1 George Mason School of LawContracts II Warranties This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

2 Conditions and WarrantiesPromises Conditions Warranties Election Damages Damages only Forfeiture

3 Warranties With a warranty a seller assumes a risk as to the productThe prior question is whether the risk should be born by the seller or the buyer

4 Promises vs. ConditionsPromissory Conditions Non-promissory Conditions Bare promises, warranties 4

5 Warranties: Let’s say seller sells a whizbang$ at Home Depot

6 The whizbang 50% chance of a whizIt might go whiz

7 The whizbang 50% chance of a whiz, 50% of a bangIt might go whiz … or it might go bang …

8 Evaluating risk: Expected ValuesThe expected monetary value of an accident is p*L

9 Evaluating risk: Expected ValuesThe expected monetary value of an accident is p*L where p is the probability of occurrence And L is the cost of the accident on occurence

10 Pascal’s Wager

11 Pascal’s Wager God Exists God Doesn’t Exist I Believe I go to HeavenNothing Happens I don’t believe I go to Hell

12 Pascal’s Wager God Exists God Doesn’t Exist I believe p(+ ∞) - 10I don’t believe (1-p)(- ∞) + 10

13 Pascal’s Wager Is there a flaw in the reasoning? God ExistsGod Doesn’t Exist I Believe + ∞ - 10 I don’t believe - ∞ + 10 Is there a flaw in the reasoning?

14 Pascal’s Wager If so—he still had to inventGod Exists God Doesn’t Exist I Believe + ∞ - 10 I don’t believe - ∞ + 10 If so—he still had to invent probability theory to make it work

15 Back to the Whizbang So the expected monetary value for an accident with a 50 percent probability of a loss of $250 is $125

16 Back to the Whizbang So the expected monetary value for an accident with a 50 percent probability of a loss of $250 is $125 We’d want to assign the risk to the least-cost risk avoider Whether in contract or tort

17 Back to the Whizbang We’d want to assign the risk to the least-cost risk avoider Contract or tort joined at the hip historically in the action on the case Prosser at 660

18 Who is the Least-Cost Risk AvoiderThere are four ways of thinking about this

19 Who is the Least-Cost Risk AvoiderThere are four ways of thinking about this Who can best fix the problem Who knows most about it Who is risk neutral and who risk averse The large-number diversified party

20 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties (or liability) as to bangs

21 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs EMV of a bang is (.5*-$250=) -$125

22 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs EMV of a bang is .5*-$125 So Buyer who pays $1000 for a whizbang is out ($1,000 + $125 =) $1125

23 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs EMV of a bang is -$125 Assume that seller (but not Buyer) can eliminate this risk at a cost of $100

24 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs EMV of a bang is -$125 Seller (but not Buyer) can eliminate this risk at a cost of $100 Do we see a Coasian bargain here? How will the parties assign the risk?

25 The Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs EMV of a bang is -$125 Seller (but not Buyer) can eliminate this risk at a cost of $100 Seller is the least-cost risk avoider and buyer will pay seller to assume the risk

26 The Least-Cost Risk AvoiderAssume that the expect cost of a bang is $125 Seller (but not Buyer) can eliminate this risk at a cost of $100 How will the parties assign the risk? Buyer will pay seller to assume the risk And what will this do to the purchase price?

27 The Least-Cost Risk AvoiderAssume that the expect cost of a bang is $125 Seller (but not Buyer) can eliminate this risk at a cost of $100 How will the parties assign the risk? Buyer will pay seller to assume the risk What is the range of prices between which the parties will bargain?

28 The Least-Cost Risk AvoiderAssume that the expect cost of a bang is $125 Seller (but not Buyer) can eliminate this risk at a cost of $100 How will the parties assign the risk? Buyer will pay seller to assume the risk Seller will not accept less than $100 and (risk-neutral) buyer will not pay more than $125

29 The Least-Cost Risk AvoiderAssume that the expect cost of a bang is $125 Seller (but not Buyer) can eliminate this risk at a cost of $100 Let’s say that seller offers a warranty for the risk at a price of $110 Buyer pays an extra $110 and saves ($1125 – $1110 =) $15

30 The Least-Cost Risk AvoiderHow it looks to buyer: Cost with no warranty: $1,000 + $125 = $1125 Cost with the warranty: $1110

31 Let’s flip this Buyer as Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs Assume that the expected cost of a bang is $125 Buyer (but not Seller) can eliminate this risk at a cost of $100 What happens now?

32 Let’s flip this Buyer as Least-Cost Risk AvoiderSeller sells a whizbang to Buyer for $1,000, with no warranties as to bangs Assume that the expected cost of a bang is $125 Buyer (but not Seller) can eliminate this risk at a cost of $100 Buyer will spend $100 to eliminate a risk with an EMV of $125

33 Let’s flip this Buyer as Least-Cost Risk AvoiderBuyer’s options; Take no care: $ $125 = $1125 Take care: $ $100 = $1100

34 The Least-Cost Risk AvoiderThe parties will seek to assign the risk to the party who can most efficiently eliminate it. What if the the law implied a warranty from the seller?

35 The Least-Cost Risk AvoiderThe parties will seek to assign the risk to the party who can most efficiently eliminate it. An application of the Coase Theorem: If bargaining is costless, does it matter how the law assigns the risk?

36 The Least-Cost Risk AvoiderThe parties will seek to assign the risk to the party who can most efficiently eliminate it. An application of the Coase Theorem And if bargaining isn’t costless?

37 The Least-Cost Risk AvoiderYou’re a judge. You have a pretty good idea who the least-cost risk avoider is. The parties have left the question of risk silent in their contract. How do you assign the risk?

38 The Least-Cost Risk Avoider“Mimicking the market”

39 A second way of thinking about Least-Cost Risk AvoidersSame example. But now neither party can eliminate the risk for less than $125. On whom should the risk fall? Does it matter?

40 A second way of thinking about Least-Cost Risk AvoidersSame example. But now neither party can eliminate the risk for less than $125. Suppose one party is in a better position to put a value on the loss?

41 A second way of thinking about Least-Cost Risk AvoidersSame example. But now neither party can eliminate the risk for less than $125. Suppose one party is in a better position to value the loss? As between a manufacturer and a consumer, who is this likely to be?

42 A second way of thinking about Least-Cost Risk AvoidersSame example. But now neither party can eliminate the risk for less than $125. Suppose one party is in a better position to value the loss? Why does the ability to value the loss matter?

43 A third way of thinking about Least-Cost Risk AvoidersSuppose that seller is a large corporation and buyer is an impecunious consumer. Does that make a difference?

44 A third way of thinking about Least-Cost Risk AvoidersSuppose that seller is a large corporation and buyer is an impecunious consumer. Does that make a difference? Do risk preferences matter?

45 Are you an EMV’er? An EMV’er always selects the payoff with the highest expected monetary value (p*O)

46 Are you an EMV’er? An EMV’er always selects the payoff with the highest expected monetary value (p*O) Suppose I offer you a lottery ticket with a .5 probability of $0 and a .5 probability of $2. Would you pay me $.50 for the ticket?

47 Are you an EMV’er? An EMV’er always selects the payoff with the highest expected monetary value (p*O) Suppose I offer you a lottery ticket with a .5 probability of 0 and a .5 probability of $2. Would you pay me 50¢ for the ticket? EMV = .5($2) = $1.00

48 Are you an EMV’er? An EMV’er always selects the payoff with the highest expected monetary value (p*O) Suppose I offer you a lottery ticket with a .5 probability of 0 and a .5 probability of $10,002. Would you pay me $5, for the ticket?

49 Are you an EMV’er? An EMV’er always selects the payoff with the highest expect monetary value (p*O) Suppose I offer you a lottery ticket with a .5 probability of 0 and a .5 probability of $10,002. Would you pay me $5, for the ticket? EMV = .5($10,002) = $5,001

50 Three kinds of people EMV’ers are risk neutralThey always take the gamble with the highest EMV

51 Three kinds of people EMV’ers are risk neutralMost people are risk averse They’ll pass on some opportunities with a positive EMV

52 Three kinds of people EMV’ers are risk neutralMost people are risk averse Risk lovers are risk prone They will accept some gambles with a negative EMV

53 Recall what we said about utilityUtility is the economist’s measure of well-being (cf. utilitarianism) Ordinal Utility measures preferences without weighing them (first, second, third are ordinal numbers) Cardinal Utility (Bentham’s “utils”) weighs utility (one, two, three are cardinal numbers)

54 Cardinal Utility plotted against EMVFor EMV’ers, utility is linear with money $EMV

55 Cardinal Utility For the risk averse, the marginal utilityof money declines (more money generates increasingly smaller increases in utility). Utility $EMV

56 Cardinal Utility Start with a risk averse person with 1,000 Utility $

57 Cardinal Utility Would he be willing to take a fair bet of $250? [.5(0) + .5(250)] Utility $ 1,000

58 Cardinal Utility Would he be willing to bet $250? Utility $ 750 1,0001250

59 Cardinal Utility Mapping this into utilities Utility $ 750 1,000 1250

60 Cardinal Utility What is the utility if he rejects the gamble? Utility$ 750 1,000 1250

61 Cardinal Utility What is his expected utility if he takes the gamble?$ 750 1,000 1250

62 Cardinal Utility What is his expected utility if he takes the gamble?$ 750 1,000 1250

63 Cardinal Utility So there is a utility loss from the gamble Utility $750 1,000 1250

64 This suggests a third way of thinking about Least-Cost Risk AvoidersWould you assume that firms are risk-neutral and consumers risk averse as to a loss of $250?

65 This suggests a third way of thinking about Least-Cost Risk AvoidersThere is a 50 percent probability of a loss of $250 Same example. But now neither party can eliminate the risk for less than $125 Would you assume the firms are risk-neutral and consumers risk averse? Would you expect the risk to be born by the wealthier party?

66 Now--A fourth way of thinking about Least-Cost Risk AvoidersSuppose that seller sells 10,000 whizbangs and buyer buys only one? Does that make a difference?

67 Probability distribution for buyer% .5 $EMV 750 1,000 Mean = 875

68 Probability distribution for seller of 60 whizbangs% 1.0 875

69 Probability distribution for seller of 200 whizbangs% 1.0 875 All Curves have the same mean value ($875) but different risk (dispersion from the mean).

70 Probability distribution for seller of 10,000 whizbangs% 1.0 875 $EMV

71 The “insurance idea” in tort and contract lawThe large volume seller is better able to self-insure (diversify) away risk than a consumer buyer.

72 Let’s add the possibility of third party insuranceThere’s something called State Farm…

73 Let’s add the possibility of third party insuranceThere’s something called State Farm… Who then would you expect to bear a loss, as between: Seller (manufacturer) Buyer (self-insurance) Third party insurance company

74 Where insurance is possibleWho would you expect to bear the loss for: Liability for a faulty transmission? Emotional Distress World War III?

75 Four kinds of Least-Cost Risk AvoidersWhere one party is better able to reduce the risk or the harm Where one party is better able to value the loss Assuming risk aversion, where one party is wealthier than the other Assuming risk aversion, where one party is a better insurer because he can diversify the risk

76 Warranties Express Implied UCC 2-314 (merchantability)UCC (fitness for purpose)

77 Express Warranties: UCC 2-313(1)Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise model.

78 Express Warranties: UCC 2-313(1)Express warranties by the seller are created as follows: (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

79 Express Warranties: UCC 2-313(2): Mere Puffsan affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

80 Sessa v. Riegle at 650 What were the alleged express warranties?

81 Express Warranties: UCC 2-313(1)Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise model.

82 Express Warranties: UCC 2-313(1)Express warranties by the seller are created as follows: (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

83 Sessa v. Riegle Riegle: “The horse is sound”

84 Sessa v. Riegle Riegle: “The horse is sound” A mere puff“bland statements”

85 Sessa v. Riegle Riegle: “The horse is sound” A mere puffA special rule for horse traders? “Horses are fragile creatures”

86 Sessa v. Riegle Riegle: “The horse is sound”Why did the court doubt that the statements were “part of the basis of the bargain”?

87 Sessa v. Riegle Riegle: “The horse is sound”Why did the court doubt that the statements were “part of the basis of the bargain”? Materiality or reliance?

88 Sessa v. Riegle Can you distinguish Frederickson from McNeir at p. 654?

89 Sessa v. Riegle Was there a finding that the horse that was sold was defective?

90 Sessa v. Riegle Was there a finding that the horse that was sold was defective? Tendenitis might have resulted from the shipping In the later case, buyer took the risk

91 Royal Business Machines at 654Representations: Copy machine… Was of high quality Frequency of repair was very low Would remain so Will bring buyer substantial profits

92 Royal Business Machines at 654Representations: Copy machine… Was tested and ready to be marketed

93 Royal Business Machines at 654Copy machine: Oh yeah, the old “machines will not cause fire” implied warranty

94 Specificity: 656 Searls v. Glasser: “recession resistant”?Keith: “sure-footed seaworthiness”?

95 Implied Warranties Merchantability: 2-314 Fitness: 2-315 Title: 2-312

96 Merchantability UCC§ 2-314(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.

97 Merchantability UCC§ 2-314(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.

98 Flippo at 657 Implied warranty in UCC 2-314?

99 Flippo Why were the goods merchantable in Flippo?

100 Flippo Why were the goods merchantable in Flippo?“Fit for ordinary purposes”

101 Merchantability Is merchantability the same thing as strict liability?Qu. expected impurities in Coffer at 660

102 Merchantability I sell you a car whose transmission fails six months later? What’s the issue?

103 Merchantability I sell you a car whose transmission fails six months later? Qu. Lapse of time UCC § 2-314, cmt. 13 Action by the buyer following an examination of the goods which ought to have indicated the defect complained of can be shown as matter bearing on whether the breach itself was the cause of the injury.

104 George Mason School of LawContracts II Warranties This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

105 Implied Warranties Qu. Non-UCC cases Cf. Gulash at 663

106 Warranty of Workmanlike PerformanceConstruction and services contracts Crawley at 661

107 UCC Implied WarrantiesMerchantability: 2-314 Fitness: 2-315 Title: 2-312

108 Fitness for Purpose: UCC § 2-315Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

109 Fitness for Purpose: UCC § 2-315Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

110 Implied UCC WarrantiesWhat does fitness add to merchantability, and how does the warranty change the buyer’s incentives?

111 Implied UCC WarrantiesWhat does fitness add to merchantability, and how does the warranty change the buyer’s incentives? The incentive to force out information

112 Exemption Clauses UCC§ 2-316(1)(a) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.

113 Exemption Clauses UCC§ 2-316(2). Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.

114 Exemption Clauses UCC§ 2-316(3)(a) …unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty

115 Exemption Clauses Pelc v. Simmonds at 664 1978 Sunbird

116 Exemption Clauses Pelc v. Simmonds at 664 Oral statements by SimmonsOnly thing wrong is the a/c Good little car, above average

117 Exemption Clauses Pelc v. Simmonds at 664 History of the car

118 Exemption Clauses Pelc v. Simmonds Oral statements by SimmonsOnly thing wrong is the a/c Good little car, above average “As is” clause. UCC § 2-316(3)(a) 118

119 Exemption Clauses What if there is an allegation of fraudulent concealment? Morris at 666: Where was the fraud?

120 Exemption Clauses What if there is an allegation of fraudulent concealment? Morris at 666: Where was the fraud? Recall Obde

121 Restatement § 160: Silence vs. ConcealmentAction intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that a fact does not exist 121 121

122 Restatement § 161: When non-disclosure is equivalent to an assertionA person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:  (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which the party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. 122 122

123 What if the performance is slightly defective?When are rejection rights triggered? Sales Law: Any defect: Perfect Tender Rule Non-sales Law: Substantial breaches only

124 Sales Law: The Perfect Tender RuleUCC § Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest.

125 Non-sales Law: Substantial PerformanceRestatement § 237: It is a condition of each party’s remaining duties to render performances … that there be no uncured material failure

126 Non-sales Law: Substantial PerformanceMateriality: Restatement § 241 Deprived of the benefit? Damages are adequate compensation Forfeiture Likelihood of cure Standards of faith and fair dealing

127 Substantial Breach The bias against forfeitureRestatement § 227(1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk. 127

128 Substantial Performance in Jacob & Young at 66

129 Jacob & Youngs v. Kent at 66 129

130 Substantial PerformanceJacob & Youngs v. Kent at 66 Was there a breach? 130

131 Substantial PerformanceJacob & Youngs v. Kent Was there a breach? How serious was it? 131

132 Substantial PerformanceJacob & Youngs v. Kent What remedy does the Π seek? 132

133 Substantial PerformanceWhat are Dependent vs. Independent Promises, and why did it matter? Benjamin Cardozo 133

134 Substantial PerformanceWhat are Dependent vs. Independent Promises? Dependent promises as “conditions” Tender of price and of delivery under Article 2 Independent promises as mere “promises” 134

135 Substantial PerformanceExamples of Dependent Promises UCC 2-507, 2-511 135

136 Substantial PerformanceWhat are Dependent vs. Independent Promises? Dependent promises as “conditions” Tender of price and of delivery under Article 2 Independent promises as mere “promises” I know Cardozo called it a “promise” but I’m going to call it a “warranty”. 136

137 Conditions and WarrantiesPromises Conditions Warranties (Dependent Promises) (Independent Promises) Damages Forfeiture Damages only

138 Substantial PerformanceSo how does one tell whether it’s a condition or warranty? 138

139 Substantial PerformanceHow does one tell? “Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable.” 139

140 Substantial PerformanceHow does one tell? Do considerations of “equity and fairness” get one to the same place? 140

141 Substantial PerformanceCould the parties to a building contract bargain for perfect tender? “This is not to say that the parties are not free …”

142 Substantial PerformanceCould the parties to a building contract bargain for perfect tender? Did they in Jacob & Young?

143 Substantial PerformanceCould the parties to a building contract bargain for perfect tender? Did they in Jacob & Young? Could you draft a clause that would have given Kent a right to rescind?

144 Substantial PerformanceCould the parties to a building contract bargain for perfect tender? Did the dissent have the better of the argument?

145 Substantial PerformanceThe dissent adopts the Art. 2 perfect tender rule, while Cardozo adopts what is now the Restatement position. Can you explain why there should be a difference?

146 Substantial PerformanceWait a minute—what about Coasian bargaining? 146

147 Substantial PerformanceWait a minute—what about Coasian bargaining? Assume: Value of house with Reading pipe is $77,000 Value of house with Cohoes pipe is $76,900 Cost of replacement is $10,000 147

148 Substantial PerformanceAssume: Value of house with Reading pipe is $77,000 Value of house with Cohoes pipe is $76,900 Cost of replacement is $10,000 So what would a Coasian bargain look like, given those numbers? 148

149 Substantial PerformanceAssume: Value of house with Reading pipe is $77,000 Value of house with Cohoes pipe is $76,900 Cost of replacement is $10,000 So will the pipe be replaced? 149

150 Substantial PerformanceAssume: Value of house with Reading pipe is $77,000 Value of house with Cohoes pipe is $76,900 Cost of replacement is $10,000 Will this satisfy the builder? How ex ante would the parties bargain over remedies? 150

151 Substantial PerformanceIs Grun Roofing at 670 consistent with Jacob and Youngs?

152 Substantial PerformanceGrun Roofing What is the test for substantial breach? Why an unintentional test?

153 Substantial PerformanceGrun Roofing How did the court arrive at damages of $122?

154 Substantial PerformanceGrun Roofing How did the court arrive at damages of $122? The cost of a new roof was $770 Owner doesn’t have to pay builder anything (contract price was $648) Difference was $122, which puts him in the same position as if the contract had not been made

155 Substantial PerformanceGrun Roofing So owner gets cost of repair

156 Haymore v. Levinson at 673 What was the alleged breach?

157 Haymore v. Levinson What was the alleged breach?A “satisfactory completion” standard So does owner get to insist on completion until he is satisfied?

158 Haymore v. Levinson What was the alleged breach?The two standards: Which do you think was intended by the parties? Subjective: Owner gets to decide Objective

159 Willful deviations Cf Grun Roofing at 672 Material Movers at 675“Contractor must have in good faith intended to comply” Material Movers at 675 Can you justify this on efficiency grounds?

160 Measure of damages: Cost of repair or diminished value?Remedies in Plante v. Jacobs at 676 Cost of repair vs. diminished value What is the difference in monetary terms?

161 Measure of damages: Cost of repair or diminished value?Remedies in Plante v. Jacobs at 688 In what respect is cost of repair akin to a promissory condition and diminished value like a warranty?

162 Measure of damages: Cost of repair or diminished value?Remedies in Plante v. Jacobs at 688 What is the difference in monetary terms between the two measures? Is it correct to say that diminished value is more economically efficient?

163 Recall the Four kinds of Least-Cost Risk AvoidersWhere one party is better able to reduce the risk or the harm Where one party is better able to value the loss Assuming risk aversion, where one party is wealthier than the other Assuming risk aversion, where one party is a better insurer because he can diversify the risk

164 Now: Warranties as a signaling strategyWarranties also signal product quality The informational asymmetry between seller and buyer

165 Recall the Four kinds of Least-Cost Risk AvoidersWarranties also signal product quality As between two sellers, one of whom offers a warranty and the other of whom doesn’t, you have more information about the former

166 Warranties as a signalling strategyIf a dealer offers you an extended warranty at a premium price, why does Consumers Reports tell you to reject this?

167 Warranties as a signalling strategyIf a dealer offers you an extended warranty at a premium price, why does Consumers Reports tell you to reject this? The offer of the extended warranty gives you the information, even if you don’t take it up

168 Van Halen Standard Contract

169 Why did Van Halen ban brown M & Ms?

170 If a warranty can operate as a signal, what about a breach?An argument for the perfect tender rule?

171 George Mason School of LawContracts II Warranties This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

172 Non-sales Law: Substantial PerformanceRestatement § 237: It is a condition of each party’s remaining duties to render performances … that there be no uncured material failure

173 Sales Law: The Perfect Tender Rule of UCC § 2-601Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest.

174 Perfect Tender in Sales LawPromises Conditions Warranties Perfect Tender Substantive Performance Damages Forfeiture Damages only 174

175 Buyer’s Remedies in the UCCBut the rejection right may be lost through: waiver estoppel acceptance cure

176 Buyer’s Remedies in the UCC2-601 Perfect Tender required Accept Reject 2-601

177 Perfect Tender Lost on AcceptanceOn acceptance, buyer’s only remedy is damages: UCC 2-607(2)

178 Acceptance § 2-606. What Constitutes Acceptance of Goods.(1) Acceptance of goods occurs when the buyer (a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or (b) fails to make an effective rejection, but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or (c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

179 Buyer’s Remedies in the UCC§ 2-714(1) Where the buyer has accepted goods and given notification he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.

180 Buyer’s Remedies in the UCC2-601 Perfect Tender required Accept Reject 2-602 Damages 2-714

181 Revocation of AcceptanceAfter acceptance, buyer might nevertheless be permitted to revoke his acceptance

182 Buyer’s Remedies in the UCC2-601 Perfect Tender required Accept Reject 2-602 Damages Revocation of Acceptance 2-608

183 § 2-608. Revocation of Acceptance(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it (a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or (b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances

184 Revocation of Acceptance But now a substantial breach standard(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it (a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or (b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances

185 § 2-608. Revocation of AcceptanceAfter revocation of acceptance, buyer may “cancel”

186 Buyer’s right to cancel§ 2-711(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid (a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or (b) recover damages for non-delivery as provided in this Article

187 Buyer’s Remedies in the UCC2-601 Perfect Tender required Accept Reject 2-602 Damages 2-714, Revocation of Acceptance 2-608 Cancel for substantial impairment 2-711, 2-106(4)

188 Buyer’s action for the price§ 2-711(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid

189 Buyer’s right to “cover”§ 2-711(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid (a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or (b) recover damages for non-delivery as provided in this Article

190 Buyer’s right to damages§ 2-711(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid (a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or (b) recover damages for non-delivery as provided in this Article

191 Buyer’s Remedies in the UCC2-601 Perfect Tender required Accept Reject 2-602 Action for price paid 2-711 Cover 2-711 Incidental Damages 2-711

192 Now—Seller’s Remedies

193 Seller’s Remedies Before DeliveryGoods not delivered Goods delivered Withhold delivery Stoppage in transitu Damages 2-703, 2-708

194 Seller’s Remedies Before DeliveryU.C.C. Sect … the aggrieved seller may: (a) withhold delivery of such goods; (b) stop delivery by any bailee as hereafter provided (Section 2-705); (d) resell and recover damages as hereafter provided (Section 2-706); (e) recover damages for nonacceptance (Section 2-708) or in a proper case the price (Section 2-709); (f) cancel.

195 Seller’s Remedies after DeliveryGoods not delivered Goods delivered Action for the price 2-709

196 Seller’s Action for the Price§ 2-709(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price (a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and (b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

197 Cure by Seller after Delivery2-601 Perfect Tender required Accept Reject 2-602 Seller Cures No cure

198 Cure before delivery date§ 2-508(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.

199 Cure before delivery dateWhat if first tender is junk?

200 Cure before delivery dateWhat if first tender is junk? Ramirez at 681: an unconditional right to cure before the delivery date

201 Cure after delivery date?§ 2-508(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

202 Cure after Delivery DateCan seller cure after the delivery date if the defect is substantial and not trivial?

203 Cure after delivery date?§ 2-508(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

204 Cure after delivery dateCan seller cure after the delivery date if the defect is substantial and not trivial? “we need not decide” at 681 Zabriskie at 684

205 Cure and Buyer OpportunismIf the delivery date has passed, might cure be unfair to the buyer?

206 Cure and Buyer OpportunismIf the delivery date has passed, in what way might this be unfair to the buyer? The delay by itself? Seller’s incentive problem

207 Ramirez at 679 Did buyers accept the goods in 2-606?

208 Ramirez Did buyers accept the goods in 2-606?Semble not, so no need to revoke acceptance Perfect Tender rule … but for cure

209 How perfect tender rights may be lostSeller’s right to cure even if no acceptance “In an age of assembly lines … buyers no longer expect a perfect tender…"

210 Can 2-508 (cure) be waived by seller?Qu. Consumer goods where seller specifies “goods satisfactory or money refunded”

211 When is buyer opportunism most a problem, and when are cure rights most needed?

212 When is buyer opportunism most a problem, and cure rights most needed?Idiosyncratic, custom-made goods

213 When is buyer opportunism most a problem, and cure rights most needed?Volatile markets

214 How might sellers behave opportunistically, given cure rights?

215 How might sellers behave opportunistically, given cure rights?Sloppiness as to delivery? Sloppy repair: Ramirez, Zabriskie at 684