warranty and limitation of remedies and disclaimer of warranties and 2-718 and 2-719 and 2-316

2-316(3) is a section that provides additional ways that implied warranties can be disclaimed. In a nutshell they are: (1) if the words "as is" or "with all faults" appear. Curiously the Code does not mention if these have to be written. Can they be oral? I would think you would have proof problems if they are oral, and most merchants would probably take care to put them in writing, but the Code seems to permit oral disclaimers by "as is" statements. (2) There can also be a disclaimer by examination (2-206(3)(b)). Read the second paragraph of Cmt. 8 to understand this section. Basically, an implied warranty may be discliamed if the buyer has fully examined the goods or has refused a demand (not an offer) of the seller to examine the goods. (3) C/D or U/T can also eliminate an implied warranty. Note that a C/D or U/T can also create such an implied warranty (2-314(3)).

Conspicuousness Under 2-316(3)(a)

Must the "as is" or "with all faults" or similar expression be conspicuous? There is nothing in the Code that expressly says so, and this question has received some attention in appellate cases. Gindy holds that a such a disclaimer must be conspicuous. That case also deals tangentially with another issue: whether an implied warranty of merchantability may be disclaimed for new goods. In that case Gindy sold twenty-five new semi-trailers to the trucking company and attempted to disclaim the warranty by an "as is" disclaimer. Defendant trucking company claimed that it had been doing business with Gindy for 20 years and had never purchased trucks "as is." Thus, defendant was trying to create a 2-314(3) warranty by this statement.

The court was not as helpful as it could have been in sorting out the various issues, and decided to spend its capital on the conspicuousness issue. The discussion is actually the most complete one I have read on the issue, and pretty convincingly argues from the history of the provision that conspicuousness was understood to refer to both (2) and (3). The court also recognized (p.320) that a usage of trade warranty had been created by past dealings of the parties. Finally, the court, rather cleverly, focused on the "unless the circumstances indicate otherwise" clause of 2-316(3)(a) and decided that circumstances did otherwise dictate--hence the "as is" disclaimer was not effective. Thus, not the prettiest opinion, but several interesting issues were broached.

2-718 and 2-719

The only reason to introduce these sections, from the Remedies portion of Article 2, at this point is because 2-316(4) points us there. An analytical disctinction needs to be made between a disclaimer under 2-316 and a remedy limitation under 2-718 and 2-719. The former assumes that there is no breach--the warranty disclaimer eliminates a cause of action, while the latter assumes that breach has taken place but that remedies are limited.

So, what must one do to limit remedies, what kind of limitations are permmissible under the Code, and are there any protections for buyers in the process? These are the three questions addressed by these sections. The more important of the two for our purposes is 2-719. 2-718(1) simply provides that a liquidated damages provision is permissible but only if it is a "reasonable" amount in light of the anticipated or actual harm caused by breach.

2-719(1) provides that limitations of remedy clauses are permissible. It gives the example of a frequent limitation--"return of goods and repayment" or "return or repair"--and says, in 2-719(1)(b) that such limitations are permissible if the "remedy is expressly agreed to be exclusive, in which case it is the sole remedy." Thus, such a limitations clause must mention that the remedy given there is the sole or exclusive remedy. Does this have to be in conspicuous print? Courts have differed on this one. Those which argue that it must be conspicuous tie the requirement back to that in 2-316 and argue that since 2-316 ties itself to 2-719, the requirements of the former should also pass to the latter. I, however, support those courts which say that such conspicuousness is not necessary. It appears to me that 2-719 stands on its own and needs to be interpreted on its own. There are no comparable drafting issues with 2-719 that the Gindy court brought out with 2-316(2).

Exceptions

Sections (2) and (3) of 2-719 limit the reach of 2-719(1) in two ways. First [2-719(2)] "where circumstances cause an exclusive or limited remedy to fail of its essential purpose," other remedies in the Act are available (the other remedies in the 2-700 series). What does it mean for something to "fail of its essential purpose?" Courts have wrestled with that one and generally conclude that it means that the given remedy (e.g., "repair or replacement") no longer is possible, either because repair isn't "fixing" the goods and replacement may not be available. Then, the contract would have failed of its essential purpose of providing the goods--and hence the plaintiff would have other remedies of Article 2 available.

Then, 2-719(3) provides that consequential damages may be limimted or excluded "unless the limitation or exclusion is unconscionable." We have not yet gotten to consequential damages yet; they are defined in 2-715. Yet you are familiar with the basic concept from tort law. These are damages that follow in the wake of the breach; they are not the direct damages of the breach but things that might include lost profits or further damage to equipment because the goods in question did not function properly. A limitations clause may eliminate those kinds of damages unless such a limitation is unconscionable. This then triggers the unconscionability analysis of 2-302.

The section ends with the remark that limitation of consequential damages for injury to the person (when the person is a consumer) is prima facie unconscionable. Recall that prima facie is not per se. It means that it is a rebuttable presumption, though a presumption nevertheless. Thus, any limitation clause attempting to eliminate liablity of personal injury in case the goods explode or malfunction, etc. may be permissible, but it would have to get over the hurdle of the prima facie presumption. Finally, when the loss is "commercial," that is in a commercial context or has to do with non personal injury, limitations on consequential damages are permissible.

Limitations of damages clauses and disclaimers of warranties are provided for you in class.