Understanding the Distinction Between Breach of Warranty and Breach of Contract in UCC, Summaries of Remedies

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DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM UCC BREACH OF WARRANTY AND CONTRACT CLAIMS: CLARIFYING THE DISTINCTION Timothy Davis* I.  Introduction ............................................................................783  II.  Distinguishing Article 2 Breach of Warranty and Breach of Contract Claims .................................................................785  A.  UCC Warranties of Quality .............................................785  B.  Breach of Warranty .........................................................789  C.  Article 2’s Remedies for Breach of Contract ..................792  D.  The Inconsistency Between Breach of Warranty and Breach of Contract ..........................................................794  E.  The Significance of the Distinction Between a Breach of Warranty and Breach of Contract Claim ....................800  III.  Conceptual Errors Derived Distinguishing Article 2 Warranty and Contract Claims ...............................................802  A.  Revocation and Breach of Warranty ...............................804  B.  Limited Remedies Provisions and the Right to Revoke ..812  IV.  Conclusion .............................................................................817  I. INTRODUCTION This Article addresses the distinction between breach of warranty and breach of contract claims arising under Article 2 of the Uniform Commercial Code (UCC). The idea to examine this distinction arose following a telephone conversation with a law professor who was preparing to teach an Article 2 Sale of Goods course for the first time. During our conversation, the professor described what she characterized as a humbling experience. A speaker at a trade association meeting nonchalantly stated: *John W. & Ruth H. Turnage Professor of Law, Wake Forest University School of Law. The Author gratefully acknowledges the research assistance of David Rea (Wake Forest University School of Law, Class of 2010). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 784 BAYLOR LAW REVIEW [Vol. 61:3 “Of course you understand there is a difference between an Article 2 breach of contract and a breach of warranty claim.” The professor was alarmed when she realized she had no idea that such a distinction existed. She had understood that any product dissatisfaction claim arising under Article 2 would afford the disappointed buyer with a claim for breach of warranty against the seller, but not for breach of contract. After briefly explaining to my colleague the differences between breach of contract and breach of warranty claims under Article 2, it occurred to me that this distinction is one that often evades law students, lawyers, judges, and perhaps even a few law professors. After further consideration, it also became apparent that a lack of understanding of this distinction also contributes to confusion regarding the relationship between UCC provisions that govern several concepts, including breach of warranty, disclaimers of warranties, revocation of acceptance, and limitation of remedies. This Article attempts to clarify the distinction between Article 2 breach of warranty and breach of contract claims by examining the existing legal framework that governs these claims. It begins with a brief overview of the provisions of Article 2 that govern UCC express and implied warranties. The Article then discusses breach of warranty and breach of contract claims arising under Article 2 and the differences that emerge from these distinct causes of action. In this regard, the Article enumerates the differing circumstances that give rise to a buyer’s breach of contract claim in contrast to a breach of warranty claim. It concludes that a disappointed buyer of goods possesses a breach of contract claim where goods have been rejected or revoked; where the seller fails to deliver any of the goods the buyer contracted to receive; where the seller repudiates; and in some circumstances, where the seller wrongfully delays delivery of the goods. On the other hand, a disappointed buyer’s breach of warranty claim arises only after the seller has finally accepted the goods as defined in section 2- 606, the UCC provision that governs a buyer’s acceptance of goods. The Article then examines cases that illustrate the practical and theoretical significance attached to understanding that breach of warranty and breach of contract are distinct causes of action to which different rules (e.g., statutes of limitations and a seller’s right to cure defects) may apply. In Part III, the Article explores the conceptual errors that flow from a failure to properly comprehend the distinction between Article 2’s warranty and contract related concepts. It argues that although courts acknowledge the distinct nature of Article 2 breach of contract and breach of warranty claims, judicial understanding of the distinction is often superficial. While DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 787 314 sets forth the requirements that must be met in order for the warranty of merchantability to be implied into a sales transaction.7 It also describes the circumstances under which such a warranty is breached.8 In a transaction involving the sale of goods, a merchant, who is a seller of goods of the kind,9 will be charged with an implied warranty of merchantability unless it has been effectively disclaimed.10 Although section 2-314 articulates several qualitative attributes that must be satisfied in order for goods to be merchantable,11 the core of the implied warranty of merchantability is that goods must be “fit for the ordinary purposes for which such goods are used.”12 If goods fail to comply with this standard at the time they are delivered, the implied warranty of merchantability has been breached.13 7 U.C.C. § 2-314(1). 8 Id. § 2-314(2). 9 Section 2-104(1) defines when a seller is a merchant of goods of the kind. Id. § 2-104(1). Comment 2 to section 2-104 states that the merchant status relevant to the implied warranty of merchantability is a merchant who deals in goods of the kind. Id. at cmt. 2; see Daniel K. Wiig, U.C.C. Article 2 Warranties and Internet-Based Transactions: Do the Article 2 Warranties Sufficiently Protect Internet-Based Transactions with Unprofessional Internet Merchants?, 12 FORDHAM J. CORP. & FIN. L. 717, 721–22 (2007) (discussing merchant status for purposes of Article 2’s implied warranty of merchantability). 10 U.C.C. § 2-314(1). Section 2-316(2) and (3) articulate the requirements a seller must meet to effectively disclaim the implied warranties of merchantability and fitness for particular purpose. Id. § 2-316. Subsection 2 provides, generally, that to be effective a disclaimer must be conspicuous and in the case of the warranty of merchantability, it must mention merchantability. Id. § 2-316(2). Subsection 3 articulates other ways in which the implied warranties can be effectively disclaimed. Id. § 2-316(3). Warranties can be effectively disclaimed through the use of language like “as is” which is commonly understood to mean that the buyer assumes all risks related to the quality of the goods; through the buyer’s inspection of the goods; and through trade usage. Id. See generally Holdych, supra note 4 (discussing UCC implied warranties). 11 Section 2-314(2)(a)–(f) articulates a non-exhaustive list of the qualitative standards with which goods must comply in order to be merchantable. U.C.C. § 2-314. For example, to be merchantable, “goods must pass without objection in the trade under the contract description,” and in the case of fungible goods, they must be of “fair and average quality within the description.” Id. § 2-314(2)(a)–(b). 12 U.C.C. § 2-314(2)(c); see Zwicky v. Freightliner Custom Chassis Corp., 867 N.E.2d 527, 536 (Ill. App. Ct. 2007) (“A product breaches the implied warranty of merchantability if it is not ‘fit for the ordinary purposes for which such goods are used.’”); Mattuck v. Daimler Chrysler Corp., 852 N.E.2d 485, 495 (Ill. App. Ct. 2006) (holding the same). 13 The implied warranty of merchantability relates to the condition of the goods at the time they are delivered to the buyer. See, e.g., Powers v. Am. Honda Motor Co., 79 P.3d 154, 157 (Idaho 2003) (explaining that breach of the warranty of merchantability focuses on whether the goods are unmerchantable at the time of delivery). The warranty does not extend to the future performance of the delivered goods. See, e.g., id.; Lipinski v. Martin J. Kelly Oldsmobile, Inc., DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 788 BAYLOR LAW REVIEW [Vol. 61:3 Elaborating on this standard, one court stated: [T]o recover for breach of the implied warranty of merchantability, the plaintiff must establish: (1) a merchant sold goods, (2) the goods were not ‘merchantable’ at the time of sale, (3) the plaintiff or his property was injured by such goods, (4) the defect or other condition amounting to a breach of the implied warranty of merchantability proximately caused the injury, and (5) the plaintiff so injured gave timely notice to the seller.14 Article 2’s other implied warranty of quality is the implied warranty of fitness for particular purpose. The essence of the fitness for particular purpose warranty is that the seller knows or has reason to know of the buyer’s purpose and the buyer actually relies on the seller’s skill or judgment in selecting goods suitable to meet the buyer’s particular purpose.15 In this regard, Article 2 provides: Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.16 A seller complies with the obligations imposed by the implied warranty of fitness if the goods satisfy a buyer’s particular purpose.17 Thus the 759 N.E.2d 66, 75 (Ill. App. Ct. 2001) (“An implied warranty of merchantability applies to the condition of the goods at the time of sale and is breached only if the defect in the goods existed when the goods left the seller’s control.”). 14 Seaside Resorts, Inc. v. Club Car, Inc., 416 S.E.2d 655, 659–60 (S.C. Ct. App. 1992) (applying North Carolina law). 15 See U.C.C. § 2-315. 16 Id. 17 See, e.g., Great Dane Trailer Sales, Inc. v. Malvern Pulpwood, Inc., 785 S.W.2d 13, 17 (Ark. 1990) (“To recover for breach of the warranty of fitness for a particular purpose, the plaintiff must prove that (1) he has sustained damages; (2) at the time of contracting, the defendant had reason to know of the particular purpose for which the product was required; (3) the defendant knew the buyer was relying on the defendant’s skill or judgment to select or furnish the product; (4) the product was not fit for the purpose for which it was required; (5) this unfitness was a proximate cause of the plaintiff’s damages; and (6) plaintiff was a person whom defendant would reasonably have expected to use the product.”). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 789 fitness warranty can be breached even if the goods are fit for their ordinary purpose if they nevertheless fail to satisfy the buyer’s particular purpose.18 In other words, a buyer need not establish that goods are defective in order to recover for breach of the warranty of fitness for particular purpose since a product can be merchantable yet unsuitable for the buyer’s particular purpose.19 A finding that the goods are defective, however, is likely to result in a breach of both the warranty of merchantability and fitness if the latter warranty has arisen.20 As with the implied warranty of merchantability, section 2-316 governs a seller’s disclaimer of the warranty of fitness for particular purpose.21 B. Breach of Warranty Section 2-714, which is titled “Buyer’s Damages for Breach in Regard to Accepted Goods,” sets forth the damages that are available to a disappointed buyer when a seller has breached Article 2’s qualitative warranties.22 Section 2-714 is properly invoked, however, only where a buyer has finally accepted goods.23 A final acceptance occurs when the buyer has sought neither to effectively reject the goods nor rightfully revoke its acceptance of them and the buyer’s conduct otherwise falls within the circumstances that trigger an acceptance under section 2-606.24 Thus, a buyer who has finally accepted nonconforming goods, and complies with other conditions precedent to its ability to recover damages, 18 See U.C.C. § 2-315. 19 McLaughlin v. Michelin Tire Corp., 778 P.2d 59, 66 (Wyo. 1989) (holding that the warranty of fitness was breached even though there was no defect in tires). 20 See Custom Automated Mach. v. Penda Corp., 537 F. Supp. 77, 83 (N.D. Ill. 1982) (holding that both the implied warranty of fitness and merchantability were breached when a machine failed to meet industry standards and conform to the buyer’s particular needs); Mennonite Deaconess Home & Hosp. v. Gates Eng’g Co., 363 N.W.2d 155, 163–64 (Neb. 1985) (holding that the warranties of merchantability and fitness were breached when a roof was defective because it leaked). 21 See discussion infra notes 146–51. 22 See U.C.C. § 2-714. 23 See id. § 2-714 cmt. 1. 24 See § 2-606(1)(b) (implying that a buyer accepts goods when he fails to effectively reject them). The other circumstances in which a buyer will be found to have accepted the goods under section 2-606(1) are when “after a reasonable opportunity to inspect the goods [the buyer] signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity,” or where the buyer “does any act inconsistent with the seller’s ownership.” Id. § 2-606(1). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 792 BAYLOR LAW REVIEW [Vol. 61:3 C. Article 2’s Remedies for Breach of Contract The buyer’s remedial options for a breach of contract are delineated in section 2-711. Among the options identified therein are rejection and revocation of acceptance.33 In this regard, section 2-711 refers to the remedies available “where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance.”34 A buyer who effectively rejects goods and a buyer with a substantively valid right to revoke are deemed not to have finally accepted the goods.35 For example, rejection and acceptance are viewed as mutually exclusive.36 Moreover, a buyer who revokes acceptance possesses the same rights and duties of a buyer who rejects.37 Comment 1 to section 2-711 differentiates its scope of coverage from that of section 2-714. It states “[t]he remedies listed here are those available to a buyer who has not accepted the goods or who has justifiably revoked his acceptance.”38 In addition to permitting the rejecting or revoking buyer to cancel the contract, an act similar to rescission,39 section 2-711 permits such buyers to 33 See U.C.C. § 2-711; see also Emerson Elec. Co. v. Am. Permanent Ware Co., 201 S.W.3d 301, 310 (Tex. App.—Dallas 2006, no pet.) (recognizing rejection and revocation as breach of contract claims under Article 2). 34 U.C.C. § 2-711(1). 35 A buyer who wrongfully rejects (i.e., had no substantively justifiable reason to reject), but does so in a procedurally correct manner, will be deemed to have effectively rejected the goods. Id. § 2-606(1)(b). Article 2’s principal section that governs acceptance, section 2-606, states, in pertinent part, that a buyer accepts when he “fails to make an effective rejection.” Id. Therefore, a buyer who follows the procedures for rejecting set forth in section 2-602 will not have accepted goods even if its rejection is substantively wrongful (i.e., the goods are not defective and thus conform to the contract). See id. In such an instance, a seller may pursue its remedies for breach by a buyer, but loses its right to sue for the price of the goods. See Integrated Circuits Unlimited v. E.F. Johnson Co., 875 F.2d 1040, 1042 (2d Cir. 1989) (holding the same); Brandeis Mach. & Supply Co. v. Capitol Crane Rental, Inc., 765 N.E.2d 173, 178–79 (Ind. Ct. App. 2002) (discussing how a wrongful yet effective rejection precludes acceptance and eliminates a seller’s action for the price). 36 U.C.C. § 2-607(2) (stating a buyer’s acceptance precludes rejection of goods); see, e.g., Lile v. Kiesel, 871 N.E.2d 995, 997 (Ind. Ct. App. 2007) (stating that an acceptance of goods precludes a buyer’s rejection of them). 37 U.C.C. § 2-608(3); See, e.g., Highway Sales, Inc. v. Blue Bird Corp., 504 F. Supp. 2d 630, 644–45 (D. Minn. 2007), rev’d on other grounds, 559 F.3d 782 (8th Cir. 2009); Scotwood Indus. Inc. v. Frank Miller & Sons, Inc., 435 F. Supp. 2d 1160, 1167 (D. Kan. 2006). 38 U.C.C. § 2-711 cmt. 1. 39 Article 2 adopted the term “revocation” to avoid problems fraught by the ambiguity associated with the term “rescission.” See id. § 2-608 cmt. 1. Revocation was also selected to DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 793 prove and recover direct damages,40 as well as incidental and consequential damages.41 Specifically, section 2-711 allows the rejecting or revoking buyer to seek damages measured by cover under section 2-712,42 or market differential under section 2-713,43 or to seek specific performance under section 2-716.44 A buyer who elects to reject or revoke does so by asserting a breach of contract action against the seller. In this regard, a state supreme court stated: Under the UCC, a non-breaching buyer’s remedy is dictated by whether the buyer has accepted or rejected the make it clear that disappointed buyers were not required to elect between cancellation of the contract and damages for breach of contract. Id. Revocation permits an aggrieved buyer to cancel the contract and sue for damages. See Lee v. Peterson, 716 P.2d 1373, 1374–75 (Idaho Ct. App. 1986) (discussing ambiguity and the other problems that flow from the term rescission). 40 See, e.g., Atlan Indus., Inc. v. O.E.M., Inc., 555 F. Supp. 184, 189 (W.D. Okla. 1983) (stating that a buyer who justifiably revokes acceptance is entitled to cover damages); Mercedes- Benz v. Garten, 618 A.2d 233, 242 (Md. Ct. Spec. App. 1993) (stating that a revoking buyer is entitled to remedies under section 2-711 including cover); Am. Bronze Corp. v. Streamway Prods., 456 N.E.2d 1295, 1302–03 (Ohio Ct. App. 1982) (holding that a seller’s repudiation of the contract permitted the buyer to cancel and pursue remedies for breach, including cover). 41 U.C.C. §§ 2-711, 2-715; see, e.g., Mercedes-Benz, 618 A.2d at 243 (revoking buyer entitled to remedies under section 2-711 including incidental and consequential damages); City Nat’l Bank v. Wells, 384 S.E.2d 374, 382 (W. Va. 1989). 42 U.C.C. § 2-711(1)(a); e.g., Cont’l Sand & Gravel, Inc. v. K & K Sand & Gravel, Inc., 755 F.2d 87, 92 n.5 (7th Cir. 1985) (stating that section 2-711 provides cover as a remedy available to a buyer when a seller fails to deliver or the buyer either rightly rejects or justifiably revokes its acceptance); Omni Electromotive, Inc. v. R.A. Johnson, Inc., 2006 WL 2590120, at *11–12 (N.J. Super. Ct. App. Div. Aug. 8, 2006) (buyer who revokes is permitted to cover). 43 U.C.C. § 2-711(1)(b); e.g., O’Brien v. Wade, 540 S.W.2d 603, 605–06 (Mo. Ct. App. 1976) (explaining that a buyer who rejects or revokes can not only cancel the contract but can also recover the difference between the contract and market price of the goods as authorized under section 2-713). Although cover is the preferred remedy, ordinarily, a buyer is free to choose between cover and market damages. See U.C.C. § 2-712 cmt. 6 . In some instances, however, a buyer will be penalized for not seeking cover damages. Id. For example, section 2-715 permits a buyer to recover consequential damages which “could not reasonably be prevented by cover or otherwise.” HGI Assocs. v. Wetmore Printing Co., 427 F.3d 867, 878, 880 (11th Cir. 2005) (articulating the principle that lost profits, consequential damages, are nonrecoverable if they could have been prevented by some means such as cover). Another possible limitation on market damages arises where use of the market formula will allow a buyer a greater recovery than it would have received under the cover remedy. See U.C.C. § 2-713. 44 U.C.C. § 2-711(2)(b); see Custom Controls Co. v. Ranger Ins., 652 S.W.2d 449, 453 (Tex. App.—Houston [1st Dist.] 1983, no writ) (illustrating that where a seller repudiates, the buyer can seek specific performance). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 794 BAYLOR LAW REVIEW [Vol. 61:3 goods. A buyer who rightfully rejects the goods can pursue a breach of contract action with [section 2-711]. However, only with acceptance may a buyer seek relief with a breach of warranty action.45 In addition to pursuing rejection or revocation under a breach of contract action, breach of contract provides the substantive basis pursuant to which a buyer can assert other claims. If the seller fails to deliver any of the goods for which the buyer contracted, the buyer’s cause of action sounds in contract and falls within section 2-711 and not section 2-714 since the buyer clearly could not have accepted what was not delivered. Section 2-711(1) states “[w]here the seller fails to make delivery or repudiates,” the breach of contract remedies prescribed in the section are available.46 Another circumstance where a disappointed buyer will be relegated to a breach of contract rather than a breach of warranty action is where the seller fails to deliver pursuant to a time period set forth in the parties’ agreement and the buyer cancels the contract.47 D. The Inconsistency Between Breach of Warranty and Breach of Contract The inconsistency in allowing a buyer to recover breach of warranty damages and breach of contract claims is illustrated by focusing on the nature of rejection and revocation of acceptance. Although the UCC eschews the use of the term rescission, rejection and revocation are akin to rescission. As one court stated, “[revocation] is, in effect, one form of rescission . . . .”48 Noting the fundamental difference between a breach of warranty action and rejection and revocation, another court stated “a party 45 Kirby v. NMC/Continue Care, 993 P.2d 951, 954 (Wyo. 1999). 46 U.C.C. § 2-711(1)–(2); see Leggett & Platt, Inc. v. Yankee Candle Co., No. 4:06-CV-366- Y, 2008 WL 723582, at *5 (N.D. Tex. Mar. 18 2008) (stating that a breach of contract claim arises when a seller fails to deliver promised); Sw. Bell Tel. Co. v. FDP Corp., 811 S.W.2d 572, 576 (Tex. 1991) (“The remedies for breach of contract are set forth in section 2-711, and are available to a buyer ‘[w]here the seller fails to make delivery.’”). 47 In such an instance, a breach of warranty action would be unavailable because the buyer would not have received any goods to accept. See U.C.C. § 2-711(1). Section 2-711(1) specifically recognizes that a seller’s failure to deliver goods constitutes a breach of contract. Id.; see Borah v. McCandless, 205 P.3d 1209, 1218 (Idaho 2009) (stating that a seller’s failure to deliver goods within a reasonable time gave the buyer action for breach of contract entitling it to remedies available under section 2-711). Accord Sw. Bell Tel. Co., 811 S.W.2d at 576. 48 Prince v. LeVan, 486 P.2d 959, 963 (Alaska 1971). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 797 which considers both the buyer’s subjective reaction to the allege defect (taking into account the buyer’s needs, circumstances, and reaction to the nonconformity) and the objective reasonableness of this reaction (taking into account the good’s market value, reliability, safety, and usefulness for purposes for which similar goods are used, including efficiency of operation, cost of repair of nonconformities, and the seller’s ability or willingness to seasonably cure the nonconformity).63 It is important to note, as discussed infra, a buyer has a substantive basis to revoke only if the goods or nonconforming in the first instance.64 A factor that may contribute to the confusion between breach of warranty and breach of contract claims is the tendency of courts to characterize a breach of warranty claims as sounding in contract. This is most vividly expressed in cases where a court must differentiate a contract based warranty action from a tort action. An instance where courts have found it necessary to draw this distinction occurs when they address the economic loss rule. An economic loss rule issue arises when an aggrieved buyer seeks to recover in tort, negligence or strict liability, under circumstances where the only injury complained of is a failure of the product to perform in accordance with the contract.65 The U.S. Supreme Court in East River Steamship Corp. v. Transamerica Delaval, Inc., articulated the economic loss rule in an admiralty case in which the Court decided “whether a cause of action in tort is stated when a defective product purchased in a commercial transaction malfunctions, injuring only the product itself and causing purely economic loss.”66 In rejecting plaintiff’s tort claims for damage to a ship’s turbines, the Court focused on the substantive bases and the policies that underlie tort and warranty recovery. Quoting a California case, the Court stated: The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing 63 Allen, 398 S.E.2d at 65. 64 See infra Part III.A. 65 See E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 859 (1986). 66 Id. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 798 BAYLOR LAW REVIEW [Vol. 61:3 physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong. The tort concern for safety is reduced when an injury is only to the product itself.67 Emphasizing that breach of warranty claims arise from the parties’ contractual relationship, the Court stated: Damage to a product itself is most naturally understood as a warranty claim. Such damage means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received “insufficient product value.”. . . Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case . . . .68 Like East River, other courts have focused on the contractual nature of breach of warranty claims in applying the economic loss rule. In a subsequent case, Saratoga Fishing Co. v. J.M. Martinac & Co., the Court explained its rationale in East River by focusing on the contractual nature of warranty claims.69 The Court stated: “[g]iven the availability of warranties, the courts should not ask tort law to perform a job that contract law might perform better.”70 A recent case also illustrates the focus on the contractual 67 Id. at 871 (quoting Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965)). 68 Id. at 872. Accord Turbomeca, S.A. v. ERA Helicopters L.L.C., 536 F.3d 351, 357 (5th Cir. 2008) (stating the court would “decline to recognize an exception to the East River doctrine for post-sale negligent failure to warn claims: ‘[I]f the damage is solely to the product itself and is solely economic, there [can be] no tort recovery,’ and the purchaser is restricted to a warranty or contract cause or action under maritime law” (citation omitted)); Isla Nena Air Servs., Inc. v. Cessna Aircraft Co., 449 F.3d 85, 87 (1st Cir. 2006); Massih v. Jim Moran & Assocs., Inc., 542 F. Supp. 2d 1324, 1331 (M.D. Ga. 2008) (stating that economic loss only recoverable in tort when there is injury to a person or property other than the defective product at issue). 69 520 U.S. 875, 880 (1997). Accord Turbomeca, 536 F.3d at 357 (adopting the holding and reasoning of East River); Isla Nena Air Servs., Inc., 449 F.3d at 91 (adopting East River rationale that economic loss rule helps to preserve line of demarcation between contract and tort). 70 Saratoga, 520 U.S. at 875. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 799 nature of warranty claims.71 The owner of a yacht unsuccessfully asserted tort claims against the various parties including the yacht’s manufacturer and the maker of the yacht’s engine.72 The yacht was totally destroyed by fire after certain of its components caught fire.73 Since the only loss was to the yacht itself, the court refused to recognize plaintiff’s tort claims.74 In contrasting tort and breach of warranty claims, the court in Fanok v. Carver Boat Corp., emphasized the contractual nature of the latter by stating: This distinction between the “defect” analysis in breach of implied warranty actions and the “defect” analysis in strict products liability actions is explained by the differing etiology and doctrinal underpinnings of the two distinct theories. The former class of actions originates in contract law, which directs its attention to the purchaser’s disappointed expectations; the latter originate in tort law, which traditionally has concerned itself with social policy and risk allocation by means other than those dictated by the marketplace.75 The contractual character of a breach of warranty action was also discussed in Lockheed Martin Corp. v. RFI Supply, Inc., which involved a suit brought by the buyer of an alleged defective fire suppression system.76 The court found that the economic loss rule precluded a cognizable tort claim since the only damage resulting from the failure of the product was to the product itself.77 Quoting East River, the First Circuit stated, “[e]ven when the harm to the product itself occurs through an abrupt, accident-like event, the resulting loss due to repair costs, decreased value, and lost profits is essentially the failure of the purchaser to receive the benefit of its bargain—traditionally the core concern of contract law.”78 Courts’ characterization of breach of warranty claims as sounding in contract in cases where the economic loss rule is at issue is not to be faulted. Such claims arise from the buyer’s and seller’s contractual 71 See generally Fanok v. Carver Boat Corp., 576 F. Supp. 2d 404 (E.D.N.Y. 2008). 72 Id. at 415–17. 73 Id. at 408. 74 Id. at 412. 75 Id. at 411 (quoting Denny v. Ford Motor Co., 662 N.E.2d 730, 737 (N.Y. 1995)). 76 440 F.3d 549, 551 (1st Cir. 2006). 77 Id. at 555. 78 Id. at 554. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 802 BAYLOR LAW REVIEW [Vol. 61:3 fees.94 The attorneys’ fees recovery was awarded pursuant to a Texas statute that permits the recovery of attorneys’ fees in breach of contract actions.95 In determining the availability of attorney’s fees, the court had to determine the substantive basis for an Article 2 breach of warranty claim.96 The court held that the attorneys’ fee statute was applicable in an Article 2 breach of warranty action since such a claim is contractual in nature since its focus is on a party’s failure to uphold its end of a bargain.97 Without elaborating the court noted that a breach of warranty claim is a distinct cause of action from a breach of contract claim.98 III. CONCEPTUAL ERRORS DERIVED DISTINGUISHING ARTICLE 2 WARRANTY AND CONTRACT CLAIMS As the forgoing discussion demonstrates, the distinction between breach of warranty and breach of contract actions under Article 2 can significantly impact buyers’ and sellers’ rights and obligations. It also reveals that courts have resoundingly acknowledged the distinct nature of Article 2 breach of contract and breach of warranty claims. Nevertheless, judicial understanding of the distinction is often superficial. Courts have erroneously conceptualized the remedies by failing to recognize that, notwithstanding their distinctiveness, breach of warranty and breach of contract claims are intertwined. A South Carolina case, Herring v. Home Depot, Inc., is instructive in this regard.99 There a purchaser asserted breach of warranty and revocation of acceptance claims relating to a defective lawn mower.100 The mower was covered by a two-year limited warranty issued by the manufacturer.101 The contract between the buyer and seller also contained a limitation of remedies provision that limited the buyer to repair and replacement of covered parts in the event of a breach of warranty.102 The mower 94 Id. 95 Id. at 57–59. 96 Id. at 60. 97 Id. at 60–63. 98 Id. at 60. 99 See generally 565 S.E.2d 773 (S.C. Ct. App. 2002). 100 Id. at 775. 101 Id. at 774. 102 Id. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 803 malfunctioned and several attempts by the manufacturer to repair it were unsuccessful.103 A jury ruled in favor of the plaintiff on his revocation of acceptance claim and awarded him breach of contract damages of over $3,000.104 Reversing the jury verdict, the court of appeals found that the jury’s verdict permitting revocation of acceptance without finding a breach of warranty was inconsistent.105 The South Carolina Court of Appeals began its analysis by appropriately noting that “[b]reach of warranty and revocation of acceptance are independent, discrete causes of action.”106 The court’s conclusion that the two causes of action “are ‘separate remedies treated in entirely different sections of the Code and they offer separate forms of relief,’”107 was also fundamentally sound. The court also accurately stated that: Breach of warranty is an action affirming the contract. In an action for breach of warranty, the buyer retains the goods. Revocation of acceptance, on the other hand, requires the return of the goods and cancellation of the terms of a contract. Additionally, the tests for a cause of action for breach of warranty differ from those for revocation of acceptance.108 The court, however, took a misstep as it concluded its analysis. The court stated that a finding of breach of warranty is not necessary to prevail on a revocation of acceptance claim.109 In arriving at this result, the court suggests there exists no relationship between a breach of warranty and a revocation of acceptance claim.110 As the following discussion reveals, although distinct, Articles 2’s breach of contract and warranty concepts bear a close relationship. It examines the two most prominent contexts in which a lack of complete comprehension of the relationship between breach of warranty and breach 103 See id. at 774–75. 104 Id. at 775. 105 Id. 106 Id. 107 Id. at 775–76. 108 Id. at 776 (footnotes omitted). 109 Id. 110 See id. at 775–76. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 804 BAYLOR LAW REVIEW [Vol. 61:3 of contract manifests: (1) the impact of disclaimers of warranties on a buyer’s right to reject and revoke; and (2) the impact of the failure of essential purpose of a limited remedy on the buyer’s right to revoke. A. Revocation and Breach of Warranty Although revocation and breach of warranty are distinct remedies, they are not completely independent. As discussed below, the existence and extent of a warranty is essential to determining whether or not a buyer has a right to reject or revoke. Nevertheless some courts, failing to recognize the connectedness of the concepts, have wrongly concluded that warranty on the one hand, and rejection and revocation on the other, are completely independent of each other. This misunderstanding of the concepts’ relationship is vividly illustrated in cases where courts have found that a buyer has a right to revoke even though the seller has effectively disclaimed all warranties. A leading case that miscasts the relationship is Blankenship v. Northtown Ford, Inc., which involved an attempt by a buyer to revoke its acceptance of a defective automobile.111 The sole issue before the court was whether the seller’s disclaimer of implied warranties barred the buyer from revoking its acceptance.112 The court rejected the seller’s argument that an effective disclaimer of all warranties negates the right to revoke.113 In contrasting a breach of warranty from a revocation claim, the court stated that whether a buyer has a right to revoke is premised on a subjective standard—if there is a substantial impairment of the goods to the buyer.114 It concluded, the “evidence unequivocally demonstrated that the substantially defective nature of the vehicle clearly impaired its value to the plaintiffs and thus revocation of acceptance is appropriate even if the dealer has properly disclaimed all implied warranties. We so hold.”115 The court went on to find that the seller had not effectively disclaimed implied warranties.116 A similar approach was taken by the court in Seekings v. Jimmy GMC of 111 420 N.E.2d 167,169 (Ill. App. Ct. 1981). 112 Id. 113 Id. at 170. 114 Id. 115 Id. 116 Id. at 171. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 807 . . . The Seekings approach relies on a seller’s implied “representation” concerning the quality of the goods, . . . which the court treats as outside the scope of the Article 2 warranty rules and thus not subject to disclaimer. This tactic renders the elaborate Code warranty provisions virtually meaningless since they can be finessed merely by finding an implied “non-warranty representation.” Surely the drafters did not promulgate three separate warranty-of- quality provisions (sections 2-313, 2-314, and 2-315) and a carefully crafted warranty disclaimer section (section 2- 316) so courts could ignore these provision at their whim. Rather, the drafters quite clearly intended U.C.C. sections 2-313 through 2-316 to be the source of rules governing a seller’s obligations concerning the quality of goods.133 Apart from being result driven, the rule adopted in the Seekings and Blankenship line of cases may also stem from an unwarranted extension of the notion that breach of warranty and revocation of acceptance claims are different remedies provided under the UCC. While the remedies and the elements required to establish them differ, they are not so distinct that one bears no relationship to the other.134 Blankenship’s adherents, in focusing on the substantial nonconformity element of a revocation claim, ignore the buyer’s burden of establishing a nonconformity in the goods as a predicate to its right to revoke.135 Under Article 2, the mere fact that goods may not perform as the buyer desires does not necessarily mean that the goods fail to conform to the contract.136 133 Harry M. Flechtner, Enforcing Manufacturers’ Warranties, “Pass Through” Warranties, and the Like: Can the Buyer Get a Refund?, 50 RUTGERS L. REV. 397, 425–26 (1998). 134 Compare U.C.C. § 2-314, and id. § 2-315, with id. § 2-608(1). 135 See Flechtner, supra note 133, at 430–32 (criticizing the Blankenship line of cases for dispensing with the requirement of the existence of a nonconformity as an essential element of a buyer’s revocation claim); David Frisch, Buyer’s Remedies and Warranty Disclaimers: The Case for Mistake and the Indeterminacy of U.C.C. Section 1-103, 43 ARK. L. REV. 291, 323–24 (1990) (commenting on the confusion resulting from the lack of clarity in Blankenship and Seekings). But see Manning Gilbert Warren III & Michelle Rowe, The Effect of Warranty Disclaimers on Revocation of Acceptance Under the Uniform Commercial Code, 37 ALA. L. REV. 307, 325 (1986) (arguing that the decision in Seekings finds support in the UCC’s definition of the nature of the nonconformity that must exist to sustain a revocation of acceptance claim). 136 See U.C.C. § 2-608(1). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 808 BAYLOR LAW REVIEW [Vol. 61:3 Therefore, a buyer seeking to revoke its acceptance must establish that the goods are nonconforming such that the value of the goods is substantially impaired as to the buyer.137 Thus a critical requirement to a viable revocation claim is establishing a nonconformity.138 Whether a good is conforming turns on express and implied terms of the contract.139 Goods conform to a contract if “they are in accordance with the obligations under the contract.”140 A determination of a seller’s obligations under the contract is based on the express terms of the contract as supplemented by UCC gap- filler provisions and inferred from circumstances such as trade usage and prior course of dealings.141 Where a seller effectively disclaims all implied warranties, it owes the buyer no obligation relating to the quality of the goods.142 Section 2-316 sets forth the requirements with which a seller must comply in order for it to effectively disclaim the implied warranties of merchantability and fitness for particular purpose.143 A seller can effectively disclaim all warranties by including conspicuous “as is” language in its contract with a buyer.144 As made clear by Comment 7 to section 2-316, the effect of “as is” language is to disclaim all warranties.145 It provides: “[G]eneral terms such as ‘as is,’ ‘as they stand,’ ‘with all faults,’ and the like . . . are understood to mean that the buyer takes the 137 Id. 138 See Manassas Autocars, Inc v. Couch, 645 S.E.2d 443, 447 (Va. 2007) (stating that nonconformity of goods is an element of a buyer’s revocation claim). Accord Camara v. Hill, 596 A.2d 349, 352 (Vt. 1991) (explaining that revocation requires that goods are nonconforming); see Herbert v. Harl, 757 S.W.2d 585, 589 (Mo. 1988); Bus. Commc’ns, Inc. v. KI Networks, Inc., 580 S.E.2d 77, 79 (N.C. Ct. App. 2003) (explaining that a buyer may revoke acceptance if “the goods are non-conforming and the non-conformity substantially impairs the goods’ value to him”); Nat’l Bank of Charleston v. Wells, 384 S.E.2d 374, 379–80 (W. Va. 1989) (stating that the existence of a nonconformity is an essential element of a revocation claim); see also Griffith v. Latham Motors, Inc., 913 P.2d 572, 577 (Idaho 1996) (“Whether an express or implied warranty has been breached is included in the revocation determination only in the sense that a breach of a warranty could substantially impair the value of the goods to the buyer.”). 139 See U.C.C. § 2-106(2) (instructing to look only to obligations under the contract). 140 Id. 141 See id. § 1-201(3) (defining agreement broadly to include express terms and terms arising out of the circumstances surrounding the transaction). 142 See id. § 2-316 cmt. 7; Olson v. U.S. Indus., Inc., 649 F. Supp. 1511, 1521 (D. Kan. 1986); Ace, Inc. v. Maynard, 423 S.E.2d 504, 509 (N.C. Ct. App. 1992). 143 See U.C.C. § 2-316(2). 144 Id. § 2-316(3)(a). 145 See U.C.C. § 2-316 cmt. 7. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 809 entire risk as to the quality of the goods involved.”146 A consequence of an “as is” disclaimer is that the seller possesses no responsibility to the buyer if the buyer receives defective goods.147 Consequently, a buyer can sue the seller neither for breach of contract nor breach of warranty for defects in the goods.148 In other words, an effective “as is” disclaimer extinguishes all UCC recourse a buyer might have with regard to a defective product, including claims for rejection and revocation of acceptance that a buyer might otherwise assert against the seller.149 The buyer’s rejection and revocation claims are nonexistent because the goods, even if defective, conform to the contract since the existence of a nonconformity is an essential element of a buyer’s rights to reject or revoke.150 Consequently, although breach of warranty and revocation of acceptance are discrete causes of action, the existence of a warranty is instrumental in determining whether a buyer has a right to reject or revoke its acceptance of goods.151 It would appear that the only instances in which the right to pursue a contract action against a seller is totally unrelated to the existence of a warranty would be where a seller fails to deliver, delivers a deficient quantity, or fails to deliver in a timely fashion.152 Otherwise, there is a relationship between the breach of contract (i.e., rejection and revocation) and the existence and breach of a warranty. Frank Griffin Volkswagen, Inc. v. Smith exemplifies the conceptually sound approach.153 There, a buyer sought to revoke its acceptance of an alleged nonconforming automobile.154 The defendant automobile dealer argued that because it had disclaimed all warranties it incurred no contractual obligations to the buyer, which could provide the basis of a right 146 Id. 147 See Harden v. Ford Motor Co., 408 F. Supp. 2d 309, 312 (E.D. Mich. 2005). 148 See Ducharme v. A & S RV Ctr., Inc., 321 F. Supp. 2d 843, 856 (E.D. Mich. 2004). 149 See id. 150 Frank Griffin Volkswagen v. Smith, 610 So. 2d 597, 602 (Fla. Dist. Ct. App. 1992) (explaining that failure of essential purpose of a limited remedy will not resurrect a buyer’s revocation claim where a seller has disclaimed all warranties and thus owes no obligation to the buyer). 151 See id. at 600 (suggesting that a contractual obligation arising from a warranty can serve as the basis for a revocation claim). 152 See U.C.C. § 2-316 cmt. 7 (2004) (no claim concerning the quality of goods). 153 Frank Griffin, 610 So. 2d at 601–02. 154 Id. at 599. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 812 BAYLOR LAW REVIEW [Vol. 61:3 contract, including the law of warranty. . . [T]he courts do not look with favor on disclaimers that purport to disclaim responsibility for what the seller has in essence agreed to sell. But if the only relevant language in the agreement as to quality has been effectively disclaimed, no nonconformity in the goods sufficient for revocation can exist. If the goods are sold “as is,” comment 7 to 2-316 states the “buyer takes the entire risk as to the quality of the goods.”170 In summary, it’s conceptually unsound for court to allow a buyer to revoke where a seller has effectively disclaimed all warranties. Courts that allow buyers to revoke in these situations are in essence creating and imposing warranty obligations on sellers that the buyer contracted away. They also manifest a lack of understanding of the relationship between the existence of a warranty and revocation of acceptance. The consequence of courts’ attempts to reach results that they perceive as fair to buyer’s, or of their misunderstanding of the relationship between warranty and revocation, is flawed interpretations and application of the UCC remedy provisions. B. Limited Remedies Provisions and the Right to Revoke Another illustration of the misunderstanding of the relationship between a breach of warranty and revocation arises in cases involving limited remedies provisions. As discussed supra,171 section 2-316 permits sellers to disclaim all implied warranties.172 Section 2-719 permits a seller to modify the remedies available to a buyer in the event that a seller breaches the contractual obligations it owes to a buyer.173 Section 2-719 provides that “the agreement may provide for remedies in addition to or in substitution for those provided in this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts.”174 Sellers will often limit or exclude warranties under section 316,175 and 170 1 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 8-4, at 565 (5th ed. 2006 & Supp. 2008) (footnotes omitted). 171 See supra notes 143–52 and accompanying text. 172 See U.C.C. § 2-316(2) (2004). 173 Id. § 2-719(1)(a). 174 Id. 175 Id. § 2-316. DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 2009] UCC CLAIMS 813 limit or modify remedies under section 719.176 In addition, sellers commonly grant buyers limited express warranties, disclaim the implied warranties of merchantability and fitness, and limit remedies for breach of the limited express warranty to repair and replacement of defective parts. Assuming such a limited remedy provision complies with the requirements of section 719, the effect of these provisions, taken in tandem, is two- fold.177 The buyer is granted a limited warranty that defines the circumstances under which a seller will be held liable to the buyer.178 If the goods fail to conform to the obligations arising pursuant to the express warranty it has given, the seller is responsible for having breached it.179 Ordinarily, such a breach gives rise to a breach of warranty claim if the buyer elects to keep the nonconforming goods.180 In the event that the buyer elects to return the goods, the buyer would be able to reject or revoke its acceptance.181 The effect of a limited remedies provisions, such as for repair and replacement of defective parts, is to displace all remedies that the UCC would otherwise allow a buyer to pursue in the event that the goods fail to conform to the seller’s contractual obligation.182 If a buyer has finally accepted the goods, a limited remedy of repair and replacement eliminates a disappointed buyer’s ability to sue for breach of warranty damages under section 2-714(2) as a means of recourse.183 An effective limited remedy of 176 Id. § 2-719(1). 177 See § 2-719 (requiring that a limited remedy constitute the exclusive and sole remedy available to the buyer in the event the seller breaches it contractual obligations). See id. § 2- 719(1). Since the UCC views all remedies as cumulative, contractually agreed upon remedies are available in addition to UCC remedies unless the contract expressly limits the buyer to the contractually agreed upon remedies. Id. § 2-719 cmt. 2. Comment 2 states: “Subsection (1)(b) creates a presumption that clauses prescribing remedies are cumulative rather than exclusive. If the parties intend the term to describe the sole remedy under the contract, this must be clearly expressed.” Id. Unlike section 2-316, which requires that disclaimers of implied warranties be conspicuous, id. § 2-316(2), the text of section 2-719 imposes no conspicuousness requirement. Id. § 2-719. Some courts, however, have read a conspicuousness requirement into section 2-719. E.g., Adams v. Am. Cyanamid Co., 498 N.W.2d 577, 588 (Neb. Ct. App. 1992) (requiring that such clauses be conspicuous); Stauffer Chem. Co. v. Curry, 778 P.2d 1083, 1093 (Wyo. 1989) (reading conspicuousness requirement into section 2-719). 178 See U.C.C. § 2-316. 179 See id. § 2-719(1). 180 See id. § 2-714. 181 See id. § 2-711. 182 See id. § 2-719(1). 183 See id. § 2-719(1)(a). DAVIS.WL (DO NOT DELETE) 4/5/2010 1:07 PM 814 BAYLOR LAW REVIEW [Vol. 61:3 repair and replacement also precludes a buyer who has accepted the goods from later revoking its acceptance of them.184 In short, an effective limited remedy eliminates all other remedies, including breach of warranty or breach of contract (e.g., rejection and revocation of acceptance).185 The buyer’s UCC remedies, including damages for breach of warranty, rejection, and revocation, are resurrected where a determination is made that the limited remedy fails of its essential purpose.186 In this regards, section 2-719 provides that “[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.” 187 A failure of essential purpose occurs when a seller is either unable or unwilling to repair the defective goods such that the buyer has lost a substantial value of the bargain.188 Because revocation is a UCC remedy, a buyer’s revocation claim can be restored if the limited remedy fails of its essential purpose.189 Notwithstanding the differences between disclaimers of warranties and limitation of remedies provisions, a few courts have erred in holding that the failure of the essential purpose of a limited remedy invalidates a disclaimer of implied warranties.190 An Alabama state court so held in Page v. Dobbs Mobile Bay, Inc.191 An automobile dealer, who sold a 184 See U.S. Achievement Acad., L.L.C. v. Pitney Bowes, Inc., 458 F. Supp. 2d 389, 405–06 (E.D. Ky. 2006) (demonstrating that an effective limited remedy provision of repair and replacement precludes revocation of acceptance claim). 185 See U.C.C. § 2-719(1)(b). 186 Razor v. Hyundai Motor Am., 854 N.E.2d 607, 626 (Ill. 2006) (stating that where a limited remedy fails of its essential purpose, a buyer is able to pursue other remedies afforded by the UCC); Young v. Hessel Tractor & Equip. Co., 782 P.2d 164, 167 (Or. Ct. App. 1989) (stating that a limited remedy fails of its essential purpose when a seller is unable or unwilling to repair defects and thus deprives the buyer of the substantial value of the bargain); Murray v. Holiday Rambler, Inc., 265 N.W.2d 513, 521 (Wis. 1978). 187 U.C.C. § 2-719(2). 188 Young, 782 P.2d at 167; Herring v. Home Depot, Inc., 565 S.E.2d 773, 776 (S.C. Ct. App. 2002) (explaining that a limited remedy fails “if the seller is unwilling or unable to repair or replace the product of if there is an unreasonable delay in the repair or replacement of the product”). 189 Rose v. Colo. Factory Homes, 10 P.3d 680, 684 (Colo. Ct. App. 2000); Young, 782 P.2d at 167 (stating that if a remedy fails of its essential purpose, revocation becomes available to the buyer); Murray, 265 N.W.2d at 521 (stating that a buyer can invoke all UCC remedies including revocation when limited remedy fails of essential purpose). 190 See, e.g., Page v. Dobbs Mobile Bay, Inc., 599 So. 2d 38, 42 (Ala. Civ. App. 1992). 191 Id.