Friday, June 15, 2012

Implied Warranties and the Distribution Chain.

Big companies have big legal departments. The purpose of those legal departments is to minimize risk for the company. In large companies that deal in goods, most of them will attempt to disclaim what is called the Implied Warranty of Fitness for a Particular Purpose ("IWFPP"). Usually, a disclaimer of IWFPP will accompany a disclaimer of the Implied Warranty of Merchantability ("IWM") and any express warranties. These generally work, but not always.

IWM can be disclaimed by mentioning "merchantability" in the disclaimer, and it must be conspicuous. Words like "as is" in connection with the purchase contract can be used. Additionally, circumstances such as failure to notice a defect upon inspection or a refusal to inspect, or courses of performance or dealing can also exclude implied warranties. IWFPP can be disclaimed by stating that "[t]here are no warranties which extend beyond the description on the face hereof." [1] IWFPP can also be disclaimed by specific language excluding the IWFPP.

Whether an implied warranty has or has not been disclaimed has real-world consequences. An implied warranty is predicated upon an an unmentioned assumption made by the buyer to which the seller either has or has not taken exception. There are problems if B buyer purchases goods from S seller, and those goods turn out to be defective in a way that incorporates an implied warranty, because either B buyer or S seller are going to have to pay unexpected costs. B buyer will have to pay unexpected costs if S seller has properly excluded implied warranties. S seller will have to pay unexpected costs if S seller has not properly excluded implied warranties.

There are further issues when there is an intermediary company, like a representative or distributor. If the first company in the chain of distribution excludes all implied warranties, the next level of distribution is sometimes hanged out to dry. The goal of the next level of distribution is to sell the product of the company higher up in the distribution chain. As a result, a number of things can happen. The terms and conditions of the original company may not be transmitted that disclaim implied warranties. Express warranties may be made by the lower level of the distribution chain. New implied warranties can also be created.

In the latter two situations, involving express warranties and new implied warranties, the lower level of the distribution chain is exposed to often unreasonable levels of liability. Let us consider a hypothetical involving a large company, A, that has produced a widget. D is a distributor of A's widget, and B buyer purchases the widget. A supplies D with however many widgets that D can sell. D needs to sell A's widgets to make money, and carrying inventory is costly. So D will attempt to sell these as quick as is practicable. A has terms and conditions like all large companies, that disclaim IWM and IWFPP. In D's attempts to sell A's widgets, it is unreasonable to assume that D will not create a new IWFPP.

The elements of IWFPP are: (1) the seller had reason to know of the buyer's particular purpose; (2) the seller had reason to know the buyer was relying on the seller's skill or judgment to furnish suitable goods; and (3) the buyer in fact relied on the seller's skill or judgment to furnish suitable goods. [2] In nearly every case that D sells A's widget, D will have created an IWFPP. A buyer of a good will tell D the purpose for which the good is being purchased. D will direct the buyer to a particular good. Thus is the IWFPP created.

Depending on the relationship between A and A's widgets and D distributor, A may be liable to B buyer. D distributor may have actual, implied or apparent authority, in which case B buyer can sue A. If B buyer sues to recover from A, A would then be able to recoup the amount for which A is liable from D distributor.

In the real-world, this ultimately comes down to an economic analysis. If D distributor made an implied warranty over goods that cost a lot, A may or probably will attempt to recover from D distributor. If D distributor made an implied warranty over goods that do not cost a lot or did not create a lot of legal liability, A probably will not attempt to recover from D distributor.

[1] UCC 2-316(2).
[2] Renze Hybrids, Inc. v. Shell Oil Co., 418 N.W. 2d 634, 637 (Iowa 1988).

No comments:

Post a Comment