Thursday, November 2, 2017

Sales of Agricultural Goods and the Implied Warranty of Merchantability

Overview

The Uniform Commercial Code (UCC) holds merchants to a higher standard of business conduct than other participants to sales transactions.  In every sale by a merchant who deals in goods of the kind sold, there is an implied warranty that the goods are merchantable.  The warranty of merchantability exists even if the seller made no statements or promises and did not know of any defect in the goods. 

What are the rules for merchantable goods? 

What are Merchantable Goods?

In order for goods to be merchantable, they must be goods that:

  • pass without objection in the trade under the contract description;
  • in the case of fungible goods, are of fair average quality within the description;
  • are fit for the ordinary purposes for which such goods are used;
  • run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;
  • are adequately contained, packaged, and labeled as the agreement may require; and
  • conform to the promises or affirmations of fact made on the container or label if any.

Requirements (a) through (c) above are most often encountered in agricultural sales, with much of the focus on whether the goods are fit for the ordinary purposes for which they are used.   For instance, as to the fair average quality requirement, one court held that beetle infestation exceeding an acceptable level of contamination for fungible flour made the flour unmerchantable.  T.J. Stevenson & Co., Inc. v. 81,193 Bags of Flour, 629 F.2d 338 (5th Cir. 1980)As for the requirement that the goods be properly packaged, the warranty is breached when defective packaging results in damage to the product or personal injury, when the package does not adequately warn about dangers with the product, and when misleading packaging inhibits subsequent resales.  See, e.g., Agricultural Services Association, Inc. v. Ferry-Morse Seed Co., Inc., 551 F.2d 1057 (6th Cir. 1977).

The ordinary purpose standard is breached when goods are not reasonably safe or when they cannot be used to meet their normal functions. For example, in Latimer v. William Mueller & Son, 149 Mich. App. 620, 386 N.W.2d 618 (1986), the Michigan Court of Appeals ruled that bean seed was unfit for its ordinary purpose when the purchaser discovered, after planting, that the seed was infected with a seed-borne bacterial disease. This defect, the court held, invalidated the label provisions that attempted to disclaim warranties for merchantability and fitness. Likewise, in Eggl v. Letvin Equipment Co., 632 N.W.2d 435 (N.D. 2001), the court found that a tractor sold with defective O-rings was not fit for the ordinary purpose for which it was intended and, thus, breached the warranty of merchantability.    

Requirement (d) involves bulk purchases and specifies that goods sold in bulk must be of an even kind, quality and quantity.  Requirements (e) and (f) pertain to goods that are sold in containers or packaging, and reflect an overlap between express warranties and the implied warranty of merchantability.  They are especially important in sales of labeled goods, such as feed, seed or pesticides.  Some courts have suggested that statements on labels or containers create both an express and an implied warranty.

Merchantability also involves the standard of merchantability in the particular trade.  Usage of trade is defined as “any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.” UCC § 1-205(2). If a product fails to satisfy industry standards, an implied warranty of merchantability may arise.  For example, in one case, the Pennsylvania Supreme Court held that feed for breeding cattle normally does not contain the female hormone stilbestrol because it is known to cause abortions in pregnant cows and sterility in bulls.  Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848 (1968).

Even if a particular farmer does not qualify as a “merchant,” known product defects must be disclosed to a potential buyer.  Every seller with knowledge of defects must fully disclose defects that are not apparent to the buyer on reasonable inspection.  This duty arises out of the underlying rationale behind the implied warranty of merchantability, which is to assure that the buyer is getting what is being paid for, and the UCC’s requirement that market participants operate in “good faith.” 

The UCC warranty provisions also apply to sales transactions involving livestock.  In a series of cases in the 1970s, courts applied the UCC implied warranty provisions to the sale of livestock as goods. See, e.g., Vorthman v. Keith E. Myers Enterprises, 296 N.W.2d 772 (Iowa 1980); Holm v. Hansen, 248 N.W.2d 503 (Iowa 1976); Ruskamp v. Hog Builders, Inc., 192 Neb. 168, 219 N.W.2d 750 (1974); Hinderer v. Ryan, 7 Wash. App. 434, 499 P.2d 252 (1972).     The livestock industry strongly reacted and successfully lobbied for an exclusionary provision limiting the application of implied warranties in livestock sales. Some version of the statutory exclusion now exists in about half of the states, especially those states where the livestock industry is of major economic importance. The statutes are of three general types: those that exempt sellers from implied warranties in all situations, those providing that no implied warranty exists unless the seller knew the animals were sick at time of sale, and those providing an exemption if certain conditions are met.  

The statutory exclusion of warranties in livestock sale transactions applies only to implied warranties; express warranties are not affected.  Express warranties can still be made in livestock transactions and may be particularly important in transactions involving breeding livestock.  Many sellers tend to make statements that might rise to the level of an express warranty in order to induce buyers to conclude the sale. Such statements can become a part of the basis of the bargain and create an express warranty enforceable against the seller.

The typical statutory exclusion also is inapplicable in situations where the seller “knowingly” sells animals that are diseased or sick.  However, it is likely to be difficult for a livestock buyer to prove that the seller knew animals were diseased or sick at the time they were sold.  Under the UCC, a seller “‘knows’ or ‘has knowledge’ of a fact when the seller has ‘actual knowledge’ of it.”  UCC § 1-201(25). Thus, in order to overcome the statutory exclusion, the buyer must prove (most likely by circumstantial evidence) the seller’s actual knowledge regarding the animal’s disease or sickness.

Under most state exclusionary statutes, the meaning of “diseased or sick” is unclear.  For instance, in breeding animals, the failure to provide offspring may result from recognizable diseases or from defects, often genetic, that historically have not been considered diseases.  It is uncertain whether the statutory exclusion of implied warranties applies in circumstances involving genetic defects.  Presently, no court in a jurisdiction having the exclusion has addressed the issue.  Similarly, uncertainty exists with respect to the application of the exclusion to the sale of semen or embryo transfers, which are increasingly common in the livestock industry. Arguably, the livestock exclusion does not apply to semen sales since semen is not “livestock.”

Conclusion

The implied warranty of merchantability arises in many sales transactions involving agricultural goods.  The rule for merchantability have produced some very interesting cases over the years.

https://lawprofessors.typepad.com/agriculturallaw/2017/11/sales-of-agricultural-goods-and-the-implied-warranty-of-merchantability.html

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