George Mason School of Law
Contracts II
Warranties
F.H. Buckley
fbuckley@gmu.edu
1
Conditions and Warranties
Promises
Conditions
Warranties
Election
Forfeiture
2
Damages
Damages only
Warranties
 With a warranty a seller assumes a
risk as to the product
 The prior question is whether the risk
should be born by the seller or the
buyer
3
Let’s say seller sells a whizbang
4
The whizbang
50% chance of a whiz
It might go whiz
5
The whizbang
50% chance of a whiz, 50% of a bang
It might go whiz …
6
or it might go bang …
Evaluating risk: Expected Values
 The expected monetary value of an
accident is p*L
7
Evaluating risk: Expected Values
 The expected monetary value of an
accident is p*L
 where p is the probability of occurrence
 And L is the cost of the accident on
occurence
8
Evaluating risk: Expected Values
 So the expected monetary value for
an accident with a 50 percent
probability of a loss of $250 is $125
9
The Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
10
The Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expected cost of a bang
is $125
11
The Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expected cost of a bang
is $125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
12
The Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 Seller is the least-cost risk avoider
13
The Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 How will the parties assign the risk?
14
The Least-Cost Risk Avoider
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 How will the parties assign the risk?
 Buyer will pay seller to assume the risk
15
The Least-Cost Risk Avoider
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 How will the parties assign the risk?
 Buyer will pay seller to assume the risk
 And what will this do to the purchase price?
16
The Least-Cost Risk Avoider
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 How will the parties assign the risk?
 Buyer will pay seller to assume the risk
 What is the range of prices between which
the parties will bargain?
17
The Least-Cost Risk Avoider
 Assume that the expect cost of a bang is
$125
 Seller (but not Buyer) can eliminate this
risk at a cost of $100
 How will the parties assign the risk?
 Buyer will pay seller to assume the risk
 Seller will not accept less than $100 and
(risk-neutral) buyer will not pay more than
$125
18
Let’s flip this
Buyer as Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expected cost of a bang
is $125
 Buyer (but not Seller) can eliminate this
risk at a cost of $100
 What happens now?
19
Let’s flip this
Buyer as Least-Cost Risk Avoider
 Seller sells a whizbang to Buyer for
$1,000, with no warranties as to bangs
 Assume that the expected cost of a bang
is $125
 Buyer (but not Seller) can eliminate this
risk at a cost of $100
 Buyer will spend $100 to eliminate a risk
with an EMV of $125
20
The Least-Cost Risk Avoider
 The parties will seek to assign the
risk to the party who can most
efficiently eliminate it.
21
The Least-Cost Risk Avoider
 The parties will seek to assign the
risk to the party who can most
efficiently eliminate it.
 An application of the Coase Theorem
 If bargaining is costless, does it matter
who bears the risk?
22
The Least-Cost Risk Avoider
 The parties will seek to assign the
risk to the party who can most
efficiently eliminate it.
 An application of the Coase Theorem
 And if bargaining isn’t costless?
23
The Least-Cost Risk Avoider
 The parties will seek to assign the
risk to the party who can most
efficiently eliminate it.
 An application of the Coase Theorem
 You’re a judge. You have a pretty good
idea who the least-cost risk avoider is.
The parties have left the question of risk
silent in their contract. How do you
assign the risk?
24
The Least-Cost Risk Avoider
 The parties will seek to assign the
risk to the party who can most
efficiently eliminate it.
 An application of the Coase Theorem
 “Mimicking the market”
25
A second way of thinking about
Least-Cost Risk Avoiders
 Same example. But now neither party
can eliminate the risk for less than
$125.
 On whom should the risk fall? Does it
matter?
26
A second way of thinking about
Least-Cost Risk Avoiders
 Same example. But now neither party
can eliminate the risk for less than
$150.
 On whom should the risk fall? Does it
matter?
 Suppose that seller is a large corporation
and buyer is an impecunious consumer.
Does that make a difference?
27
A second way of thinking about
Least-Cost Risk Avoiders
 Same example. But now neither party
can eliminate the risk for less than
$150.
 On whom should the risk fall? Does it
matter?
 Suppose that seller is a large corporation
and buyer is an impecunious consumer.
Does that make a difference?
 Do risk preferences matter?
28
Are you an EMV’er?
 An EMV’er always selects the payoff
with the highest expected monetary
value (p*O)
29
Are you an EMV’er?
 An EMV’er always selects the payoff
with the highest expect monetary
value (p*O)
 Suppose I offer you a lottery ticket
with a .5 probability of 0 and a .5
probability of $2. Would you pay me
50¢ for the ticket?
30
Are you an EMV’er?
 An EMV’er always selects the payoff
with the highest expect monetary
value (pO)
 Suppose I offer you a lottery ticket
with a .5 probability of 0 and a .5
probability of $2. Would you pay me
50¢ for the ticket?
 EMV = .5($2) = $1.00
31
Are you an EMV’er?
 An EMV’er always selects the payoff
with the highest expect monetary
value (pO)
 Suppose I offer you a lottery ticket
with a .5 probability of 0 and a .5
probability of $10,002. Would you
pay me $5,000 for the ticket?
32
Are you an EMV’er?
 An EMV’er always selects the payoff
with the highest expect monetary
value (pO)
 Suppose I offer you a lottery ticket
with a .5 probability of 0 and a .5
probability of $10,002. Would you
pay me $5,000 for the ticket?
 EMV = .5($10,002) = $5,001
33
Three kinds of people
 EMV’ers are risk neutral
 They always take the gamble with the
highest EMV
34
Three kinds of people
 EMV’ers are risk neutral
 Most people are risk averse
 They’ll pass on some opportunities with a
positive EMV
35
Three kinds of people
 EMV’ers are risk neutral
 Most people are risk averse
 Risk lovers are risk prone
 They will accept some gambles with a
negative EMV
36
Recall what we said about utility
 Utility is the economist’s measure of
well-being (cf. utilitarianism)
 Ordinal Utility measures preferences
without weighing them (first, second,
third are ordinal numbers)
 Cardinal Utility (Bentham’s “utils”)
weighs utility (one, two, three are
cardinal numbers)
37
Cardinal Utility plotted against EMV
Utility
For EMV’ers,
utility is linear with money
$EMV
38
Cardinal Utility
For the risk averse, the marginal utility
of money declines (more money generates
increasingly smaller increases in utility).
Utility
$EMV
39
Cardinal Utility
A justification for progressive income taxation?
Utility
$EMV
40
This suggests a second way of thinking
about Least-Cost Risk Avoiders
 There is a 50 percent probability of a
loss of $250
 Same example. But now neither party
can eliminate the risk for less than
$125
 Would you assume that firms are riskneutral and consumers risk averse as to
a loss of $250?
41
This suggests a second way of thinking
about Least-Cost Risk Avoiders
 There is a 50 percent probability of a
loss of $250
 Same example. But now neither party
can eliminate the risk for less than
$125
 Would you assume the firms are riskneutral and consumers risk averse?
 Would you expect the risk to be born by
the wealthier party?
42
Now--A third way of thinking
about Least-Cost Risk Avoiders
 There is a 50 percent probability of a
loss of $250
 Same example. But now neither party
can eliminate the risk for less than
$125
 On whom should the risk fall? Does it
matter?
 Suppose that seller sells 10,000 whizbangs
and buyer buys only one? Does that make
a difference?
43
Probability distribution for buyer
%
.5
750
44
$750
1,000
$EMV
Probability distribution for seller of 60
whizbangs
%
.5
875
45
$EMV
Probability distribution for seller of
10,000 whizbangs
1.0
%
875
46
$EMV
Probability distribution for seller of
10,000 whizbangs
1.0
%
875
All Curves have the same mean value ($875)
but different risk (dispersion from the mean).
47
Probability distribution for seller of
10,000 whizbangs
1.0
%
875
All Curves have the same mean value ($875)
but different risk (dispersion from the mean).
48
Probability distribution for seller of
10,000 whizbangs
1.0
%
875
49
$EMV
Three kinds of Least-Cost Risk Avoiders
1. Where one party is better able to
reduce the risk or the harm (or to
value the loss)
2. Assuming risk aversion, where one
party is wealthier than the other
3. Assuming risk aversion, where one
party is a better insurer because he
can diversify the risk
50
Three kinds of Least-Cost Risk Avoiders
 Where one party is better able to reduce the
risk or the harm (or to value the loss)
 Assuming risk aversion, where one party is
wealthier than the other
 Assuming risk aversion, where one party is a
better insurer because he can diversify the risk
 Where might third party insurance
substitute?
51
Three kinds of Least-Cost Risk Avoiders
 Where might third party insurance
substitute?




52
Liability for a faulty transmission?
Break-in of a house?
Emotional Distress
World War III?
Sessa v. Riegle
 Was there a finding that the horse
that was sold was defective?
53
Sessa v. Riegle
 Was there a finding that the horse
that was sold was defective?
 Tendenitis might have resulted from the
drive, or from unclean conditions in
Sessa’s stable
 In the later case, buyer took the risk
54
Sessa v. Riegle
 Was there a finding that the horse
that was sold was defective?
 Tendenitis might have resulted from the
drive, or from unclean conditions in
Sessa’s stable
 In the former case, who took the risk?
 UCC §§ 2-501(1)(a), 2-504
55
Sessa v. Riegle
 Was there a finding that the horse
that was sold was defective?
 Tendenitis might have resulted from the
drive, or from unclean conditions in
Sessa’s stable
 Thrombosis might have been a preexisting latent condition
 Might the seller be liable for this?
56
Sessa v. Riegle
 Was this a promise that the horse
would be sound after the sale
 Like a 5 year warranty on a sale of a
car?
57
Sessa v. Riegle
 Was this a promise that the horse
would be sound after the sale
 E.g. 5 year warranty on a sale of a car
 Was this a promise that the horse
was sound at the time of the sale?
 “the horse is sound”
 “the horse is a good one”
 “you will like him”
58
Sessa v. Riegle
 Why not within UCC §2-313?
59
Sessa v. Riegle
 Why not within UCC §2-313
 “an affirmation of fact”?
 Statements of opinion: UCC §2-313(2)
 Mere puffs
60
Sessa v. Riegle
 Why not within UCC §2-313
 “an affirmation of fact”
 Statements of opinion: UCC §2-313(2)
 Mere puffs
 A special rule for horse traders?
 “horses are fragile creatures”
61
Sessa v. Riegle
 Why not within UCC §2-313
 “an affirmation of fact”
 Statements of opinion: UCC §2-313(2)
 Mere puffs
 A special rule for horse traders?
 “horses are fragile creatures”
 Frederickson
 Distinguish McNair
 What if soundness was “guaranteed”
62
Royal Business Machines
 Copy machine:




63
Was of high quality
Frequency of repair was very low
Would remain so
Will bring buyer substantial profits
Royal Business Machines
 Copy machine:
 Machines were tested
64
Royal Business Machines
 Copy machine:
 Machines will not cause fire
65
Specificity: Searls v. Glasser
 “recession resistant”?
 Keith: “sure-footed seaworthiness”?
66
George Mason School of Law
Contracts II
Warranties
F.H. Buckley
fbuckley@gmu.edu
67
Flippo
 Remedy in tort?
68
Flippo
 Remedy in tort?
 Remedy in contract?
 What were the goods?
69
Flippo
 Remedy in tort?
 Remedy in contract?
 Implied warranty of merchantability
 What were the goods?
 Cf. Prosser on p. 672
 UCC § 2-313B
70
Implied UCC Warranties
 Merchantabilty: UCC § 2-314
 Fitness: UCC § 2-315
71
Implied UCC Warranties
 I sell you a car whose transmission
fails six months later?
 Qu. Lapse of time
 UCC § 2-314, cmt. 13
72
Implied UCC Warranties
 I sell you a car whose transmission
fails six months later?
 Qu. Lapse of time
 UCC § 2-314, cmt. 13
 Does reliance come into this?
73
Implied UCC Warranties
 I sell you a car whose transmission
fails six months later?
 Qu. Lapse of time
 UCC § 2-314, cmt. 13
 Does reliance come into this?
 I sell you a car which proves
unsuitable for off-terrain driving
74
Fitness: UCC § 2-315
 How is this different from
merchantibility?
 What more is needed?
 Seller knows or has reason to know
 Particular purpose
 Buyer’s reliance
75
Fitness: UCC § 2-315
 How is this different from
merchantibility?
 What more is needed?
 Seller knows or has reason to know
 Particular purpose
 Buyer’s reliance
 Why no warranty in Lewis and Sims at
674?
76
Warranty of Workmanlike Performance
 Construction and services contracts
 Could any contractor be thought to resist
such a duty?
77
Exemption Clauses
 Pelc v. Simmonds
 Oral statements by Simmons
 Only thing wrong is the a/c
 Good little car, above average
78
Exemption Clauses
 Pelc v. Simmonds
 Oral statements by Simmons
 Only thing wrong is the a/c
 Good little car, above average
 “As is” clause. UCC § 2-316(3)(a)
79
Exemption Clauses
 Pelc v. Simmonds
 Oral statements by Simmons
 Only thing wrong is the a/c
 Good little car, above average
 “As is” clause. UCC § 2-316(3)(a)
 What if it had been proven that seller
knew it was a clunker. Morris v. Mack’s
80
Exemption Clauses
 Pelc v. Simmonds
 Oral statements by Simmons
 Only thing wrong is the a/c
 Good little car, above average
 “As is” clause. UCC § 2-316(3)(a)
 What if seller in Pelc had said “it’s in
perfect condition” or “I guarantee it’s in
good shape”
81
Exemption Clauses
 Does an “as is” clause exclude
express warranties?
 Only if not “unreasonable” UCC § 2316(1)
82
Exemption Clauses
 What were the warranties in Pelc?
 Qu. the finding that the representations
were not improper?
83
Exemption Clauses
 What were the warranties in Pelc?
 Qu. If the representations had been
fraudulent?
84
Weisz v. Parke-Bernt
 Can you spot the fake Van Gogh?
85
Weisz v. Parke-Bernt
 Why was the exemption clause ignored?
86
Weisz v. Parke-Bernt
 Just what is a “Raoul Dufy”??
87
Weisz v. Parke-Bernt
 The old fundamental breach doctrine
88
Substantial Performance
vs. Perfect Tender
 Perfect tender required in UCC § 2601
 Substantial Performance
 Restatement § 229 (no disproportionate
forfeiture unless “material” event)
 Restatement § 237 (“no uncured
material failure
89
Substantial Performance
vs. Perfect Tender
 Perfect tender required in UCC § 2601
 Substantial Performance
 Restatement § 229 (no disproportionate
forfeiture unless “material” event)
 Restatement § 237 (“no uncured
material failure
 Materiality defined in § 241
90
Substantial Performance
in Jacob & Young
91
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
92
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
 Did they in Jacob & Young?
93
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
 Did they in Jacob & Young?
 Could you draft a clause that would
have given Kent a right to rescind?
94
What is Reading Pipe?
This is Reading Pipe
This is not Reading Pipe
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
 Did they in Jacob & Young?
 Would the parties have agreed to
such a clause? Why not?
97
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
 Did they in Jacob & Young?
 Was this like Grun Roofing?
98
Substantial Performance
in Jacob & Young
 Could the parties to a building
contract bargain for perfect tender?
 Did they in Jacob & Young?
 Was this like Grun Roofing?
 What is substantial performance for a
roof?
99
Haymore v. Levinson
100
Grun Roofing vs. Haymore
 Personal taste or fancy vs. operative
fitness
 “mere taste may be controlling” in the
former case
101
Measure of damages
 Plante v. Jacobs at 688
 Cost or repair or diminished value?
 What is the proper measure of Πs loss?
102
Measure of damages
 Plante v. Jacobs at 688
 Cost or repair or diminished value?
 What is the proper measure of Πs loss?
 The “substantial performance” standard
103
Measure of damages
 Plante v. Jacobs at 688
 Cost or repair or diminished value?
 What is the proper measure of Πs loss?
 Would perfect tender open the door to
opportunism?
104
Things looked simple at common law
Promises
Conditions
Warranties
Election
Forfeiture
105
Damages
Damages only
They’re more complicated in the
UCC
Buyer’s Remedies
2-601 Perfect Tender required
Conforming goods 2-106
106
Buyer’s Remedies in the UCC
2-601 Perfect Tender required
Accept 2-606
107
Reject 2-602
Buyer’s Remedies in the UCC
2-601 Perfect Tender required
Accept 2-606
Reject 2-602
Action for price paid 2-711
Incidental Damages 2-711, 2-713
Cover 2-711, 2-712
108
Cure by Seller
2-601 Perfect Tender required
Accept 2-606
Reject 2-602
Cure 2-508
109
Don’t cure
Buyer’s Remedies in the UCC
2-601 Perfect Tender required
Accept 2-606
Damages 2-714, 2-715
110
Reject 2-602
Buyer’s Remedies in the UCC
2-601 Perfect Tender required
Accept 2-606
Damages 2-714, 2-715
111
Reject 2-602
Revocation of Acceptance 2-608, 2-607
Buyer’s Remedies in the UCC
2-601 Perfect Tender required
Accept 2-606
Damages 2-714, 2-715
Reject 2-602
Revocation of Acceptance 2-608, 2-607
Cancel 2-711, 2-106(4)
Damages 2-711, 2-713
Specific performance? 2-711(2)
112
Seller’s Remedies
Goods not delivered
Withhold delivery 2-703
Stoppage in transitu 2-705
Damages 2-703, 2-708
113
Goods delivered
Seller’s Remedies
Goods not delivered
Goods delivered
Action for the price 2-709
Damages 2-710
114
George Mason School of Law
Contracts II
Warranties
F.H. Buckley
fbuckley@gmu.edu
115
Opportunism and Perfect Tender?
 The problem of buyer opportunism is
addressed by the seller’s right to cure
116
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
117
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 The sulfur content was promised to be
0.5%
118
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 The sulfur content was promised to be
0.5%
 The price of oil had fallen by 25%
119
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 When was delivery to take place?
120
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 When was delivery to take place?
 When was the substitute delivery to occur?
121
What’s the opportunism problem
under perfect tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 Before delivery date: 2-508(1)
 Cure after: 2-508(2)
 Seasonable notice
 Reasonable time
 Seller had reasonable grounds to believe would
be acceptable, with or without money
allowance
122
What’s the opportunism problem
under perfect tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 Before delivery date
 Cure after
 Seasonable notice
 Reasonable time
 Seller had reasonable grounds to believe would
be acceptable, with or without money
allowance
 Must seller know that tender will be nonconforming? Nordstrom on Sales
123
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 Before delivery date
 Seasonably notify buyer---why?
 What if first tender is junk?
124
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 Before delivery date
 Seasonably notify buyer---why?
 What if first tender is junk?
 Ramirez at 697: an unconditional right to
cure before the delivery date
125
Opportunism and Perfect Tender?
 TW Oil: Why did buyer reject?
 Cure: 2-508
 Before delivery date
 Seasonably notify buyer---why?
 What if first tender is junk?
 Ramirez at 697: an unconditional right to
cure before the delivery date
 Cf. proposed 2003 revision
126
Why no cure permitted in Ramirez?
 Delivery scheduled for August 3
 Rejection on Aug. 14
127
Why no cure permitted in Ramirez?
 Delivery scheduled for August 3
 Rejection on Aug. 14
 Did sellers effect a cure?
 2-508(2)
Why no cure permitted in Ramirez?




Delivery scheduled for August 3
Rejection on Aug. 14
Did sellers effect a cure?
Did buyers accept the goods?
 2-606
129
Why no cure permitted in Ramirez?





Delivery scheduled for August 3
Rejection on Aug. 14
Did sellers effect a cure?
Did buyers accept the goods?
Did buyers revoke acceptance and
cancel?
 2-608, 2-711
130
Can 2-508 be waived by seller?
 Qu. Consumer goods where seller
specifies “goods satisfactory or
money refunded”
 I order a shirt on-line, which is torn. Can
seller resend?
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When is perfect tender most in need
of cure rights?
 Buyer’s opportunism especially a
problem in:
 Idiosyncratic goods
 Volatile markets
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When is perfect tender most in need
of cure rights?
 Buyer’s opportunism especially a
problem in:
 Idiosyncratic goods
 Volatile markets
 In other cases, weakened cure rights?
 Zabriskie Chevrolet
 Might cure rights give sellers
misincentive to cheat on terms?
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George Mason School of Law
Contracts II
Anticipatory Repudiation
F.H. Buckley
fbuckley@gmu.edu
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