Bus 311 Business Law

Chapter Overview

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9.1 Warranties • Warranty of Title and Against Infringements (§ 2-312) • Implied Warranty of Merchantability (§ 2-314) • Implied Warranty of Fitness for a Particular Purpose

(§ 2-315) • Express Warranties (§ 2-313) • Disclaimer of Warranties (§ 2-316)

9.2 Remedies • Buyer’s Remedies for Breach • Seller’s Remedies for Breach

9.3 Chapter Summary • Focus on Ethics • Case Study: Bigelow v. Agway Inc. • Case Study: Midwest Hatchery & Poultry Farms, Inc. v.

Doorenbos Poultry, Inc. • Critical Thinking Questions • Hypothetical Case Problems • Key Terms

9 Learning Objectives

After studying this chapter, you will be able to:

1. Explain the concept of implied warran- ties and distinguish implied from express warranties.

2. Discuss the requirements for disclaiming warranties under the UCC.

3. List three examples of buyer’s remedies for breach of the sales contract.

4. List three examples of seller’s remedies for breach of the sales contract.

Warranties and Remedies for Breach

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CHAPTER 9Section 9.1 Warranties

In a sales of goods contract, both buyer and seller have certain responsibilities. Many of these are established by the parties themselves, but some are provided by statute. For example, a warranty is an assurance that the goods will meet certain requirements. The UCC provides four specific types of warranties covering goods under sales contracts:

1. warranty of title; 2. implied warranty of merchantability; 3. warranty of fitness for a particular purpose; and 4. express warranties.

These warranties offer buyers important protection covering purchases of goods and are important to both merchant and consumer buyers.

Sales contracts are as susceptible to breach as any other contract. The com- mon law of contracts provides a vari- ety of remedies to parties who suffer a breach of contract, as we’ve previously seen in Chapter 6. The UCC also pro- vides remedies to buyers and sellers who suffer a breach of contract. As usual, the UCC makes some modifications to the common law of contracts in order that the remedies allowed to buyers and sell- ers reflect the economic realities of doing business and fostering commerce.

9.1 Warranties

As mentioned in the introduction, there are four types of warranties made by sellers to buyers under the UCC: warranty of title and against infringements, the war-ranty of merchantability, the implied warranty of fitness, and express warranties. Warranty of Title and Against Infringements (§ 2-312) In every sales contract, there are a number of implied and express warranties that can be made by a seller to a buyer. Every seller warrants to every buyer that the seller’s title to the goods being sold is good, that the transfer is rightful, and that there are no liens or encumbrances against the title to the goods being sold that the buyer is unaware of as of the time of entering into the sales contract.

When a store sells CDs, it warrants them to be noninfringing copies.

Jose Luis Magana/Associated Press

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CHAPTER 9Section 9.1 Warranties

Example 9.1. Antonio steals Kendra’s car and sells it to Ben. As noted in the last chapter, because Antonio stole the good he has only a void title to the car and cannot transfer good title to Ben. Although Kendra will get her car back, Ben can sue Antonio for breach of warranty and recover damages. (Of course, a car thief may not be that easy to track down or recover money from, but at least Ben has a legal right against Antonio!)

The warranty of title is an implied warranty that automatically attaches to every sale made. It can, however, be disclaimed through specific language giving the buyer notice that the seller does not claim title to the goods sold, or that she is only transferring what- ever ownership right she has in the property.

Example 9.2. Susan, after breaking up with her boyfriend, wants to sell a ring he gave her as a gift. Margaret agrees to buy the ring for $100. Susan believes that her ex-boyfriend purchased the ring from a jeweler, but she also knows that he’d purchased items from street peddlers of questionable repute in the past. In order to cover herself against a possible future suit for breach of warrantee of title from Margaret, she draws up a sales contract that reads as follows:

In consideration of $100, I hereby sell all of my interest, if any, in a gold ring with a small opal to Margaret Smith. I sell the ring AS IS, and make no express or implied warranties of any kind to the buyer. In particular, I make no warranty of title to the buyer.

As long as Susan sells the ring to Margaret in good faith, Margaret will not be able to sue her in the future for breach of warranty if the ring turns out to be worthless or stolen. In order for a warranty to be waived, the language waiving it must be conspicuous—it must stand out from the written contract by being larger, darker, or of different color. A waiver of warranty that does not stand out from the text of a contract will not be enforced.

If the seller is a merchant who regularly deals in goods of the kind being sold, the seller also makes a warranty against infringement to the buyer, through which the seller war- rants that the goods are delivered free of any copyright, patent, or trademark infringement.

Example 9.3. Big Box Store buys 100 copies of Lady Gaga’s latest CD from Music Wholesale Inc. Music Wholesale automatically guarantees that the CDs were manufactured under a proper license. If they turn out to be coun- terfeits that infringe copyright, Music Wholesale will be liable for breach of warranty.

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CHAPTER 9Section 9.1 Warranties

Implied Warranty of Merchantability (§ 2-314) Every sale made by a merchant who deals in goods of the type sold carries with it an implied warranty that the goods are merchantable—in other words, the goods must be fit for their normal purpose.

Example 9.4. Acme Hardware Store sells a hammer to Stephanie. Acme is guaranteeing that the hammer is fit for pounding in nails and other normal things people use ham- mers for. Acme is not guaranteeing that the hammer will serve as an impromptu car jack.

No statement needs to be made by the mer- chant; it is implied and automatic (although it can be excluded or modified by express language).

It is not necessary for the buyer to show that the seller knowingly or negligently sold faulty, mislabeled, or otherwise non- conforming goods in order to sue for breach of the warranty of merchantability. Merchants are strictly liable for breach of the warranty whether or not they were aware that the goods were not merchant- able at the time that they sold them.

Implied Warranty of Fitness for a Particular Purpose (§ 2-315) The warranty of fitness for a particular purpose arises when a seller (merchant as well as non-merchant) sells goods to a buyer guaranteeing that the goods are suitable for the specific purpose for which buyer intends to use them. In order for the warranty to arise, two tests must be met:

1. The seller must be aware that the buyer is purchasing the goods with a particular use in mind; and

2. the buyer must rely on the seller’s superior skill and judgment in selecting goods appropriate to his specific intended use.

Consider the following:

Example 9.5. Buyer, a novice fisherman, tells Seller, the owner of a sporting goods store, that he needs a rod and reel for fly fishing, and asks her to rec- ommend a good model. Seller, who is new to the trade and unfamiliar with fly fishing, recommends an excellent deep-sea fishing rod and reel set that is inappropriate for fly fishing. Seller is liable for breach of warranty, since

A drawer is not designed to be used as a stepladder! If it breaks and the child falls and is injured, it is unlikely that the manufacturer would be liable.

Design Pics/Thinkstock

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CHAPTER 9Section 9.1 Warranties

Seller knew Buyer’s purpose and Buyer was entitled to rely on Seller’s presumed expertise.

Example 9.6. Buyer, a first-year college student, offers to buy from Seller, a second-year law student, the seller’s used contracts, torts, and civil pro- cedure casebooks in the hope that they will assist him in his Business Law I course at State U. The business law student does not ask the law student whether the books would be useful as study guides for a business law class, and Seller, not knowing the reason for the purchase, offers no opinion on the subject. In fact, the Buyer soon discovers (as many law stu- dents have before him) that case books are not textbooks and are worse than useless to the undergraduate student who spends the rest of the semester trying to make sense of the seemingly incongruous collection of cases in the law books and ultimately fails the business law course. Seller is not liable for breach of warranty, because Seller did not know Buyer’s intended use.

Example 9.7. When Tiffany was a preteen, she was crazy about horses and her parents bought Ruby, a quarter horse mare, for her. Now 16, Tiffany has discovered boys and no longer rides Ruby. Buyer, a rancher, purchases the horse from Tiffany’s parents, telling them that he plans to use Ruby

as a stock horse. The parents, who don’t really know anything much about horses except that they are expensive to maintain, are happy to think Ruby will be useful to someone. Ruby turns out to have no intention of working for a living. Plus, she’s scared of cows. Are Tiffany’s parents in breach of warranty?

Although the sellers in this last example knew of the buyer’s intended purpose for Ruby the horse, they are not breach- ing the warranty of fitness for a particu- lar purpose. The buyer was the expert, and he was not relying on Tiffany’s par- ents’ judgment or superior knowledge in buying Ruby.

A salesperson makes a warranty of fitness for a particular purpose if he recommends a specific product for a specific use.

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CHAPTER 9Section 9.1 Warranties

In the Media: Woman Injured by Victoria’s Secret Thong That Was Also a Boomerang (Allegedly)

Products sometimes don’t do what they’re supposed to, or they break much earlier than is reasonably expected, which is why Macrida Patter- son filed a breach of implied warranty lawsuit in Los Angeles Superior Court in 2008. Ms. Patterson’s lawsuit was against lingerie seller Victo- ria’s Secret and it also included a personal injury claim. According to the 52-year-old Los Angeles traffic officer, in 2007 she was changing in the locker room at the end of her work shift when she attempted to put on a Victoria’s Secret thong, with a heart-shaped rhinestone on the waist- band, connected by metal links. While slipping into the undergarment, Ms. Patterson claims she was hit in the eye by a rhinestone that flew off the garment. In terrible pain, she went to the doctor the next day, where, according to her lawyer, she was prescribed a topical steroid for severe damage to her cornea.

Not much is known about what happened after the lawsuit was filed. (The complaint can be accessed through the “Smoking Gun” website link below.) Within a month of filing the personal injury/product liability/breach of warranty suit, Ms. Patterson and her lawyer gave quite an interesting interview on NBC’s Today Show, where Meredith Viera asked more and more pointed questions about the incident and how much money she wanted from Victoria’s Secret. (That interview can be viewed through the MSNBC website link below.) If there was a settlement, it was as “Secret” as . . . .

According to the UCC, merchant sellers make the implied warranty of merchantability, which means fitness for normal use. Whether a product is not fit for normal use, or whether it has been negligently designed or made, is a question that juries often get to resolve, but only if the plaintiff’s lawyer can establish first that there is evidence that will support the theory of liability.

Sources: http://www.thesmokinggun.com/documents/crime/dinged-g-string http://today.msnbc.msn.com/id/25258522/ns/today-style/t/eye-catching-thong-gives-rise-lawsuit/

Merchant sellers, like Victoria’s Secret, are required to sell products that are fit for normal use.

Jennifer Graylock/Associated Press

Express Warranties (§ 2-313) An express warranty arises when the seller has with words or actions clearly indicated that the goods will meet certain standards. Express warranties can arise through affirma- tion of a fact, from description of the goods, or through use of a sample or model.

For the warranty to arise, the statements, descriptions, samples, or models must have been made available to the buyer at a time when he might have relied on such informa- tion in agreeing to enter into the contract. Representations about the goods are binding whether they are made orally, in writing, or by showing a sample or model before the buyer agrees to purchase the goods.

An affirmation of fact must be specific and cannot be a mere opinion.

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CHAPTER 9Section 9.1 Warranties

Example 9.8. “This car gets an average of 35 miles per gallon” is an affir- mation that gives rise to an express warranty. “This car gets great mileage” is too vague and general a statement and thus does not create a warranty.

Example 9.9. “This elliptical exercise machine is guaranteed for three years” creates a warranty. “This thing will last forever” is puffery and not an affirmation, thus there is no warranty created.

The display of a model or sample to a buyer can also constitute an express warranty in some situations.

Example 9.10. Brianna, a bud- ding rock star, goes to Wally’s Guitar Shop. The salesperson encourages her to try out a Jap- anese-made copy of a Fender Stratocaster electric guitar. It absolutely rocks! Brianna plays the guitar for ten minutes, doing her Chuck Berry–style splits and a slide across the floor she copied from Elvis. She buys the same model (but in a jazzier color than the floor sample) and then discovers that it tends to make buzzing noises when the power cord is jogged. This will clearly not do for Brianna, who has lots of great moves. Is Wally’s Guitar Shop in breach of warranty?

The answer is yes, because by using the model the store was basically guaranteeing that the guitar Brianna bought would perform in the same manner. The model didn’t buzz when Brianna busted a move, but the one she bought does, which is not the same level of performance.

Disclaimer of Warranties (§ 2-316) Generally speaking, warranties can be waived by the agreement of the parties. The war- ranty of merchantability, however, can only be excluded by language that specifically men- tions the word “merchantability,” and the disclaimer must be conspicuous. In addition, an exclusion of the warranty of fitness for a particular purpose must be in writing and con- spicuous. Implied warranties can be disclaimed by a clear statement that the warranties are excluded. Selling goods “as is” or “with all faults” generally disclaims all implied war- ranties. But note that the specific requirements for waiving implied warranties can vary among the states, and many states prohibit a disclaimer in the sale of consumer goods.

When a customer tries out a display model in a store, a warranty is being made.

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CHAPTER 9Section 9.2 Remedies

Example 9.11. Big Box Store sells an exercise bike with a written contract that disclaims all warranties. Buyer (who is out of shape but only weighs 140 pounds) is injured when he sits on the bike and it collapses. In many states, Big Box can still be held liable for breach of warranty.

Most states also allow clauses that limit remedies for breach of warranty. Remedies are the compensation a buyer or seller can collect from the liable party for breaches of warranty. Suppose Seller contracts to supply Buyer with a cement mixer and the contract states that Buyer’s remedies in the case of malfunction or defect are limited to repair of the mixer by Seller. The cement mixer breaks down almost immediately, and discharges a load of wet cement in the parking lot, damaging five of Buyer’s fleet vehicles. Buyer has over $50,000 in damage to his property, but he will not be able to collect it from Seller because of the limitations of remedies clause in the contract.

9.2 Remedies

Buyer’s Remedies for Breach

When a seller breaches the sales contract, the buyer can pursue a number of rem-edies to compensate for the breach. These include the right to reject noncon-forming goods, the right to sue for damages, and, under certain circumstances, the right to sue for specific performance.

Right to Reject Nonconforming Goods (§ 2-601) When a seller tenders delivery to a buyer of nonconforming goods, the buyer may keep them and sue for damages under the contract or, in certain cases, reject the goods and either sue for damages or cancel the contract at his option. The options available to the buyer depend in part on whether the contract is for a single delivery or a contract requir- ing the seller to ship the goods in separate installments. When the contract requires only a single delivery by seller and the seller tenders nonconforming goods, the buyer may reject the whole shipment, accept the whole shipment, or accept any separate part of the shipment and reject the rest.

Example 9.12. Buyer orders an entertainment system from ACME Elec- tronics that consists of a 40-inch high-definition LCD television, a multi- disk DVD player/recorder, a surround-sound system with seven speak- ers, and a wood-grained cabinet. The entire system is sold as a unit for a price of $3,000. When the entertainment system arrives, all parts function properly except for one of the speakers. The buyer may, at her option, accept the system and sue for damages (e.g., the price of fixing or replac- ing the defective speaker) or reject the system, since it is clearly non- conforming goods because of the defect. The buyer may not, however, accept the television, DVD player/recorder, and cabinet and return the surround sound system with the defective speaker for partial refund, since the item was sold as a unit and is not divisible into its several parts.

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CHAPTER 9Section 9.2 Remedies

When the nonconforming goods are shipped as part of an installment contract that requires or allows goods to be tendered in a series of separate shipments, the buyer’s right to reject the contract is more limited. A buyer can reject a nonconforming delivery if the nonconformity materially impairs the value of that installment and cannot be cured. In other words, a buyer who allows a seller to ship goods in installments will not be able to refuse the shipment unless he first informs the buyer that the goods are nonconform- ing, gives him the opportunity to cure the defect within a reasonable time, and can show that the nonconformity lessens the value of the goods. This may seem to give an unfair advantage to the seller, but it is yet another example of the UCC’s pragmatism in recog- nizing the practical realities of doing business. Minor nonconformities in sales contracts, particularly between merchants dealing in high volumes and repeat sales, are inevitable. The code seeks to encourage commerce and prevent waste by ensuring that parties that work with one another on an ongoing basis can’t reject shipments for inconsequential nonconformities without first giving the breaching party the opportunity to cure the breach.

Example 9.13. Buyer orders 1,000 one-pound cans of coffee from seller to be delivered in installments of 100 cans per month for ten months. During the third month of the contract, seller ships 90 cans of coffee. Buyer cannot reject the shipment, since this is an installment sale, without first giving the seller the opportunity to cure the defect within a commercially reasonable time (e.g., by sending the missing 10 cans of coffee within a few days of being notified that the shipment was nonconforming.)

Right to Sue for Damages (§ 2-713) As with the common law of contracts, buyers who suffer a breach of contract may sue for compensatory damages that will place them in the same position they would have been in had the breach not occurred.

Example 9.14. Buyer orders 1,000 Ugly Dudes from the Galactic Core Dolls in August for ship- ment by October 1, in time for the Christmas rush. Due to the popularity of these hideously ugly new toys, the seller fails to ship until December 26.

When the toys finally arrive, buyer can reject the shipment due to seller’s failure to ship them on time and can sue the seller for his incidental and consequential dam- ages, including lost profits that would have been made on the sale of the dolls.

Even if the bike was sold with a disclaimer of warranties, if it collapses under the consumer, he may still be able to sue.

© Getty Images/Jupiterimages/Thinkstock

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CHAPTER 9Section 9.2 Remedies

Right to Cover (Obtain Substitute Goods) (§ 2-712) The right to cover is the right to make a good faith purchase of goods similar to those in the contract. After a breach by the seller, the buyer can choose to obtain substituted goods from a different seller. If buyer chooses to do so, buyer may then sue the seller for the dif- ference between what buyer would have paid seller for the goods under the contract and what buyer now needs to pay a substitute supplier for the goods. In the last example, the buyer could have obtained the Ugly Dudes dolls from another supplier when the seller failed to ship the dolls on a timely basis. Buyer could then sue the seller for the difference between the contract price and the higher price paid to the substitute supplier.

Right to Specific Performance (§ 2-716) A court has the power to grant specific performance to the buyer under the UCC where the goods in question are unique or “in other proper circumstances” where mere money damages would not properly compensate the buyer for his loss.

Example 9.15. Buyer agrees to buy a painting, Aardvark Playing Violin, by an up-and-coming artist from Seller for $2,500. After paying for the painting but before it is shipped by Seller, the artist dies. If Seller refuses to deliver the painting because its value has increased to $5,000, Buyer may sue for specific performance of the sales contract. In the alternative, Buyer may choose to allow Seller to keep the painting and sue for compensatory dam- ages of $2,500—the difference between the contract price and the market value of the painting at the time of Seller’s breach.

Seller’s Remedies for Breach When a buyer breaches the sales contract, the seller has a number of remedies available to her in seeking compensation for her loss. These include the right to withhold goods, the right to recover shipped goods, and the right to force buyer to accept shipped goods under certain circumstances.

Right to Withhold Goods (§ 2-705) When payment for the sale of goods is due under the terms of the contract when or before delivery is made, the seller can withhold delivery until payment is made.

Example 9.16. Buyer orders 100 widgets and agrees to wire payment to Seller immediately. If Seller has not received payment when the goods arrive at their destination, Seller can order the carrier not to deliver the goods to Buyer until payment has been made.

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CHAPTER 9Section 9.2 Remedies

Right to Recover Goods (§ 2-702) Under Section 2-702 of the UCC, a seller who delivers goods under a credit arrangement to a buyer can reclaim the goods within 10 days of the buyer’s receipt of the goods if she learns that the buyer is insolvent. If delivery was made on credit after the buyer misrep- resented in writing that he was solvent within three months of the delivery, the seller may reclaim the goods at any time after she learns of the buyer’s insolvency. In order for the seller to reclaim the goods, however, the buyer must not yet have resold them in the normal course of business. If an insolvent buyer transfers goods in the normal course of business to a bona fide good faith purchaser (BFP) before the seller reclaims the goods, the seller cannot reclaim the goods from the innocent purchaser.

If the goods are in the hands of a third party, such as a storage facility, on their way to the buyer when the seller learns of the buyer’s insolvency or breach of contract, Section 2-705 of the UCC gives the seller the right to recover the goods from the third party prior to their delivery (e.g., from a carrier or warehouse entrusted with turning over the goods to the buyer).

Example 9.17. Buyer in Ohio buys goods from Seller in Indiana and agrees to have them delivered to a warehouse in Pennsylvania, where he will have them picked up. If after the goods arrive in Pennsylvania but before Buyer has picked them up Seller learns that Buyer is insolvent, Seller can recover the goods from the warehouse and not be in breach of contract.

Right to Force Buyer to Accept Goods (§ 2-709) In general, a buyer who wrongfully refuses to accept goods purchased under a valid sales contract is liable to the seller for the seller’s lost profits and incidental damages or conse- quential damages that flow from the buyer’s breach. However, if the seller is not able to sell the goods to another buyer in the regular course of business, or if the goods have been lost or damaged in transit after the risk of loss has passed to the buyer, Section 2-709 gives the seller the right to force buyer to accept the goods. This is, in essence, specific perfor- mance (mentioned earlier for the buyer) allowed to the seller when another remedy would not put him in the position he would have been in had the buyer not breached the contract.

Seller’s Damages for Breach (§§ 2-708–2-711) When buyer breaches the sales contract, seller can recover his lost profits from buyer or, alternatively, the difference between the contract price and the market price, or the con- tract price and the resale price (the latter is the price at which the seller is able to resell the goods to another buyer after a good faith effort). The seller is also entitled to recover incidental and consequential damages from the buyer, such as the cost of shipment, stor- age and restocking charges.

Example 9.18. Seller ships to Buyer 100 widgets pursuant to a valid sales contract. When the goods arrive, Buyer wrongfully refuses to accept them. Seller can sue Buyer for his lost profits under the contract and for the costs of storing the goods, shipping them back, and restocking them once they arrive at Seller’s plant.

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Section 9.3 Chapter Summary CHAPTER 9

9.3 Chapter Summary

The UCC provides for a number of warranties, both express and implied, that may accompany a sale of goods transaction. The seller’s guarantee that there is valid title to the goods and that the goods are merchantable are implied warranties that do not need to be specifically stated by the seller. The guarantee of fitness of the goods for a par- ticular purpose is also implied, but this warranty requires that the seller know what use the buyer intends, and that the buyer rely on the seller’s superior knowledge of the goods. It is obviously important for both parties to be aware of the legal ramifications of any representa- tions regarding the title or function of the goods, but equally they must pay careful attention to the language of the contract so as to be aware of possible disclaimers and limitations.

As with any contract, sales of goods contracts can be breached on either side, and the UCC has a number of provisions dealing with remedies for breach. Buyers can reject noncon- forming goods, sue for damages, and, in cases of unique subject matter, alternatively sue for specific performance of the contract. If the buyer breaches, the possible remedies for a seller include the right to withhold goods or to recover goods that were already shipped, the right to force the buyer to accept goods under some circumstances, or monetary dam- ages. An astute seller or buyer should know when she makes the contract what remedies are available to her, should things go wrong.

Focus on Ethics

On one hand, the UCC code provides for the implied warranty of merchantability. On the other, it allows sellers to easily disclaim the warranty, or limit the damages the seller owes if the product is defective. Let’s look at two examples of how this may play out in the real world:

• Suppose you are buying a used car from Big Al’s Auto Dealership. The car, a 2009 Toyota Corolla, is sold with either a one-year warranty for an extra $1,000 or “as is” for the list price. You buy the car “as is,” since you are a cash-strapped college student and every dollar counts. As you are driving away from the dealership, the accelerator pedal sticks and you crash into a highway barrier, wrecking the car.

• What if Net One, a cable television and Internet service provider, is buying cable from Cable Co. to install for an upgrade to their system. The contract provides that remedies are limited to replacement and repair. Net One spends over $1 million dollars installing the cable, which turns out to be defective. Net One loses an estimated $7.5 million in business during the period that the cable is being replaced.

Questions for Discussion

1. How would Big Al’s Autos and Cable Co. argue that their lack of liability is not only legal, but ethical?

2. Does it make a difference with regard to the fairness of the transaction that you as the cash- strapped college student had a choice to pay more for a warranty on the used car?

3. What if Net One shows that all the cable manufacturers use remedy limitations, and thus they had no choice in the matter, that they could not bargain for a better deal because there was no other supplier to bargain with? Note that Net One is a big company, complete with attorneys, which puts them at a distinct disadvantage in attempting to argue any kind of unconscionability claim. Does that mean that the law is giving the sellers an unfair advantage?

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Section 9.3 Chapter Summary CHAPTER 9

Case Study: Bigelow v. Agway Inc.

506 F.2d 551 (2d Cir. 1974)

Facts: Bigelow was a dairy farmer who grew and baled his own hay. Kemin, a chemical manufacturer, made a chemical preparation called Hay Savor, which was sold by Agway, Inc. Hay Savor’s purpose is to retard mold in baled hay, enabling it to be baled earlier when it has a higher moisture content, which is more nutritious. Advertising literature for Hay Savor stated that moisture levels should be 25 percent or below. Bigelow bought Hay Savor and spraying equipment from Agway.

Representatives from Kemin (Mr. Nelson) and Agway (Mr. Newton) visited the Bigelow farm when the hay lay drying in the fields. Nelson stated that even though the hay had over 30 percent moisture, and normal safe level for baling would be 25 percent or below, it would be safe for baling if Hay Savor was used. Bigelow thought the hay was too green, but relying on Nelson’s statement, he went ahead and baled the hay and stored it in his barn. Unfortunately, it turned out the hay was indeed too wet and as a result of the heat generated by mold, spontaneous combustion occurred. The hay and barn were destroyed in the ensuing fire.

Bigelow sued the sellers of Hay Savor, alleging among other things breach of warranty of merchant- ability and warranty of fitness for a particular purpose. The trial court found there was no competent evidence to support the plaintiff’s case and directed a verdict for the defendant.

Issue: Could a jury find that the warranty was made and breached?

Discussion: The court first waxed rhapsodic over the business of farming, quoting poets such as Byron (“the first and most respectable of all the arts”) and Shakespeare (“A better farmer ne’er brushed dew from grass”—apparently the court’s acknowledgement that the plaintiff had been a Vermont Farmer of the Year). Getting down to business on the warranty claims, the court noted that there was no evidence that Hay Savor would not have performed properly and safely had the hay been below the advertised 25 percent moisture level. Thus the warranty of merchantability could not have been breached.

With regard to the warranty of fitness for a particular purpose, the court acknowledged that with regard to the element of the buyer’s relying on expertise, the defendant might claim that since the representation of Nelson had been made after the sale of the Hay Savor, Bigelow could not have been relying on it when he made the purchase. However, it was clear that the visit of Nelson and Newton to the farm was to promote the use of Hay Savor, and under the UCC the exact timing of the representa- tion is less important than whether the language or samples or models are fairly to be regarded as part of the contract. If language is used after the closing of the deal (as when the buyer when taking delivery asks and receives an additional assurance), the warranty becomes a modification under UCC Section 2-209 (as discussed in Chapter 7), and need not be supported by consideration if it is otherwise reasonable and in order.

Mr. Bigelow had testified that he treated and baled the hay in its condition at that time because of what Nelson told him. Nelson first employed a testing device to determine the moisture content of the hay in the field, and that the moisture level was about 32 to 34 percent. Mr. Bigelow said that he

In Bigelow v. Agway, the legal issue related to the moisture content in hay.

iStockphoto/Thinkstock

(continued)

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Section 9.3 Chapter Summary CHAPTER 9

Case Study: Bigelow v. Agway Inc. (continued)

thought the hay was too green, but the court decided that a jury could infer he had reasonably relied on Nelson’s statements, and thus possibly find that a warranty of fitness for a particular purpose had been violated. Because a reasonable person could find that Mr. Bigelow was justified in relying on Nelson’s particular expertise (rather than the farmer’s general experience with crops), and because this issue had not been given to the jury to decide but rather preempted by the judge, Farmer Bigelow was entitled to a new trial.

Holding: The trial court erred in issuing a directed verdict for the defense. The plaintiff, Mr. Bigelow, is entitled to a new trial.

Questions for Discussion

1. Why did the court find there was no breach of the warranty of merchantability? 2. The farmer was very experienced when it came to baling hay. Why would he have been enti-

tled to rely on Nelson’s opinion that it was safe to bale the hay? 3. How was a warranty for fitness of a particular purpose created here? 4. Why is UCC Section 2-209 relevant in this case?

Case Study: Midwest Hatchery & Poultry Farms, Inc. v. Doorenbos Poultry, Inc.

783 N.W.2d 56 (Iowa Ct. App. 2010)

Facts: Midwest Hatchery (Midwest) raises and sells chickens. It had a written contract with Doorenbos Poultry (Doorenbos) for delivery of 112,000 pullets (young hens who are able to lay eggs) at 18 weeks of age, because Doorenbos was seeking to replace its older hens who would soon not be laying eggs. Midwest’s contract included the following limitation of remedies provision: “If Seller breaches this Contract, at Seller’s option, customer is entitled to either replacement or refund of the price paid by Customer.” When Midwest delivered the pullets in January, Doorenbos discovered that the hens were still too young to lay eggs and informed Midwest about the nonconforming goods. However, Dooren- bos neither returned the pullets nor asked for a refund. According to Doorenbos’s president, the pul- lets were not returned because the older flock had been removed in anticipation of the new one arriv- ing, and because Doorenbos believed that the water lines in its barns (which didn’t have heat) would freeze if there weren’t birds (and their accompanying body heat) living in the barns. Midwest did not offer to replace the pullets but billed Doorenbos the original contract amount. When Doorenbos sent Midwest a check that was $83,000 less than the contract price, Midwest sued for breach of contract. Doorenbos then filed a counterclaim for breach of contract. The trial court ruled that Doorenbos had accepted the pullets and, therefore, had to pay full price for them. But it also concluded that Midwest still breached the contract and awarded lost profits of about $31,000 to Doorenbos because the birds were for some time too young to lay eggs. That left Doorenbos with a $52,000 bill to pay, and so it appealed. On appeal, Doorenbos argued that Midwest was barred from any recovery under the con- tract because it did not perform a material condition of the contract—the delivery of 18-week-old birds; second, it contended that the limitation of remedies provision should have applied here, (continued)

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Section 9.3 Chapter Summary CHAPTER 9

Case Study: Midwest Hatchery & Poultry Farms, Inc. v. Doorenbos Poultry, Inc. (continued)

so that Midwest should have replaced the birds when it was informed about their nonconformity (Mid- west couldn’t have refunded the money because it hadn’t been paid before or at delivery). The District Court agreed with Midwest, however, that the limitation of remedies provision failed its essential pur- pose (a doctrine from another part of the UCC) and, therefore, couldn’t apply.

Issues: (1) Does a buyer who accepts nonconforming goods have to pay the contract price for the goods? (2) Did the limitation of remedies provision in the contract fail its essential purpose?

Discussion: Under the UCC, “if a buyer accepts goods, despite their nonconformity to the specifications of the contract, the buyer must pay the contract rate for the goods accepted.” Because Doorenbos accepted the pullets, it has to pay the contract price. However, acceptance of nonconforming pullets does not preclude Doorenbos from its counterclaim against Midwest for the breach of contract, and there is no dispute that Midwest breached the contract by providing nonconforming birds. The appel- late court also analyzed the limitation of remedies provision and concluded that it would have been impractical for Midwest to replace the entire flock of 112,000 young hens. Since the limitation of rem- edies provision “failed its essential purpose,” the court ruled that Midwest was liable to Doorenbos for damages related to the hens being too young to lay eggs. Under the applicable section of the UCC, the damages are “measured by the difference between the value of the goods at the time of acceptance, and their value if they had been as specified in contract.” The court concluded that Midwest had to compensate Doorenbos in its counterclaim for the feed cost and lost revenue because the pullets were too young to lay eggs. That amount of damages the District Court awarded at trial was correct (but still less than what Doorenbos owed Midwest because it accepted the pullets).

Holdings: The decision of the trial court is affirmed with respect to Midwest’s complaint and with respect to Doorenbos’s counterclaim.

Questions for Discussion

1. Why do you think Midwest included the limitation of remedies provision in the contract? 2. Why did Midwest argue that its own limitation of remedies provision didn’t apply because it

failed its essential purpose, and why did Doorenbos argue that it did apply? 3. What was the rationale of the appellate court in fashioning the remedy it did for Midwest? 4. If the court ruled in favor of Midwest, then why did the court rule that Midwest is liable to

Doorenbos for damages? 5. Do you think it was ethical for Doorenbos to accept nonconforming pullets, use them until the

end of their productive life, and still claim that Midwest should not be paid? Do you think it was ethical for Midwest to insist that it be paid in full for pullets that weren’t old enough to lay eggs?

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Section 9.3 Chapter Summary CHAPTER 9

Critical Thinking Questions

1. How do express and implied warranties differ? 2. Try reading the packaging of various products. Does it contain warranties? Does

it disclaim or limit warranties? 3. How much attention do you pay to warranties when you purchase a product?

Does it matter what the product is, or how much it cost? If you don’t particularly notice warranties, why not?

Hypothetical Case Problems

Case 1. Buyer orders an AM/FM stereo receiver, an amplifier, a record player, a CD player, and speakers from the same retailer. The system is not sold as a set and the separate components are listed separately on the bill. When the com- ponents are delivered, buyer notices that the system works perfectly, but the CD player is a different brand than that which he had ordered.

A. Can the buyer return the CD player and demand that it be exchanged but keep the rest of the system after paying for it? Why?

B. Can the buyer reject the shipment and cancel the contract? C. If the buyer returns the CD player and is informed that the one he had

ordered is no longer sold by the seller, what legal remedies are available to him?

D. Is the buyer entitled to reimbursement for the incidental expense of ship- ping the nonconforming CD player back to the seller?

Case 2. In describing a new sculpture by a new artist, the owner of an art gallery makes the following statement to a prospective buyer:

This wonderful sculpture by Jeff Oops, Brass Bedpan Over City Land- scape, represents a poignant example of humanity’s struggle to tri- umph over existentialist despair. It is also the best social commen- tary on the evils of globalization ever to have been conceived by a brilliant young artist. And it is a bargain at $25,000.

A. Assume that buyer purchases the sculpture in question for the asking price. Does the statement made by seller constitute an express warranty as to the sculpture’s value? Why?

B. If most rational art critics would consider the work a worthless piece of junk, is the seller guilty of breach of an express or implied warranty based on the above statement?

C. Which of the following statements made by the seller about the sculpture would constitute express warranties?

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Section 9.3 Chapter Summary CHAPTER 9

• If you purchase the sculpture and are displeased by it after 90 days, you may return it to us for a full refund.

• This sculpture is not only art, but a valuable antique as well, since the bedpan used by the artist once belonged to the emperor Napoleon.

• This sculpture will appreciate at a minimum of 10 percent per year over the next ten years.

• If the chamber pot had been stolen from a college fraternity house, where it had been used as a punch bowl, placed atop a five-year-old’s crayon drawing of a city landscape, and then sold to the unsuspect- ing art gallery owner as an original work by Jeff Oops, will the gallery owner be in breach of an implied warranty if he sells it in good faith to a buyer? Explain.

Case 3. A buyer orders a truckload of Florida oranges from the owner of a Florida orange grove. Under the terms of the agreement, the seller is to ship the oranges to the buyer F.O.B. seller’s plant, with payment due on delivery. After the goods are placed in the hands of the carrier, but before they are delivered to the buyer, the seller learns that the buyer has filed for bank- ruptcy and will be unable to pay for the shipment if it is delivered.

A. What can the seller do under the circumstances to protect his rights? B. If the goods had been shipped on credit and actually delivered to the

insolvent buyer, what would seller’s remedies be under the contract? C. If the buyer is solvent but refuses to accept the goods upon delivery,

claiming to have found a cheaper supplier, what can the seller do?

Case 4. A buyer, wishing to buy a Christmas gift for her husband, visits a computer store and asks the salesperson to recommend a laser printer. She tells the sales- person that the printer must print at a minimum of 12 pages per minute at a minimum resolution of 1200 dots per inch (dpi) and must have a duty cycle of at least 10,000 copies per month. The salesperson recommends a low-end printer on sale that week but fails to mention that it prints at a speed of only 8 pages per minute and is rated for not more than 5,000 copies per month.

A. Has the salesperson breached any express warranty? B. Has the salesperson breached any implied warranty? Explain. C. If the salesperson demonstrates a color printer that meets all of the sell-

er’s requirement but then sells her a cheaper monochrome laser printer instead, has he breached any warranty?

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Key Terms

consequential damages Reimbursement resulting from the particular circumstances of the plaintiff, which were foreseeable to the defendant.

cover To make a good faith purchase of goods similar to those in the contract.

fitness for a particular purpose A war- ranty that the goods are suitable for a specific use intended by the buyer. Such use must be known to the seller at the time of sale, and the buyer must be relying on seller’s expertise in recommending the goods for the purpose indicated.

incidental damages Relatively minor costs incurred by the injured party in responding to the other’s breach of contract.

merchantability Fitness for a usual or normal purpose.

remedies The compensation a buyer or seller can collect from the liable party for breaches of warranty.

warranty A guarantee that goods will meet certain standards.

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