UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 13, No. 2WINTER 1990
ARTICLES
Individual Negotiation of Warranty Disclaimers: An Economic Analysis of an Assumedly Market Enhancing Rule
Thomas J. Holdych(fn*)
George Ferrell(fn**)
I. Introduction
Few concepts in law have been attacked with the ferocity and tenacity that the judiciary has reserved for disclaimers of warranty. Even though U.C.C. section 2-316 provides the manner by which parties to a transaction for the sale of goods may disclaim implied warranties of merchantability and fitness for a particular purpose, courts have held many disclaimers meeting the section's requirements to be unenforceable.(fn1) In Washington State, a combination of judicial and legislative actions has added to the requirements of the U.C.C, and to warranty disclaimers not governed by the Code, the additional requirements that a disclaimer of implied warranties be explicitly negotiated and that the attributes being disclaimed be specifically described.(fn2)
The genesis of these requirements was Berg v. Stromme, a case in which the Washington Supreme Court sustained the claim that a disclaimer of the implied warranty of merchantability did not bar a new car buyer from recovering for a breach because the term had not been "explicitly negotiated" between him and the dealer.(fn3) In Berg, the plaintiff, a nonmerchant, purchased a new car from the defendant. After the plaintiff experienced problems with the car, he sued, claiming a breach of express and implied warranties. The court found that the plaintiff negotiated with the defendant the purchase of more than forty pieces of optional equipment, the cost of which nearly doubled the price of the car. The court also found, however, that the plaintiff did not negotiate with the defendant over various terms appearing in condensed type on the reverse side of the purchase order. One of those terms was a disclaimer by the defendant of all warranties, express or implied.(fn4) The court stated that "[w]aivers of such warranties, being disfavored in law, are ineffectual unless eocplicitly negotiated between buyer and seller and set forth with particularity showing the particular qualities and characteristics of fitness which are being waived."(fn5) Although the Berg decision may have provided relief to the bedeviled owner of a 1965 Pontiac, it also created rules that increase the transaction costs of the bargaining process to the extent those rules are adhered to by contracting parties.
To the Washington Supreme Court, the Berg case involved a paradigmatic unfair transaction in which the contract term was provided on a standard form without negotiation.(fn6) The court assumed that the buyer was unaware of the onerous disclaimer clause and that he would never have agreed to it if he had known of its existence.(fn7) Thus, in the eyes of the court, the buyer received what economists would classify as a suboptimal term. The facts that the court recited were apparently intended to suggest that the seller was unconcerned with the buyer's preferences and completely unwilling to take those preferences into account when drafting his form contract.(fn8)
The court's dire view of contracts using standardized terms, if correct, might be perceived by some to justify the explicit negotiation and particularized disclaimer requirements of Berg. But if, instead, the terms of those contracts are the product of determined efforts by merchants to offer the terms that buyers desire, explicit negotiation and particularized disclaimer would simply be unnecessary, unwanted, and costly protections forced upon buyers by the courts.
In this Article, we will examine the economic forces that shape the typical contract for the sale of goods to determine whether Berg's requirements of explicit negotiation and specific disclosure are justified, and if not, whether the Berg rules should be modified or abolished. In particular, we will examine how buyers and sellers determine the terms of the contracts they enter. Most importantly, we will consider the common assertion that consumers have no ability to bargain and therefore have no influence on what terms merchants and manufacturers include in their standard contracts. We will also consider whether merchants systematically frustrate consumers' preferences regarding contract terms, or whether, instead, merchants are driven by market forces to satisfy those preferences at either competitive or monopolistic prices. We will conclude by suggesting that the Berg rules are ineffective, or at best unnecessary, in furthering the consumer protection goals announced by the court itself.
II. The Rules of Berg and Its Progeny
Courts quickly extended the Berg rules, described above, to situations other than disclaimers of warranty in consumer purchases of durable goods.(fn9) In Dobias v. Western Farmers Association,(fn10) the Court of Appeals invalidated a disclaimer of warranties because it was not explicitly negotiated, even though both parties to the contract were merchants, and even though the party seeking to defeat the disclaimer actually knew of its presence by virtue of its inclusion in previous contracts between the parties.(fn11) Apparently unconcerned that the Berg court's desire to protect against unknowing assent to disclaimers had been completely satisfied by the buyer's actual knowledge of the disclaimer, the Dobias court instead focused on explicit negotiation, as if the court considered negotiation to be an indispensable ritual indicating actual assent.(fn12)
The approach in Dobias appears to have been modified somewhat by Hartwig Farms, Inc. v. Pacific Gamble Robinson,(fn13) in which the same court recognized in dicta that disclaimers could be effective between merchants if sufficient evidence were introduced to show that either a course of dealing between the parties or trade usage provided for such disclaimers.(fn14) Finding insufficient evidence of such a course of dealing or trade usage, the court went on to invalidate the disclaimer at issue because it had not been explicitly negotiated.(fn15) Despite the rapid and enthusiastic expansion of the Berg doctrine,(fn16) the Washington Supreme Court has recently limited the doctrine in important ways in cases involving nonconsumer transactions. In Frickel v. Sunnyside Enterprises,(fn17) the court considered the case of an inexperienced buyer who purchased apartment buildings that later proved to have faulty foundations. The buyer sued the developer/seller, claiming that the seller had breached an implied warranty that the apartments would be habitable. The seller defended on the ground that, among other things, the contract of sale signed by the buyer included a disclaimer of warranties.
After holding that an implied warranty of habitability did not attach to the transaction, the court went on to state in dicta that the seller's disclaimer of warranties was valid even though the parties did not explicitly negotiate over it.(fn18) The court found the Berg case distinguishable from the case at bar in several important ways: first, the buyers, though inexperienced, were entering into the purchase of commercial property as an investment;(fn19) second, the transaction was at arm's length, with no hint that it involved what is commonly characterized as a contract of adhesion;(fn20) and third, the buyers were represented by counsel and had ample opportunity to inspect the premises or obtain an expert inspection if they had desired to do so.(fn21) Thus, the court concluded, the buyers did not require the protection afforded less capable buyers under Berg.(fn22)
The next contraction of the explicit negotiation requirement came in Travis v. Washington Horse Breeders Association.(fn23) In Travis, the court dealt with a buyer purchasing a racehorse at auction on behalf of a partnership of which he was a member. After purchasing the horse, the buyer discovered that the horse was physically unfit for use as a racehorse. The former owner of the horse and the auctioneer refused to refund the purchase price, and the buyer sued both, claiming, among other things, breach of an implied warranty.(fn24) In their defense, the seller and auctioneer relied on a disclaimer of warranties contained in a catalog issued to the buyer. The buyer responded by asserting that the disclaimer was invalid under Berg because it was not explicitly negotiated between the parties. The court sided with the seller and auctioneer and refused to extend the explicit negotiation doctrine to sales at auction.(fn25)
To support its decision, the Travis court explicitly relied on some of the same economic rationales explored later in this Article. The court pointed out that the auction catalog conspicuously displayed the disclaimer at issue and that such disclaimers, at least in the context of an auction, were effective even if the buyer did not have actual knowledge of them.(fn26) This rule was necessary, the court explained, to preserve the fundamental justification for auctions: "[P]art of the economic rationale of an auction is to avoid face-to-face negotiations. It is a cost-saving device in which face-to-face negotiations, except as to price, are not engaged in by the parties."(fn27)
The explicit negotiation doctrine thus appears to be developing away from the rigid and overinclusive rules of Berg and its progeny, moving instead toward...
