Corporate & Securities Law

Disclaiming the Warranty of Title in Sales of Goods

By Ken Adams

Rarely do I have occasion to offer thoughts on drafting under article 2 of the Uniform Commercial Code, which applies to sales of goods.

Here are two warranty disclaimers from some equipment purchase agreements I’ve been reviewing:

NO OTHER WARRANTY TO CUSTOMER FROM SELLER IS EXPRESS OR IMPLIED. SELLER SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULARPURPOSE.

THE FOREGOING WARRANTIES … ARE GIVEN IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, IN FACT OR BY LAW, OR ARISING BY REASON OF CUSTOM OR USAGE IN THE TRADE OR BY COURSE OF DEALING, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

Both extracts disclaim all warranties other than those stated, then make a point of mentioning the warranty of merchantability and the warranty of fitness for a particular purpose.

Mentioning the warrant of merchantability makes sense, as section 2-316 of the UCC says that “to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability.” By contrast, section 2-316 says that you don’t have to refer by name to the warranty of fitness?it’s enough to say, for example, that ?There are no warranties which extend beyond the description on the face hereof.?

But being more specific than strictly necessary isn’t much of a problem. Here’s what is a problem: these extracts make no mention of the warranty of title.

Section 2-312 of the UCC says “there is in a contract for sale a warranty by the seller that (a) the title conveyed shall be good, and its transfer rightful; and (b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.” It goes on to say that the warranty of title “will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.”

So if disclaimer language proposes to exclude all warranties other than those stated in the contract but doesn’t mention the warranty of title, that disclaimer language is incorrect?it’s insufficient to exclude the warranty of title. And in the contracts that I’ve looked at recently that contain warranty disclaimer language, most don’t mention the warranty of title.

Failure to take into account the warranty of title would seem unlikely to result in, for example, a seller’s being unpleasantly surprised to find that it had in fact given a warranty of title. That’s because, in the words of Drafting Effective Contracts: A Practitioner’s Guide, by Robert A. Feldman and Raymond T. Nimmer, the warranty of title doesn’t “give rise to as much legal excitement and debate as express warranties dealing with the quality and nature of goods or other subject matter.”

Nevertheless, it’s a bad idea to say in a contract something that’s incorrect as a matter of law.

By the way, a reminder: disclaimer language doesn’t have to be in all capitals in order to be “conspicuous,” as required under the UCC. See this February 2008 blog post.

Full post as published by AdamsDrafting on January 12, 2010 (boomark / email).