Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 22 Sales and Lease Warranties Chapter 22 Sales and Lease Warranties

22 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Warranties  Article 2 of the UCC – establishes certain warranties that apply to the sale of goods. Applies only to sales transactions. Applies only to sales transactions.  Article 2A of the UCC – establishes warranties that apply to lease transactions.

22 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Warranties (continued)  Warranties are the buyer’s or lessee’s assurance that the goods meet certain standards.  Warranties, which are based on contract law, may be either expressly stated or implied by law.  If the seller or lessor fails to meet a warranty, the buyer or lessee can sue for breach of warranty.

22 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Warranties of Title and No Infringements Good Title No Security Interests No Infringements No Interference

22 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Warranty of Good Title: Sellers warrant that they have valid title to the goods they are selling and that transfer of title is rightful.

22 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Warranty of No Security Interests  Under the UCC, sellers of goods warrant that the goods they sell are delivered free from any third-party security interests, liens, or encumbrances that are unknown to the buyer.

22 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Warranty Against Infringements  A seller or lessor who is a merchant who regularly deals in goods of the kind sold or leased automatically warrants that the goods are delivered free of any: Third-party patent, Third-party patent, Trademark, or Trademark, or Copyright claim Copyright claim

22 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Warranty Against Interference  The lessor warrants that no person holds a claim or interest in the goods that arose from an act or omission of the lessor that will interfere with the lessee’s enjoyment of his or her leasehold interest.

22 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Warranties of Quality  Seller’s or lessor’s assurance to buyer or lessee that the goods meet certain standards of quality.  Warranties of quality include: 1. Express warranties 2. Warranties implied by law

Copyright © 2004 by Prentice-Hall. All rights reserved. Express Warranties  Are created when a seller or lessor makes an affirmation that the goods he or she is selling or leasing meet certain standards of: Quality, Quality, Description, Description, Performance, or Performance, or Condition Condition

Copyright © 2004 by Prentice-Hall. All rights reserved. Express Warranties (continued)  Express warranties can be either written, oral, or inferred from the seller’s conduct.  It is not necessary to use formal words such as warrant or guarantee to create an express warranty.  Sellers and lessors are not required to make such warranties.

Copyright © 2004 by Prentice-Hall. All rights reserved. Express Warranties (continued) Basis of the Bargain  Sellers and lessors of goods do not have to make express warranties concerning the quality of their goods.  They often make such warranties to convince people or businesses to purchase or lease goods from them. Basis of the Bargain  Sellers and lessors of goods do not have to make express warranties concerning the quality of their goods.  They often make such warranties to convince people or businesses to purchase or lease goods from them. Statements of Opinion  Sales “puffing” by sales- persons usually does not create a warranty.  It is merely a statement of opinion. Statements of Opinion  Sales “puffing” by sales- persons usually does not create a warranty.  It is merely a statement of opinion.

Copyright © 2004 by Prentice-Hall. All rights reserved. Warranties Implied By Law Implied Warranty of Merchantability Implied Warranty of Fitness for Human Consumption Implied Warranty of Fitness for a Particular Purpose

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Merchantability  Unless properly disclosed, a warranty that is implied that sold or leased goods are fit for the ordinary purpose for which they are sold or leased, and other assurances.  The implied warranty of merchantability does not apply to sales or leases by nonmerchants or casual sales.

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Merchantability (continued)  The implied warranty of merchantability requires the following standards to be met: The goods must be fit for the ordinary purposes for which they are used. The goods must be fit for the ordinary purposes for which they are used. The goods must be adequately contained, packaged, and labeled. The goods must be adequately contained, packaged, and labeled. The goods must be of an even kind, quality, and quantity within each unit. The goods must be of an even kind, quality, and quantity within each unit.

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Merchantability (continued)  Standards (continued) The goods must conform to any promise or affirmation of fact made on the container or label. The goods must conform to any promise or affirmation of fact made on the container or label. The quality of the goods must pass without objection in the trade. The quality of the goods must pass without objection in the trade. Fungible goods must meet a fair average or middle range of quality. Fungible goods must meet a fair average or middle range of quality.

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Fitness for Human Consumption  A warranty that applies to food or drink consumed on or off the premises of: Restaurants Restaurants Grocery stores Grocery stores Fast-food outlets Fast-food outlets Vending machines Vending machines

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Fitness for Human Consumption (continued) Foreign Substance Test  A test to determine merchantability based on foreign objects that are found in food. Foreign Substance Test  A test to determine merchantability based on foreign objects that are found in food. Consumer Expectation Test  A test to determine merchantability based on what the average consumer would expect to find in food products. Consumer Expectation Test  A test to determine merchantability based on what the average consumer would expect to find in food products.

Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Warranty of Fitness for a Particular Purpose  A warranty that arises where a seller or lessor warrants that the goods will meet the buyer’s or lessee’s expressed needs.  The warranty applies to both merchant and nonmerchant sellers and lessors.

Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Express and Implied Warranties of Quality (1 of 2) Type of Warranty How Created Description Express warranty Made by the seller or lessor Affirmation that the goods meet certain standards of quality, description, performance, or condition Implied warranty for fitness for a particular purpose Implied by law Implied that the goods are fit for the purpose for which the buyer or lessee acquires the goods.

Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Express and Implied Warranties of Quality (2 of 2) Type of Warranty How Created Description Implied warranty of merchantability Implied by law if the seller or lessor is a merchant Implied that the goods: 1. Are fit for the ordinary purposes for which they are used 2. Are adequately contained, packaged, and labeled 3. Are of an even kind, quality, and quantity within each unit 4. Conform to any promise or affirmation of fact made on the container or label 5. Pass without objection in the trade 6. Meet a fair average or middle range of quality for fungible goods

Copyright © 2004 by Prentice-Hall. All rights reserved. Other Warranty Issues  Overlapping and inconsistent warranties  Warranty disclaimers  Conspicuous display of disclaimer  Unconscionable disclaimers  Warranty disclaimers in software licenses  Third-party beneficiaries of warranties

Copyright © 2004 by Prentice-Hall. All rights reserved. Damages Recoverable for Breach of Warranty Compensatory Damages  Damages that are generally equal to the difference between the value of the goods as warranted and the actual value of the goods accepted at the time and place of acceptance. Compensatory Damages  Damages that are generally equal to the difference between the value of the goods as warranted and the actual value of the goods accepted at the time and place of acceptance. Consequential Damages  Foreseeable damages that arise from circumstances outside the contract.  To be liable for these damages, the breaching party must know or have reason to know that the breach will cause special damages to the other party. Consequential Damages  Foreseeable damages that arise from circumstances outside the contract.  To be liable for these damages, the breaching party must know or have reason to know that the breach will cause special damages to the other party.

Copyright © 2004 by Prentice-Hall. All rights reserved. Statute of Limitations  The UCC provides for a four-year statute of limitations for breach of warranty actions.  The parties may agree to reduce the period to not less than one year.  They may not extend it beyond four years.  The statute begins to run when the goods are tendered to the buyer or lessee.

Copyright © 2004 by Prentice-Hall. All rights reserved. Landmark Law: Magnuson-Moss Warranty Act (1975)  Covers written warranties relating to consumer products.  Commercial and industrial transactions are not governed by the Act.  The Act does not require a seller or lessor to make express written warranties.

Copyright © 2004 by Prentice-Hall. All rights reserved. Landmark Law: Magnuson-Moss Warranty Act (1975) (continued)  Persons who do make such warranties are subject to the provisions of the Act. Full Warranties Full Warranties Limited Warranties Limited Warranties  The Act does not create any implied warranties.