1. CHAPTER 19 WARRANTIES AND PRODUCT LIABILITY DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 INTRODUCTION A Warranty is “a promise that a proposition of fact is true.” A Warranty is a promise that becomes part of the contract. Warranty is often the best protection buyer has on a sale. A Warranty is “a promise that a proposition of fact is true.” A Warranty is a promise that becomes part of the contract. Warranty is often the best protection buyer has on a sale.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 INTRODUCTION Types of warranties: – Express warranty. – Implied warranty. – Statutory warranty. Types of warranties: – Express warranty. – Implied warranty. – Statutory warranty.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 EXPRESS WARRANTIES Actually stated or communicated from one party to another. Given only by the seller. By UCC is part of the “basis of the bargain.” Seller creates warranty in one of three ways: – 1) Seller affirms a material fact. – 2) Seller describes the goods. – 3) Seller provides a sample or model of goods. Actually stated or communicated from one party to another. Given only by the seller. By UCC is part of the “basis of the bargain.” Seller creates warranty in one of three ways: – 1) Seller affirms a material fact. – 2) Seller describes the goods. – 3) Seller provides a sample or model of goods.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 EXPRESS WARRANTIES No need to show intent or reliance. Reliance is presumed. Seller must disprove the existence of an express warranty. Focuses on facts. Statement quantifiable it is treated as a fact. Advertisements that claim certain characteristics for a product. No need to show intent or reliance. Reliance is presumed. Seller must disprove the existence of an express warranty. Focuses on facts. Statement quantifiable it is treated as a fact. Advertisements that claim certain characteristics for a product.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 EXPRESS WARRANTIES The Code considers timing of the statement or conduct from the buyer’s perspective. A modification of a sales contract is valid without consideration. Sellers should remember: – If they know a fact, state it honestly. – If they do not know a fact, do not speculate. The Code considers timing of the statement or conduct from the buyer’s perspective. A modification of a sales contract is valid without consideration. Sellers should remember: – If they know a fact, state it honestly. – If they do not know a fact, do not speculate.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 IMPLIED WARRANTIES Not created by seller, imposed by operation of law. Automatically present in contract unless they are voluntarily surrendered by buyer or properly excluded by seller. Not created by seller, imposed by operation of law. Automatically present in contract unless they are voluntarily surrendered by buyer or properly excluded by seller.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 IMPLIED WARRANTIES Four types of implied warranties: – Warranty of title. – Warranty against infringement. – Warranty of merchantability. – Warranty of fitness for a particular purpose. Four types of implied warranties: – Warranty of title. – Warranty against infringement. – Warranty of merchantability. – Warranty of fitness for a particular purpose.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 WARRANTY OF TITLE Warranty of Title. – Guarantees title. – Ensures the buyer of the following: 1) Transfer of the goods by the seller is proper. 2) Buyer is receiving good title. 3) Goods are free of hidden security interests, encumbrances, or liens. Warranty of Title. – Guarantees title. – Ensures the buyer of the following: 1) Transfer of the goods by the seller is proper. 2) Buyer is receiving good title. 3) Goods are free of hidden security interests, encumbrances, or liens.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 INFRINGEMENT Warranty Against Infringement. – Can be given by either the buyer or seller. – The infringement protected against is the rightful claim of any third person concerning the goods. – Seller must be a merchant who regularly deals in the type of goods involved. – Buyer does not need to be a merchant. Warranty Against Infringement. – Can be given by either the buyer or seller. – The infringement protected against is the rightful claim of any third person concerning the goods. – Seller must be a merchant who regularly deals in the type of goods involved. – Buyer does not need to be a merchant.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 MERCHANTABILITY Warranty of Merchantability. – Given whenever a merchant of goods makes a sale. – Designed to assure buyers that purchased goods are suitable for normal or intended use. Warranty of Merchantability. – Given whenever a merchant of goods makes a sale. – Designed to assure buyers that purchased goods are suitable for normal or intended use.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 MERCHANTABILITY Criteria: goods are merchantable and warranty has been breached: – Goods must be able to pass without objection in the trade. – If goods are fungible, must be of fair average quality within the description. – Goods must be suitable for their ordinary purpose and use. – Goods must be of even kind, quality, and quantity. – Goods must be adequately contained, packaged, and labeled as required under agreement. – Goods must conform to the promise and facts contained on the label. Criteria: goods are merchantable and warranty has been breached: – Goods must be able to pass without objection in the trade. – If goods are fungible, must be of fair average quality within the description. – Goods must be suitable for their ordinary purpose and use. – Goods must be of even kind, quality, and quantity. – Goods must be adequately contained, packaged, and labeled as required under agreement. – Goods must conform to the promise and facts contained on the label.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 FITNESS FOR A PARTICULAR PURPOSE Warranty of Fitness for a Particular Purpose – May be given by merchant or non-merchant. – To exist all conditions must be present: 1) Seller must know that the buyer is contemplating a particular use for the goods. 2) Seller must know that the buyer is relying on the seller’s skill, judgement or knowledge in selecting proper goods. 3) Buyer must not restrict the seller’s range of choices to a particular brand or price range or limit the scope of the seller’s judgement. Warranty of Fitness for a Particular Purpose – May be given by merchant or non-merchant. – To exist all conditions must be present: 1) Seller must know that the buyer is contemplating a particular use for the goods. 2) Seller must know that the buyer is relying on the seller’s skill, judgement or knowledge in selecting proper goods. 3) Buyer must not restrict the seller’s range of choices to a particular brand or price range or limit the scope of the seller’s judgement.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 WARRANTY EXCLUSIONS Seller can modify or exclude warranties. Simplest way to exclude an express warranty is not to give one. Seller can attempt to exclude an express warranty in writing. Not easy to exclude or modify implied warranties. Seller can modify or exclude warranties. Simplest way to exclude an express warranty is not to give one. Seller can attempt to exclude an express warranty in writing. Not easy to exclude or modify implied warranties.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 WARRANTY EXCLUSIONS Three sets of circumstances to exclude all implied warranties: – 1) Language must be used properly so buyer is duly informed no implied warranties are given. – 2) Buyer has examined goods or refused to examine them before sale, no implied warranty is given for defects that examination should have revealed. – 3) Under course of dealings, performance, or usage of trade, implied warranties not given. Three sets of circumstances to exclude all implied warranties: – 1) Language must be used properly so buyer is duly informed no implied warranties are given. – 2) Buyer has examined goods or refused to examine them before sale, no implied warranty is given for defects that examination should have revealed. – 3) Under course of dealings, performance, or usage of trade, implied warranties not given.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 SCOPE OF WARRANTY PROTECTION Warranties extend to any member of buyer’s family or household or any guest. Warranties extend to any natural person who could reasonably be expected to use/consume the goods. Warranties extend to any person (corporation) who could reasonably be expected to use/consume the goods. Warranties extend to any member of buyer’s family or household or any guest. Warranties extend to any natural person who could reasonably be expected to use/consume the goods. Warranties extend to any person (corporation) who could reasonably be expected to use/consume the goods.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 STATUTORY WARRANTY PROVISIONS Consumer Product Warranty Act of 1975: – Manufacturer must provide presale warranty information. – Created informal settlement procedures to benefit consumer. – Manufacturer not required to give any express warranties. – But if manufacturer does give an express warranty, must designate it as full or limited. Consumer Product Warranty Act of 1975: – Manufacturer must provide presale warranty information. – Created informal settlement procedures to benefit consumer. – Manufacturer not required to give any express warranties. – But if manufacturer does give an express warranty, must designate it as full or limited.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 STATUTORY WARRANTY PROVISIONS Full Warranty must meet four requirements: – Defects of goods will be remedied within a reasonable time. – Exclusions/limitations must be conspicuously displayed of consequential damages. – Implied warranty must not be limited in time. – If seller attempts to remedy defect fails, consumer allowed to select either a refund or replacement. Full Warranty must meet four requirements: – Defects of goods will be remedied within a reasonable time. – Exclusions/limitations must be conspicuously displayed of consequential damages. – Implied warranty must not be limited in time. – If seller attempts to remedy defect fails, consumer allowed to select either a refund or replacement.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 PRODUCT LIABILITY Breach of warranty claims do not extent to injury suffered from use of product. Injured party may be able to assert negligence against the manufacturer. May be able to establish strict tort liability against the manufacturer or seller of the goods. Breach of warranty claims do not extent to injury suffered from use of product. Injured party may be able to assert negligence against the manufacturer. May be able to establish strict tort liability against the manufacturer or seller of the goods.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 PRODUCT LIABILITY: NEGLIGENCE Under common law negligence can be used in only two circumstances: – Buyer can argue breach of duties by privity of the contract. – Goods are innately dangerous, so that privity of contract is not necessary to establish the liability of the seller or manufacturer. To establish tort negligence injured party must prove duty, breach of duty, harm, and proximate cause. Under common law negligence can be used in only two circumstances: – Buyer can argue breach of duties by privity of the contract. – Goods are innately dangerous, so that privity of contract is not necessary to establish the liability of the seller or manufacturer. To establish tort negligence injured party must prove duty, breach of duty, harm, and proximate cause.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 STRICT PRODUCT LIABILITY Applies only to a merchant. Merchant must sell a “defective” product that is “unreasonably” dangerous to the consumer. Product must reach the consumer without any substantial change in its condition. Applies only to a merchant. Merchant must sell a “defective” product that is “unreasonably” dangerous to the consumer. Product must reach the consumer without any substantial change in its condition.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 LEASESLEASES When goods are leased, the lessee receives certain warranties. Lessee receives express warranties on the same basis as a buyer of goods does. Lessee receives four implied warranties: – Warranty against interference. – Warranty against infringement. – Warranty of merchantability. – Warranty of fitness for a particular purpose. When goods are leased, the lessee receives certain warranties. Lessee receives express warranties on the same basis as a buyer of goods does. Lessee receives four implied warranties: – Warranty against interference. – Warranty against infringement. – Warranty of merchantability. – Warranty of fitness for a particular purpose.