Thursday, September 21, 2017

Ag Contracts and Express Warranties

Overview

Understanding warranties with respect to contracts is important.  One important aspect concerns their creation.  There are various types of warranties that are recognized by the law.  One type, an express warranty, generally results from explicit statements made by the seller and are the most common way of imposing liability on sellers of agricultural products.  Once an express warranty has been made, it is very difficult to disclaim and, in general, an express warranty cannot be limited.  Under the Uniform Commercial Code (UCC), an express warranty can be created in three ways.  In each case, it is important that the event creating the express warranty occur at a time when the buyer could have relied upon it.

Today’s post looks at express warranties and ag contracts.

Creation

The first way an express warranty can be created is for the seller to make “ any affirmation of fact or promise” that relates to the goods and becomes part of the basis of the bargain.  The warranty is that the goods will conform to the affirmation or promise.  Oral or written statements concerning the goods that the buyer relies on in purchasing the goods can create an express warranty. In agricultural sales, express warranties usually involve the seller’s oral or written statements concerning the goods.  If the statements become “part of the basis of the bargain,” that is, if they tend to induce the buyer to make the purchase, they may be considered express warranties.   But, statements do not create an express warranty if they are statements of opinion, honestly held, or merely commendation of the goods (“puffing talk”).  See, e.g., American Italian Pasta Co. v. New World Pasta Co., 371 F.3d 387 (8th Cir. 2004).  For example, in a South Dakota case, a seller’s statement that allegedly defective seeds were “good seed” created no express warranty. Schmaltz v. Nissen, 431 N.W.2d 657 (S.D. 1988).  Similarly, in a North Carolina case a seller’s statement that a herbicide would “do a good job” also did not create an express warranty. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).  Also, in a Wisconsin case, Fulton v. Vogt, 583 N.W.2d 673 (Wis. Ct. App. 1998), a broker’s statement that “there is no reason that this property cannot be a successful sod farm” did not create an express warranty.

However, at some point a statement moves from being merely an opinion and becomes an express warranty because the buyer reasonably understands that only an opinion is involved.  For example, a statement by the seller that “all of my cows are bred,” or “all of my hay is of the highest quality” creates an express warranty that the goods (cows or hay) will conform to the particular affirmation or promise. See, e.g., Smith v. Bearfield, 950 S.W.2d 40 (Tenn. Ct. App. 1997); Reilly Construction Co., Inc. v. Bachelder, Inc., 863 N.W.2d 302 (Iowa Ct. App. 2016); Smith v. Penbridge Associates, Inc., 440 Pa. Super. 410, 655 A.2d 1015 (1995).  Likewise, statements contained in product labels may be deemed to create express warranties. 

An express warranty can also be created if the seller provides “any description of the goods” that becomes part of the basis of the bargain.  The warranty is that the goods will conform to the description.  Similarly, an express warranty can be created if the seller displays a “sample or model” of the goods.  If the sample or model becomes part of the basis of the bargain, the warranty is that all of the goods will conform to the sample or model. See, e.g., Dakota Grain Co., Inc. v. Ehrmantrout, 502 N.W.2d 234 (N.D. 1993).  The UCC creates a presumption that any sample or model is intended to become a basis of the bargain.  UCC §2-313, Comment 6.  To prevent a sample or model from creating an express warranty, the presumption must be rebutted by the seller.  See, e.g., Sylvia Coal Co. v. Mercury & Coke Co., 151 W. Va. 818, 156 S.E.2d 1 (1967).

In general, express warranties are not subject to exclusion or modification and, once made, are very difficult to disclaim or limit.  The UCC requires that “[w]ords or conduct relevant to the creation of an express warranty [be construed as consistent with] words or conduct tending to negate or limit warranty...wherever reasonable...[and] negation or limitation is inoperative to the extent that such construction is unreasonable.  UCC § 2-316(1). 

Disclaiming An Express Warranty

While it is difficult for an express warranty to be disclaimed once created, it may not be created if it doesn’t become a basis of the bargain between the parties.  For example, the statement by a tractor seller that the tractor was in “excellent condition” and “field ready” did not become a basis of the bargain with the buyer because the buyer inspected the tractor, determined it was in need of some repairs and was familiar with tractors based on his experience.

Other Related Issues

Parties to sales contracts should exercise caution when reducing oral agreements to writing with the intent of making the written contract the final agreement between the parties.  Oral statements may inadvertently be omitted from a later writing, but could have served as the basis of the bargain.  As such, an express warranty could have been created orally, but eliminated by a subsequent writing omitting the relied upon oral statements.  The best approach may be to ensure that all previously negotiated terms are included in any subsequent written agreement.

Any representations made by a company, its employees, consultants or agents pertaining to a product, whether oral or written, can potentially be treated as express warranties.  Thus, an important part of any loss prevention program is to closely monitor any representations made and provide training concerning appropriate representations.

Conclusion

When entering into contracts for ag products, statements and conduct can create an express warranty.  That can have legal implications.  Care must be taken to make sure only what is intended to be warrantied occurs.  It can be easy to create an express warranty, but difficult to disclaim.  Take care when contracting.

https://lawprofessors.typepad.com/agriculturallaw/2017/09/ag-contracts-and-express-warranties.html

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