Don’t Be Inconspicuous: Disclaiming the Implied Warranty of Merchantability

Some of the most important terms in any contract for the sale of goods are the warranties that apply to the goods.  In addition to any express warranties made by the seller, the law implies certain warranties in some contracts unless the seller expressly disclaims them, which may be trickier than expected.  One such warranty—the implied warranty of merchantability—applies in all sales of goods by a “merchant” with respect to the goods.  (Courts broadly interpret the term “merchant.”)  In such sales, section 2-314 of the Uniform Commercial Code (“UCC”) provides that the seller impliedly warrants that the goods are “merchantable.”  That concept could affect, for example, the number of allowable improperly stitched T-shirts in a batch or the required tensile strength of a polymer. As a result, manufacturers often want to exclude or disclaim the implied warranty of merchantability in favor of specific warranties or representations made in the sales contract or purchase agreement.  But, excluding the implied warranty of merchantability requires more than a standard provision stating that the seller makes no warranties other than those set forth in the agreement.

UCC Requirements To Exclude Implied Warranty Of Merchantability

Section 2-316 of the UCC sets forth the requirements under which the implied warranty of merchantability may be excluded from a contract for the sale of goods.  To disclaim the warranty of merchantability in the relevant agreement, the written contract must contain a conspicuous disclaimer that either: (1) expressly identifies “merchantability” or (2)  includes an expression stating that the goods are sold “as is” or “with all faults.”

According to the UCC, a disclaimer is conspicuous if it is written, displayed, or presented in such a way that a reasonable person should have noticed.  While these rules and the entirety of Article 2 of the UCC have been adopted by all 50 states, except Louisiana, these rules have not been interpreted in the same way by each state’s courts.

Varying Interpretations of the Requirements

In practice, courts from different jurisdictions have adopted different standards for determining whether a disclaimer is sufficiently conspicuous. Thus, an identically worded provision disclaiming the warranty of merchantability may be effective in one jurisdictions but not in another.  Rather than depending on the substance of the provisions, the difference may be in whether the heading, font, color, or style of the provision was sufficiently distinct from the rest of the contractual terms.  Consider the following examples of different interpretations.

• Some jurisdictions require provisions excluding the implied warranty of merchantability be printed in larger or differing font or color. Other jurisdictions allow other methods of distinguishing the provision, such as bolding, italicizing, or indenting the provision.
• Some jurisdictions will consider the buyer’s experience in determining whether a particular provision excluding the warranty of merchantability is conspicuous. In others, the buyer’s level of sophistication is irrelevant.

Drafting Considerations

When drafting a contract, any seller that wishes to disclaim the implied warranty of merchantability must carefully consider what is required under the laws of the relevant jurisdiction.  This highlights the importance of forum-selection and choice-of-law provisions, which determine where a lawsuit would be filed and what law the court must apply.  Many sellers use a form contract.  However, some buyers will insist on using their own terms of purchase or may otherwise request that the applicable law be changed.  Additionally, sellers should be mindful of integration clauses, which provide that the agreement evidences the entire contract and supersedes all previous writings and oral representations.  Where contracts contain such provisions, sellers should be careful not to rely on previous communications to establish that the implied warranty of merchantability should not apply to the sale.  Instead, disclaimers must be “conspicuously” included in the final written contract.

Failing to properly disclaim the implied warranty of merchantability may create unexpected liability.  Accordingly, please consult legal counsel when contracting with other parties, and be sure to ask if any exclusion or waiver of the warranty of merchantability would be effective in the particular jurisdiction of interest.