buyer's insurance will not cover the loss.

Buyer Breaches

When a buyer breaches the contract before taking possession, it assumes the risk of loss to the extent that the seller's insurance is deficient.

If the parties do not agree on passing title, §2-401 decides. There are three possibilities:

When the goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do. Suppose the Seller is in Milwaukee and the Buyer is in Honolulu. The contract requires the Seller to deliver the goods to a ship in San Francisco. Title passes when the Seller completes its last contractually required step. In this example, that happens when the goods reach the ship in San Francisco. When the goods are not being moved and a contract calls for delivery of ownership documents, title passes when the seller delivers these documents to the buyer. Suppose Seller, located in Louisville, has manufactured 5,000 baseball bats, which are stored in a warehouse in San Diego. Under the terms of their contract, Buyer will take possession of the bats at the warehouse. When Seller gives Buyer ownership documents, title passes. When the goods are not being moved and the contract does not call for delivery of ownership documents, title passes when the parties form the contract. For example, if the Buyer owns the warehouse where the bats are stored, Buyer needs no documents to take possession; title passes when the parties reach agreement.

Privity

When two parties contract, they are in privity.

Personal Injury

Where a product causes a personal injury, most states permit a warranty lawsuit even without privity.

UCC §2-403(2)

any entrusting to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business (BIOC). There are several important ideas in this section: Entrusting means delivering goods to a merchant or permitting the merchant to retain them.

In the Ordinary Course of Business

buyer in the ordinary course of business (BIOC) is one who acts in good faith, without knowing that the sale violates the owner's rights. If Frank List buys your piano assuming that Showpan owns it, he has acted in good faith. If Frank was your neighbor, recognized your instrument, and bought it anyway, he is not buying in the ordinary course of business and must hand over the piano. Of course, a merchant who violates the owner's rights is liable to that owner. If Showpan were still in business when you discovered your loss, you could sue and recover the value of the piano. The problems arise when the merchant is bankrupt or otherwise unable to reimburse the owner.

A buyer obtains an insurable interest when the

goods are identified to the contract (UCC §2-501).

bailment,

meaning that one person or company is legally holding goods for the benefit of another

In the remaining cases, if the seller is a merchant,

risk passes to the buyer on receipt. This means that a merchant is only off the hook if the buyer actually accepts the goods. If the seller is not a merchant, risk passes when the seller tenders the goods, meaning that she makes them available to the buyer. The Code is giving more protection to buyers when they deal with a merchant.

The seller retains an insurable interest in goods as long as

she has either title to the goods or a security interest in them (UCC §2-501). "Security interest" refers to cases in which the buyer still owes money for the goods and the seller can repossess the goods if payment is not made.

It is generally easy for purchasers to show that they gave value. The real issue becomes whether

the buyer acted in good faith.

UCC §2-509(4) states that

the parties may allocate the risk of loss any way they wish

Floataway had delivered nonconforming goods; that is, merchandise which differs from that specified in the contract. A buyer has a right to reject such goods. When the buyer rejects nonconforming goods,

the risk of loss remains with the seller until he cures the defect or the buyer decides to accept the goods.

If the contract requires a bailee to hold the goods for the buyer,

the risk passes when the buyer obtains documents entitling her to possession, or when the bailee acknowledges her right to the goods.

A person with voidable title has power to transfer

valid title for value to a good faith purchaser, generally called a bona fide purchaser or BFP. The collector can prove that he is a bona fide purchaser by showing two things: That he gave value for the goods and That he acted in good faith.

The UCC establishes that the seller may create an express warranty in three ways:

with an affirmation of fact or a promise, with a description of the goods, or with a sample or model. In addition, the buyer must demonstrate that what the seller said or did was part of the basis of the bargain.

If the parties fail to specify when the risk passes from seller to buyer, the Code provides the answer. When neither party breached the contract,

§2-509 determines the risk; when a party has breached the contract, §2-510 governs. The full analysis of risk is somewhat intricate, so we first supply you with a short version: When neither party has breached the contract, the risk of loss generally passes from seller to buyer when the seller has transported the goods as far as he is obligated to. When a party has breached, the risk of loss generally lies with that party.