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Manufacturer’s Corner: Implied Warranties, Part 6

We bring our series on implied warranties to a close with a discussion about the consequences of breaching an implied warranty. (You can find the previous installment of the serieshere). The general rule is that the measure of damages for breach of warranty is the difference in value of the goods as delivered and the value of the goods as warranted. But, that simplistic statement glosses over many important issues that you need to consider in evaluating how to price your product.

First, the “value” is determined “at the time and place of acceptance [of the goods].” Note that this is not the time and place of acceptance of the contract, so there is a lag between the time you determine what you will charge, and the time at which the value of your product will be measured for purposes of ascertaining damages. Usually, this will not be a matter of much concern. However, if there is high price volatility in your product market or you’re entering a long-term supply contract, this can be a serious issue. In this instance, consider imposing an exclusive liquidated damages provision in your contract.

Second, this measure of damages is not exclusive. Unless otherwise limited, your buyer can usually recover incidental or consequential damages as well. As with your implied warranties, you may limit or exclude consequential damages by contract. Although the Uniform Commercial Code does not expressly allow you to exclude incidental damages, you may provide for exclusive liquidated damages or – as is commonly done – limit the buyer’s remedy to repair or replacement of the offending goods.[1]

Third, a buyer may, upon discovering a breach of warranty that could not have been discovered earlier, revoke its acceptance of the goods. This opens up a new measure of damages: the buyer may “cover,” by purchasing replacement goods, and then the measure of damages will be the difference between the replacement price and the contract price. In this instance, the replacement price is, of course, measured at the time of replacement, so once again this raises concerns in product markets where there is substantial price volatility, or where long-term contracts could allow for significant price variance.

Fourth, the foregoing is merely the general rule.  The UCC provides that “special circumstances” may dictate proximate damages of some other amount. For instance, consider a situation in which you sell to a wholesaler, who then resells the goods at a profit. Although some commentators suggest that this does not justify a departure from the general rule because your immediate buyer is also exposed to breach of warranty claims, limited case law holds that this is a special circumstance that would preclude recovery entirely.

These issues prompt only the first inquiries one must make when examining potential exposure for breach of warranty. We hope it is evident that they warrant careful consideration at two points at least: when pricing the goods and when drafting terms and conditions. As an immediate action item, we urge you to re-examine your terms and conditions to ensure that you have appropriate liquidated damages provisions or limitations of remedies.

[1] This is subject to its own limitations, of course.  If the limited remedy fails of its essential purpose – e.g. you promise repair or replacement, but the goods cannot or are not effectively repaired or replaced – the limitation is unenforceable and the ordinary rules apply.