5.7 Warranties and Disclaimers

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

5.7 WARRANTIES AND DISCLAIMERS

5.701 In General. A warranty is defined as a "promise that a proposition of fact is true." ⁶⁹ A person typically gives a warranty to relieve another party of the burden of ascertaining one or more facts himself or herself. To this extent, warranties reduce transactional costs and, thus, promote the utility of contracting with others. Warranties can be either express or implied. Express warranties arise from specific terms of a contract, while implied warranties can arise from a party's conduct or as a matter of law. Contract issues concerning warranties typically arise under the Uniform Commercial Code (UCC) in connection with contracts for the sale of goods; however, warranties also arise under common law and under state and federal statutes in a variety of contexts.

In commercial transactions, a carefully drafted and extensively negotiated section of warranties and representations is common. These provisions often turn out to be the most heavily negotiated provisions of the contract. Common contractual representations and warranties concern: (i) title to the

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assets or securities being sold; (ii) proper authorization of the transaction; (iii) accuracy of historical financial statements; (iv) material adverse changes in the business; (v) litigation and undisclosed liabilities; (vi) tax matters; (vii) leases, licenses, and contracts with third parties; (viii) employee matters; (ix) compliance with federal, state, and local laws; and (x) material misstatements and omissions.

In transactions involving the purchase of a new house, the Virginia Code provides certain statutory warranties to protect unwary consumers. In particular, section 55.1-357(B) of the Virginia Code provides:

[I]n every contract for the sale of a new dwelling, the vendor shall be held to warrant to the vendee that, at the time of the transfer of record title or the vendee's taking possession, whichever occurs first, the dwelling with all of its fixtures is, to the best of the actual knowledge of the vendor or his agents, sufficiently (i) free from structural defects, so as to pass without objection in the trade, and (ii) constructed in a workmanlike manner, so as to pass without objection in the trade.

In any contract dispute, an attorney should confirm whether any type of warranty exists and, if so, determine the basis of such warranty. Applicable statutes of limitation and available remedies, for example, typically vary depending on the type of warranty at issue.

5.702 Warranties, Representations, and Covenants Distinguished. Drafters of contracts frequently confuse the concepts of representations, warranties, and covenants. A representation is a statement made by one contracting party to the other, before or at the time of making the contract, concerning some past or existing fact or circumstance pertinent to the contract, which is influential in bringing about the agreement. ⁷⁰ A warranty refers to a promise concerning a present or future factual circumstance. Accordingly, a contracting party may represent that a certain factual circumstance is true and warrant that the factual circumstance will remain true.

Confusion arises when a contract provides that a party covenants that a factual circumstance will remain true or will occur. While this is the proper role of a warranty, it is not the proper use of a covenant. A covenant is literally

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a promise, and in contracts it should be used as a promise to perform. Accordingly, a sample clause in a contract using these terms correctly would read as follows:

The promisor represents that the factual event has not occurred as of the date hereof. In addition, the promisor warrants that the factual event will occur and covenants to perform and do all things and acts necessary to cause the factual event to occur.

5.703 Warranties Under the UCC.

A. In General. Warranties in connection with the sale of goods take three forms. First, there are express warranties made by the seller that the goods delivered to the buyer will conform to the description set forth in the sales contract. ⁷¹ Second, there are implied warranties made by the seller that the goods delivered to the buyer are suitable for the ordinary purposes for which the goods are used (an implied warranty of merchantability). ⁷² Third, there are implied warranties made by the seller that the goods sold are fit for the buyer's special intended use (implied warranty of fitness for a particular purpose). ⁷³

B. Express Warranty. Section 8.2-313(1) of the Virginia Code provides that any affirmation of fact or promise relating to the goods sold, any description of the goods, and any sample or model that is made part of the basis of the parties' bargain creates an express warranty that the goods delivered will conform to the affirmation, description, or model. An affirmation of fact could be something as simple as a statement that the goods will do a specified thing or serve a specified function. Reference to a sample or model may be accomplished through the seller's use of pictures, diagrams, or drawings, the effect of which is a warranty by the seller that goods sold are as shown in the sample or model.

A gray area in this aspect of contract law deals with the distinction between an express warranty and mere sales talk or "puffery." The general rule is that statements regarding value, statements of opinion, sales talk, and

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advertisements do not give rise to claims of fraud, misrepresentation, or breach of warranty. It is often difficult to apply this rule in practice, however. The Virginia Supreme Court has held that statements such as "in first class working condition" ⁷⁴ and "best quality" ⁷⁵ were express warranties in the contexts in which they were used by sellers. Similarly, sellers who describe vehicles as being in "excellent...