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Warranty: an effective disclaimer?


Although sometimes overlooked by businessmen engaged in selling goods, every contract of sale contains one or more implied warranties. These warranties can, in most cases, be disclaimed, but absent an affirmative disclaimer, the warranties are there. These implied warranties are, of course, the implied warranty of merchantability, and, under some circumstances, the implied warranty of fitness for a particular purpose. Unlike express warranties which the contracting parties themselves create, the implied warraties arise "by operation of law." That is, these warranties are in the contract because the law says there are to be there. The law is but reflective of society's demand for such protection. They are, in laymen's term, "understood," and even if the contracting parties do not know of the very existence of such warranties, they are a part of the contract.

Here, the concern is with the implied warranty of merchantability. This warranty is an implied warranty made only by merchants. The Uniform Commercial Code, now in effect in every state but Louisiana, defines a merchant as "a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the produces or goods involved in the transaction..." Thus, those selling goods (tangible, personal property) are merchants. "Merchantable" goods can be defined, generally, as those which are free of latent defects and fit for the ordinary purposes for which such goods are used.

As noted previously, the merchant may, by conforming with prescribed requirements, affirmatively disclaim the implied warranty of merchantability, unless such disclaimer be unconscionable. The disclaimer may be oral or written. If in writing, the disclaimer must mention merchantability and be conspicuous, although the statute provides that the warranty may also be disclaimed by such commonly used terms as "with all faults," "as is," or other language calling the exclusion to the buyer's attention or making it plain that there is no implied warranty. The implied warranty can also be disclaimed by a course of dealing or course of performance between the parties or by trade usages. In addition, no implied warranty of merchantability exists if the buyer has examined the goods, or has refused to examine the goods, and such goods contain defects which an examination revealed or ought to have revealed.

One of the reasons for refusing to enforce a disclaimer is that the particular disclaimer is unconscionable. The court's invalidation of a disclaimer on the basis of unconscionability in a 1985 decision generated legislative concern. In 1986 the legislature enacted legislation abrogating the court's 1985 decision, Hanson v. Funk Seeds International, 373 N.W. 2nd 30 (SD 1985). The ultimate ramifications of the statute remain to be determined, but a merchant believing the statute has cleared the way for all-but-automatic disclaimers is probably deluding himself. There is more than one way to skin a cat--or to invalidate a disclaimer.

The "it's-there-unless-you-throw-it-out" aspect of the implied warranty of merchantability, coupled with the right (in most cases) to exclude the warranty, has led to a practice the effect of which may not be what the practitioners anticipated. Taking advantage of the right to disclaim the warranty, some businessmen have been routinely printing disclaimers on sales receipts. Modern cash registers enable the merchant to list details of the transaction; they also enable the user to have the machine print a disclaimer (or other message) on the register tape. When confronted with a warranty claim based upon the implied warranty, the merchant defends on the basis of the disclaimer printed on the register tape. It is so simple!--and likely too good to be true.

Will such a disclaimer really work? Will a merchant be safe in relying on such a disclaimer? Is the imprinted notation on the tape binding on the customer? In all probability, no. While each case must be decided on its merits, it is likely unwise to rely on a disclaimer made in this fashion. As the uniform commercial code does specifically provide for a disclaimer, it is certainly fair to ask why the disclaimer might nevertheless be held invalid by a court.

Different reasons may be given for an invalidation. To begin with, a contract is a negotiated matter, the result of the give-and-take between the parties. Even in contracts of adhesion ("take-it-or-leave-it" type transactions), the customer manifests an intent to buy the goods in question by agreeing to pay the price asked and to such other terms as were expressed. At that point the parties have a contract, a contract including the implied warranty of merchantability. The customer is given the goods, e.g., a set of spark plugs, and pays the seller. The latter rings up the sale on his register which spits forth the inevitable tape, or sales receipt.

Printed thereon is the disclaimer. The buyer may or may not see it. It is almost certainly not called to his attention. From a legal viewpoint it will be argued that the seller is adding a term to the sale after the contract was made. Contracts cannot be unilaterally changed, and there is real doubt as to whether the disclaimer (or attempted disclaimer) is a part of the contract at all. The buyer neither bargained for nor expected the disclaimer--and should not be bound by it.

Yet other legal pitfalls await the seller of goods who relies on disclaimers created in the fashion described. The statute required that the written disclaimer be conspicuous. Cash register tapes are often notoriously difficult to decipher. The printing itself may be bad. All too frequently the imprint, good or bad, is so faint as to be scarcely legible. The disclaimer phrase itself may or may not be distinguishable from the other material imprinted on the tape. Except for perhaps being in capital letters or being separated from the numerical information on the tape, the disclaimer may well not meet the legal requirement of being conspicuous.

A 1988 decision by the South Dakota Supreme Court involved the legality of an attempt to disclaim an implied warranty in the sale of seed (Schmattz v. Nissen, et al; Nible v. Farmers Feed and Seed, et al). That case was decided for the farmer/buyer. There, the basis of the court's decision was unconscionability.

The plaintiff (the farmer/buyer) contended that the attempt to disclaim the warranty was not only unconscionable but, in addition, was in fact never a part of the contract and that the attempted disclaimer was invalid because it was not conspicuous. The case focused on the unconscionability issue, and the whole court did not discuss the contention relating to whether the disclaimer was in fact part of the contract.

In a specially concurring opinion, however, one of the justices did address the "conspicuousness" issue. The justice said "Even if disclaimers and limitations are sufficiently conspicuous to comply with the statutory language of the Uniform Commercial Code, they may still be inconspicuous in fact [emphasis added], if, by the genius of product packaging, the color, size, emphasis, or distractions on the package substantially detract from the disclaimer or limitation."

Numerous supreme courts around the country have dealt with the issue of disclaiming implied warranties. The tenor of the decision is clear: disclaimers, while legal and enforceable, are not favorites of the law. They are often invalidated. Thus, any merchant relying on the disclaimer of implied warranties as a means of limiting his liability should be aware that his efforts may be of no avail. This is particularly true if the disclaimer relied upon is a disclaimer routinely used as a matter of course.

Attempted disclaimers which are subject to attack on the basis that they are not a part of the contract (in that the disclaimer was not bargained for and was a unilateral "add on" to the sale slip) would seem especially questionable. The very existence of implied warranties stems from a public belief that they should be part of the contract. It is unlikely that the courts will countenance an emasculation of the legislative and public will by so simple a device as the casual, routine disclaimer. When such attempted disclaimers are also subject to attack because they are not conspicuous, the fate of the attempt is reasonably certain.

The ultimate shaping of the periphery and parameters of the law relating to disclaimers in contracts for the sale of goods must perforce await the Supreme Court's resolving disputed issues as they arise. Meanwhile, sellers of goods should be cautious in placing too much reliance on routine disclaimers. Indeed, " caveat venditor" may be the appropriate watchword here.

James M. Peterson, J.D., is Professor of Business Law at the School of Business, The University of South Dakota, Vermillion, South Dakota.
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Author:Peterson, James M.
Publication:South Dakota Business Review
Date:Mar 1, 1990
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