Friday, September 23, 2022
Why Does the Restatement Omit the Law of Warranties?
Warranties can be critical elements in the modern business transaction. In real property transactions, courts have long enforced express and implied warranties relating to title and possession. In corporate mergers and acquisitions, contractual warranties, along with covenants, conditions, and representations, are fundamental to a well-designed allocation of information risks and assurances among the parties.
In contracts for the sale of goods, Article 2 is replete with the rules relating to warranty. It contains four sections describing different kinds of warranties (§§ 2-312 (Warranty of Title); § 2-313 (Express warranty); § 2-314 (Implied warranty of Merchantability); and § 2-315 (Implied Warranty of Fitness for a Particular Purpose). In addition, § 2-316 contains rules for disclaiming warranties and § 2-317 says how warranties and disclaimers are to be construed.
One would expect, therefore, to find cognate sections in the Restatement (Second) of the Law: Contracts addressing warranties arising in non-sales transactions. Alas, one would be disappointed. You are about to read virtually everything that the Restatement has to say about warranty, which appears in Comment d to Section 2 (quoted in full as follows):
Promise of event beyond human control, warranty. Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain and may be dealt with as if the warrantor could cause the fact to be as he asserted. It is then immaterial that the actual condition of affairs may be irrevocably fixed before the promises made.
Words of warranty, like other conduct, must be interpreted in the light of the circumstances and the reasonable expectations of the parties. In an insurance contract, a warranty by the insured is usually not a promise at all; It may be merely a representation of fact, or, more commonly, the fact warranted is a condition of the insurer's duty to pay. In the sale of goods, on the other hand, a similar warranty normally also includes a promise to answer for damages.”
And that’s it. One must infer the Restatement’s view of warranty from this fragment. One thing seems clear: by identifying a warranty as a form of promise rather than a representation of fact, the Restatement assimilates warranty to the law of contractual agreement rather than the tort law of misrepresentation. By doing so, it seeks to change the illocutionary force of warranty, as a speech act theorist would say.
Speech act theory differentiates between the illocutionary force of statements of fact and promises. In speech act theory, an “assertive” speech act like a representation of fact makes a true or false statement about the world. A “commissive” speech act, like a promise, commits the speaker to act in some way. An assertion is true or false when it is made, but making an assertion imposes no obligation on the speaker. By contrast, a promise imposes on the speaker an obligation to act, but is neither true nor false because it does not communicate anything factual about the state of the world. To the extent that these speech acts can create legal liability for breach of the legal obligations they create, false assertions can make the speaker liable in tort for fraud while broken promises can make the speaker liable for breach of contract. At common law, this line between fraud and contract was strictly observed.
Because they both make assertions about the world and create legal obligations to act, sales warranties are hybrid speech acts, potentially making the speaker responsible both for having made a truthful representation and committing the speaker to perform a promise. Thus, Prosser called warranty: “a freak hybrid born of the illicit intercourse of tort and contract.” Perhaps it would be more charitable to call it the duckbilled platypus of sales law, confusing to legal taxonomists who try to police the boundaries between tort and contract but perfectly able to survive and thrive despite their theoretical confusion. (I am assuming that duckbilled platypuses thrive, at least on their better days.) Unfortunately, the failure of warranty to fit comfortably into either the tort or contract family creates enduring problems for courts adjudicating warranty claims.
Problems with considering warranty as a tort: To see a warranty as a tortious misrepresentation raises questions about how the elements of fraud apply. If the warranty is false, the warrantor’s liability does not turn on either its scienter or intent but only its agreement to be liable. Must a warrantee, like the recipient of a misrepresentation of fact, show reasonable reliance on the truth of the warranty in order to recover? In Article 2 warranties, courts generally do not require a buyer to reasonably rely on the warranty for it to become part of the basis of the bargain. But courts differ on whether recovery is barred by a warrantee’s actual knowledge of the falsity of the warranty. See CBS Inc vs. Ziff Davis Pub. Co. 553 N.E.2d 997,1011 (N.Y. 1990) (“This view of reliance, -- i.e., as requiring no more than reliance on the express warranty as being part of the bargain between the parties -- reflects the prevailing perception of an action for breach of express warranty that is no longer grounded in tort, but essentially in contract.”) Farnsworth said that Ziff indicates that tort is being absorbed into contract rather than vice versa. Farnsworth Contracts 4th ed.) section 1.7.
Problems with considering warranty as a contract: If modern warranty law fits poorly with tort law, it fits even less well with contract law. First there is the speech act problem. If contracts are promises and promises are commitments to act in a certain way, what can it mean to “promise” that something is the case? If the warrantor can bring about the warranted condition, an implied promise is clear. A seller who warrants that the cow it promises to sell to the buyer is a pure-blooded Angus is promising to deliver a pure-blooded Angus. But as Comment d confirms, by warranting a condition over which both parties know the promisor has no control, one is not promising to act at all. Instead, the courts construe the warranty to be an implied promise to compensate the warrantee if the warranted facts turn out not to be the case. Thus, a statement of fact is construed to imply a promise.
But to infer an implied promise to indemnify from the mere making of a false statement of fact threatens to turn any tort into a contract to indemnify. For example, a person who makes a materially false statement with the intention that the hearer rely thereby incurs potential liability to indemnify the hearer for loss incurred in reliance on the statement. If both parties are aware of this rule, then should the court infer that the speaker “promised” to indemnify by making the statement?
But conceptualizing a warranty as a promise raises many collateral questions about non-Article 2 warranty-promises that the Restatement leaves unaddressed and unanswered, to wit: What exactly is a warranty? Is it always a promise? How is a warranty made? Must the warrantee to whom the warranty is made rely in any way on the warranty as a condition to its enforceability? Does a warranty require consideration in order to be enforceable? Can a warranty be disclaimed, and if so, when and how? What if a warranty is made and disclaimed in the same agreement? How and when is a warranty “breached”? May warranties arise by implication with nothing being said by either party? When is a warranty breached for purposes of the statute of limitations? Can breach of warranty be a repudiation of the contract? Can breach of warranty be a material breach of contract suspending the counterparty’s duty to perform and justifying cancellation of the contract if the warranty is never fulfilled? What is the correct measure of damages when a warranty is breached?
At the time the Restatement (Second) was being drafted, someone must have suggested that these questions be answered by importing Article 2’s warranty provisions wholesale into the Restatement. But that was a temptation that the drafters wisely resisted. To bring the Restatement into conformity with Article 2’s warranty provisions would have threatened the entire Restatement project.
For it is not often recognized that Article 2’s warranty provisions violate the most fundamental principles of mutual assent intrinsic to contract theory. They represent an overthrow of the common law of express warranty, in which warranties did not arise from mere descriptions of goods being sold but from language that expressly “guaranteed” the accuracy of those descriptions. Chandelor v Lopus Exchequer Chamber Cro. Jac. 4 (1603) (Seller’s description of bezoar stone did not guarantee its authenticity).
Under Article 2, both implied and express warranties are now recognized to constitute an entirely different sort of legal obligation from the common law of express warranties. An implied warranty of merchantability arises automatically upon any sale of goods from a merchant dealer. § 2-314. Many analysts now consider the implied warranty of merchantability to be a form of product regulation having nothing to do with either mutual assent or reliance. It is an obligation imposed by law, not by agreement, which is the mark of tort, not of contract.
Assent and reliance are also eliminated as necessary to Article 2 express warranties, which abandon Chandelor’s requirement that a seller must expressly assume warranty obligations. Under § 2-313, the mere use of descriptive language by either party, if followed by performance, may create warranty obligations without either party being aware that a warranty was made. Thus, if buyer orders a shipment of 50,000 20-V-lithium ion batteries and seller ships 50,000 batteries, they are expressly warranted to be 20-V lithium ion batteries. § 2-106 (2) (shipment accepts order for immediate delivery); § 2-313 (1) (b) (express warranty created by any description of the goods that is made part of the basis of the bargain.)
Drafted in the 1970’s, The Second Restatement was notable for the number of provisions that it imported from Article 2, which had become popular with courts and commentators. But despite the view that express warranty was part of contract law and not the tort law of deceit, the drafters saw that incorporation of the Article 2 rules on warranty for non-Article 2 warranties would completely undo the unity of contract law. Since they could not generally acknowledge warranty without extensive reference to Article 2’s novel rules, they left the development of the general principles of non-Article 2 warranty law to the courts, where they are apparently developing smoothly without the guidance of the Restatement. This dodge permitted the Restatement to preserve its illusion of doctrinal coherence in achieving Williston’s great project of rationalizing all of contract law.
The mathematician Kurt Gödel (left) famously demonstrated (in layman’s terms, i.e. so far as I can understand it) that any system of logic that was rich enough to permit all mathematical truths to be deduced would inevitably give rise to contradictions, while any system consistent enough to eliminate all contradictions would inevitably be unable to generate all truthful mathematical propositions. All logical systems are either inconsistent or incomplete. The Restatement appears to have fallen prey to Gödel’s Theorem: it cannot accommodate all the rules of Article 2 warranty law without violating its fundamental premises about mutual assent.