Contract Warranties

Cite this article as:"Contract Warranties," in The Business Professor, updated February 22, 2019, last accessed May 27, 2020, https://thebusinessprofessor.com/lesson/contract-warranties/.

Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY

What is a warranty in a contract?

A warranty is a representation by a party that something is true and will remain true until some point in time (generally the time of contract performance).

• Example: Tim owns a supply store and enters into a contract to sell Bernice a piece of equipment. Tim assures Bernice that the equipment is in good working order. Further, he warrants that the equipment will be in working order on the day that the sale is carried out.

Do warranties apply to goods and services?

Warranties generally exist in contracts for the sale of goods. The UCC provides for both express and implied warranties of goods sold by both merchants of those types of goods and non-merchants. Express warranties and implied warranties of merchantability, title, and fitness are discussed further below. In some jurisdictions, contracts for services carried out by a professional or someone holding themselves out as an expert include a warranty of workmanship. While a warranty is a contract term, the warranty of workmanship is generally engulfed in the standard of care owed by someone in carrying out an activity. As such, the warranty of workmanship gets subsumed in the tort of negligence.

• Example: In the above-referenced example, Tim is a merchant of those goods and makes an express warranty as to their functionality. If Tim were to include in the contract an obligation to install the equipment for Bernice, this would be a service. Some jurisdictions may find an implied warranty of workmanship. In most jurisdictions, however, a failure to properly install the equipment would simply lead to a breach of contract action (failure to complete duties – not a claim regarding a warranty) or a negligence action if someone is harmed by the faulty work.

• Note: A party who sells a good that does not meet an express or implied warranty thereby breaches the contract. A party who does not perform a service at a required level also breaches a contract. A professional service provider may be sued in tort for negligence (professional liability or malpractice).

What constitutes an express warranty by the seller of a good?

When a seller makes any assurances or statements of fact about the goods (including a description, drawing, model, etc.), then she expressly warrants that the goods will conform to those representations. It is not necessary to use the words “warranty” or “guarantee.”

• Example: Edgar enters into a contract to sell a car to Wynona. Edgar states that the car does not leak oil. By stating this fact, Edgar makes an express warranty about the car. Because the contract is required to be in writing (the car is a good of $500 or more), Wynona should ask Edgar to put it into the agreement. This will avoid issues of proving the express warranty and parole evidence issues.

• Note: A seller bragging about the quality of the goods (known as puffing) or stating a value for the goods is generally not a warranty. If, however, the individual making the brag is an expert in the field, then relying on that brag make constitute a warranty.

What is the implied warranty of title for goods?

In all sales of goods the seller warrants that she is transferring good title, that she has the right to transfer that title, and that the goods are not subject to outside interest (liens, encumbrances, security interests). If the seller is a merchant dealing in this type of goods, she warrants that the goods are free from claims of copyright, patent, or trademark infringement.

• Example: Keith enters into a contract to sell a piece of equipment to Julia. It is implied in the offer that Keith owns the equipment (or will own the equipment at the time of sale) and that the equipment is free of undisclosed liens or claims of ownership by third parties.

• Note: There is an exception if the goods are custom made at the direction of the buyer. In this case, the manufacturer does not warrant that the manufactured design does not violate third-party, intellectual property rights. The buyer requesting production bears the risk of any such infringement.

What is the implied warranty of merchantability for goods?

Merchants who sell goods warrant to any purchasers of the goods that they are merchantable. The word merchantability is a legal term that means the goods:

  • Meet the standards under the contract and would meet industry standards for such a described good;
  • Meet the quality standards of an average item of such description;
  • Are fit for the ordinary and intended use of such goods;
  • Are uniform in type and quality among all units subject to the transaction;
  • Are appropriately packaged and labeled as to the packaged contents; and
  • Meet any representations depicted on the item or packaging.

Generally, the implied warranty assures a purchaser that she is receiving the industry standard for the type and quality of goods that she bargained for under the contract.

What is the implied warranty of fitness for a particular purpose for goods?

This warranty applies to sales of goods by merchants and non-merchants. Unless expressly excluded in a contract, any seller of goods warrants that the goods are fit for the purposes for which they are sold if:

  • the seller knows (or has reason to know) the purpose for which the goods are purchased, and
  • the buyer relies on the seller’s skill or judgment in selecting a suitable good.

• Example: Tom sells a piece of equipment to Jerry for use in his construction business. Tom knows of Jerry’s intended use and assists him in picking out the specific equipment that he needs. Therefore, Tom impliedly warrants that the equipment sold is fit for Jerry’s intended use. If the products are not fit for the intended use, then Tom breaches his warranty of fitness and Jerry may sue him.

Can a seller disclaim the implied warranties?

Yes. The standard for disclaiming an implied warranty depends upon the type of warranty. Generally, express language must be used to disclaim the implied warranty or title. In some instances, however, the implied warranty is disclaimed when the buyer knows or has reason to know that the seller is only attempting to sell her rights (whatever their extent) in the good. This often arises in transfers of inheritance rights in goods that are contested or uncertain.

As discussed above, the implied warranty of merchantability applies to goods sold by merchants. To disclaim the implied warranty of merchantability, the contract must expressly use the word “merchantability” in the disclaimer. The written disclaimer must also be conspicuous (such as capitalized or in bold) to the reader.

The disclaimer of the implied warranty of fitness must be in writing and conspicuous in the contract of sale. Unlike the warranty of merchantability, however, a general disclaimer stating that no warranties other than express warranties apply is generally sufficient to disclaim this warranty.

• Example: Wilt, a merchant, enters into a contract to sell Aaron equipment. Wilt is not certain about the quality of the equipment and all of the equipment is subject to a lien by a third-party lender. Aaron is willing to take the risk. In the contract, Wilt expressly states that there are no warranties and, specifically, that there is no warranty of merchantability. He also discloses the third-party lender’s lien on the equipment. The contract states that the proceeds from sale will be used to pay off this lien at the time of purchase. The general disclaimer and specific disclaimer together are sufficient to disclaim the implied warranty of merchantability and fitness. The disclosure of the lien is sufficient to disclaim the implied warranty of title and also creates an obligation under the contract.

• Note: Implied warranties can arise or be further excluded by a course of dealing, course of performance, or trade usage.

What is a general disclaimer of warranties?

A general disclaimer attempts to disclaim all possible warranties in the sale of a good. Using specific words of disclaimer, such as “as is” or “with all faults,” serves to disclaim the implied warranties of fitness and any other implied warranties (with the exception of the implied warrant of merchantability). These words must appear conspicuously in the contract. If the buyer is given the right to examine the goods prior to purchase or has refused to examine the goods, then there is no implied warranty for defects that should have been discovered on examination. The knowledge, skill, or experience of the buyer is considered in determining the extent of the warranties excluded.

• Example: Richard, a merchant, enters into a contract with Wilma to sell a shipment of notebooks. Richard conspicuously notes that the notebooks are sold, “as is.” Wilma is very knowledgeable about notebooks and paper quality. She inspects a sample notebook and proceeds to order the shipment. Upon arrival, Wilma realizes that lead pencils do not write well on this type of paper. If she sues Richard under an implied warranty, her argument will have to be a breach of the implied warranty of merchantability. The “as is” notification expressly disclaims the warranty of fitness. Her claim may not prevail, however, as she should have discovered the defect in the quality of the paper upon careful inspection of the sample notebook.

• Note: The seller can further limit implied warranties by expressly disclosing any defects in the goods.

Can a general disclaimer of warranties disclaim an express warranty?

No. A general disclaimer cannot disclaim an express warranty. A general disclaimer and an express warranty will be construed consistently if reasonable to do so.

• Example: Carlos enters into a contract to sell an office printer to Jeffrey. Carlos expressly states in the contract that the printer will print in several colors and 50 pages per minute. At the bottom of the contract, Carlos expressly disclaims any warranties. When the printer fails to perform as stated, Jeffrey asks for a return of his money. When Carlos refuses to return the money, Jeffrey sues Carlos under a theory of breach of express warranty. Carlos will not be successful asserting that he disclaimed all warranties. A general disclaimer cannot disclaim an express warranty.

• Note: If a contract contains an express warranty and there is language expressly disclaiming the express warranty, then there is an ambiguity in the contract. The court will then consider outside evidence to determine the intent of the parties to the agreement.

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