Express Warranty as Contractual - the Need for a Clear Approach - Sidney Kwestel

• Publication year: 2002

Express Warranty as Contractual—The Need for a Clear Approach

Sidney Kwestel^*

I. Introduction

In jettisoning section 12 of the Uniform Sales Act ("U.S.A."), which required reliance to create an express warranty¹ and replacing it with the "basis of the bargain" language of section 313(1) of the Uniform Commercial Code ("U.C.C."),² Karl L. Llewellyn touched off what appears to be an eternal debate as to whether reliance is still a prerequisite to the creation of an express warranty in a sale of goods.³ A recent attempt to put the debate to rest through a revision of section 2-313(1) failed,⁴ and it appears that the basis of the bargain language is here to stay. What clearly emerges from the ongoing debate, however, is that there is significant support for the view (i) that the U.C.C.'s basis of the bargain language requires some form of actual reliance for the creation of an express warranty⁵ or (ii) that such language is synonymous with a contract approach.⁶ But no one who is advocating that some form of actual reliance is necessary to create an express warranty has advanced a cogent reason why the immediate buyer in a commercial transaction should not be permitted to treat an express warranty the same as any other term of a sales contract. Stated otherwise, no one has explained why a seller's promise as to the quality of the goods should be treated differently from any of the seller's other promises to the buyer including, for example, her promise as to the quantity of the goods to be delivered.⁷

As explicated at length elsewhere,⁸ 1 favor a contract approach in all contexts to determine whether an express warranty has been created, and have shown that reliance should play no role in the formation of a contract that contemplates an exchange between the parties—such as a contract for the sale of a building or goods or a business. A contract may be formed even though the contracting parties do not subjectively rely on each other's promises in entering into the contract. If from an objective point of view each party sought the other party's promise in exchange for his own, the contract is enforceable even though neither may, in fact, have been motivated to make his promise in return for the other party's.⁹ Because reliance is irrelevant to contract formation, it should follow that a seller's promise as to a building's structural soundness, a business's financial condition, or the quality of goods becomes a term of the contract even though the party to whom the promise was made did not in fact rely on it. The promise becomes part of the contract unless the promisor shows that the parties did not mutually assent, that the promise was not supported by consideration, or that some other contract principle negates that conclusion.¹⁰

Recently the Second Circuit, in Galli v. Metz¹¹ and Rogath v. Siebenmann,¹² injected confusion into the contract approach when it considered the question of whether a seller's promise as to existing circumstances is enforceable if the buyer had knowledge that the circumstances were not as promised. The answer, it said, depends on the source of the buyer's knowledge.¹³ If the buyer "closes on a contract"¹⁴ after the seller has disclosed facts that would constitute a breach of warranty under the contract, the Second Circuit holds that the buyer has waived the breach.¹⁵ Under these circumstances, the court says, "[I]t cannot be said that the buyer . . . believed he was purchasing the seller's promise as to the truth of the warranties."¹⁶ But, the court notes, if the buyer's source of knowledge is anyone other than the seller, the buyer may maintain a breach of warranty action because "it is not unrealistic to assume that the buyer purchased the seller's warranty 'as insurance against any future claims'" and that is why the buyer insisted on the inclusion of the warranty in the sales agreement.¹⁷ In short, the Second Circuit gives us a black letter rule: If the source of the buyer's knowledge is the seller, the buyer has waived any breach of warranty; if the source of the buyer's knowledge is other than the seller, the seller's warranty is enforceable.¹⁸

In taking this cut-and-dried approach, the Second Circuit did not identify the fundamental contract issues involved. Nor are its opinions very clear. For example, in stating that the buyer waived the breach when the seller made the disclosure, the Second Circuit appears to assume that an express warranty was created and breached but that the buyer cannot recover because it waived the breach as a matter of law.¹⁹

Yet, when the court explains the reason for this sort of waiver, it uses terminology more appropriate to warranty creation ("purchasing the seller's promise") than to waiver of a breach of a warranty that had in fact been created.²⁰ In addition, when the Second Circuit in Galli uses the phrase "closes on a contract,"²¹ is it referring to the time of contract formation or to the time of contract performance? Put differently, does it make a difference, according to the Second Circuit, whether the seller's disclosure to the buyer occurs before contract formation—or after contract formation but prior to contract performance? Further, if the concept of waiver of breach is applicable, why does it not apply regardless of the source of the buyer's knowledge?

In an attempt to answer these questions and clarify the contract approach to express warranties between the immediate contracting parties, this Article will identify and address, in a commercial context, the relevant issues that arise when a party learns (either precontract or postcontract but preperformance) that the other party's warranties are untrue. Whether or not one agrees with a contract approach to express warranties, the debate over its applicability should at least take place in an arena in which all disputants speak the same language and use clearly denned terms. Thus, the relevant contractual issues should be placed on the table and analyzed together with case precedents that have addressed the issues but apparently have been overlooked in the ongoing debate. More specifically, after a brief discussion of the contract approach to warranty creation, this Article considers whether a promisor may introduce parol evidence of the promisee's precontract knowledge that warranted information is not true for the purpose of establishing that the promisor's promise warranting the information did not become part of the written contract or for the purpose of interpreting the warranty term.²² In this connection, assuming the parol evidence rule precludes the promisor from introducing this sort of evidence, I consider whether the promisor can obtain relief in an action for reformation.²³ Finally, I discuss how cases such as Galli and Rogath should be decided using a contract approach, and in so doing, I analyze the Second Circuit's interpretation of CBS Inc. v. Ziff-Davis Publishing Co. ("Ziff-Davis").²⁴

II. Warranty Creation

A. Mutual Assent and Consideration

In Ziff-Davis the New York Court of Appeals, adopting a contract approach to express warranties, unequivocally tells us that an "express warranty is as much a part of the contract as any other term."²⁵ Under this view, in determining whether a seller's promise relating to the condition of the subject matter became part of the contract, the critical question is whether the buyer '"believed [it] was purchasing the [seller's] promise . . ."'²⁶ as to the truth of the warranted information.

Similarly, the Indiana Supreme Court in Shordan v. Kyler²⁷ made clear that an express warranty is contractual in nature.²⁸ It explains that a seller's warranty "is a part of the contract."²⁹

It enters into the contract of sale as an element upon which the minds of the contracting parties unite and as a part of the consideration for the purchase. The action or defence [sic] based upon the breach of an express warranty is founded upon an express contract, and not upon deceit; and the question of the intent of the parties is involved as in actions on contracts generally. Defects known to the buyer may sometimes be excluded from a warranty, which are covered by its general terms, because they can not [sic] be presumed to have been intended by the parties to be insured against. But whatever, under the circumstances, the parties can be said to have intended by their contract, to that will the seller be held, as to other lawful engagements . . .³⁰

Although both Ziff-Davis and Shordan are silent as to the standard by which the buyer's belief or parties' intent will be determined, we would expect, consistent with contract law, that an objective—not a subjective—test would be applied to determine whether a buyer believed it was purchasing the seller's promise as to the truth of the warranted information.³¹ Thus, in deciding whether the seller's promise as to the truth of certain information is part of the sales contract, a court must first ask and answer the same questions it would ask and answer to determine whether any other promise is part of a contract. Those questions are whether, to paraphrase the Second Restatement of Contracts' ("Second Restatement") definition of an offer,³² the seller has manifested such a willingness to enter into a bargain on terms that include the seller's promise as to the truth of the information, so as to justify the buyer in understanding that her assent to that bargain is invited and will conclude it, and if so, whether the buyer has manifested assent to the seller's offer.³³ In short, the first questions that must be answered are whether, objectively viewed, the seller has made an offer that includes the warranty promise and, of course, whether the buyer has accepted the offer, that is, whether the parties mutually assented to terms that include this sort of promise. Similarly, in determining whether the seller's promise is supported by consideration, the court must ask whether, objectively viewed, it can be...