Disclaimers and limited remedies

Bloomfield, New Jersey, the seventh of May, nineteen fifty five. A man and his wife visit a dealer to look at a Plymouth. They have also been considering a Ford or a Chevrolet. They like the Plymouth and buy it, a Plaza Six Club Sedan, as a Mother's Day gift for her. He signs the purchase order alone.
The order is a printed form of one page. Most of it is in twelve point type, easy to read. But the two paragraphs just above the signature line are in six point script, the lines packed close together. They say the front and back comprise the entire agreement, and that the buyer has read the matter printed on the back and agrees to it. He did not read them, and no one called them to his attention.
On the back, eight and a half inches of fine print, ten paragraphs, sixty five lines, no headings. In the seventh paragraph, two thirds of the way down, is the warranty.
The manufacturer warrants each new vehicle to be free from defects in material or workmanship, its obligation being limited to making good at its factory any defective part returned within ninety days or four thousand miles, and this warranty being expressly in lieu of all other warranties expressed or implied, and all other obligations or liabilities on its part.
The car is delivered on the ninth of May. On the nineteenth she drives it to Asbury Park. Coming home on Route thirty six at twenty to twenty two miles an hour, she hears a loud noise from the bottom, by the hood. It felt as if something cracked. The steering wheel spun in her hands; the car veered sharply to the right and crashed into a highway sign and a brick wall. It has four hundred and sixty eight miles on it.
The insurer declares it a total loss.
So here is the question. The buyer signed a document that said, in words, there are no warranties except replacement of defective parts. The law of contract says you are bound by what you sign whether or not you read it. Is the manufacturer liable to her for her injuries? Think about it before I go on.
And now the question I keep asking. What exactly did these people promise each other? The dealer promised a new car. The form promised a replacement part. Today the two ways a seller shrinks his obligation. First, disclaiming a warranty, so that the promise is smaller. Second, limiting the remedy, so that the promise is the same but the cost of breaking it is smaller. The Code polices them differently.
Here is the first line for the board, section two dash three sixteen. To exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.
And its alternatives. Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like as is, with all faults or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty.
And its rule of construction for express warranties. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other, but negation or limitation is inoperative to the extent that such construction is unreasonable. A seller cannot warrant with one hand and take it back with the other.
Second line, section two dash seven nineteen. The agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable, 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.
Two limits on that. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. And consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
Now the case. Henningsen against Bloomfield Motors, Supreme Court of New Jersey, nineteen sixty, Justice Francis. Before the Code was adopted in New Jersey, and it is the case the Code's drafters were answering. The court first described the document. These two paragraphs are the least legible and the most difficult to read in the instrument. They do not attract attention and there is nothing about the format which would draw the reader's eye to them.
In fact, a studied and concentrated effort would have to be made to read them. De-emphasis seems the motif rather than emphasis.
Then what the words did. Any ordinary layman of reasonable intelligence, looking at the phraseology, might well conclude that Chrysler was agreeing to replace defective parts and perhaps replace anything that went wrong because of defective workmanship during the first 90 days or 4,000 miles of operation, but that he would not be entitled to a new car. The buyer would read it as a promise. The seller meant it as a release from injury claims.
Then the bargaining. The warranty before us is a standardized form designed for mass use. It is imposed upon the automobile consumer. He takes it or leaves it, and he must take it to buy an automobile. No bargaining is engaged in with respect to it. In fact, the dealer through whom it comes to the buyer is without authority to alter it; his function is ministerial, simply to deliver it.
And it was the same form everywhere. The form warranty is not only standard with Chrysler but it is the uniform warranty of the Automobile Manufacturers Association. The Big Three made more than ninety three per cent of the cars. The gross inequality of bargaining position occupied by the consumer in the automobile industry is thus apparent. There is no competition among the car makers in the area of the express warranty. Where can the buyer go to negotiate for better protection?
The court's sharpest sentence about what the form had become. The ingenuity of the Automobile Manufacturers Association, by means of its standardized form, has metamorphosed the warranty into a device to limit the maker's liability.
Then the holding. The implied warranty of merchantability does not depend upon the affirmative intention of the parties. It is a child of the law; it annexes itself to the contract because of the very nature of the transaction. The disclaimer of the implied warranty and exclusion of all obligations except those specifically assumed by the express warranty signify a studied effort to frustrate that protection.
The Legislature had allowed parties to vary warranties, but quite obviously the Legislature contemplated lawful stipulations arrived at freely by parties of relatively equal bargaining strength. The lawmakers did not authorize the automobile manufacturer to use its grossly disproportionate bargaining power to relieve itself from liability and to impose on the ordinary buyer, who in effect has no real freedom of choice, the grave danger of injury to himself and others that attends the sale of such a dangerous instrumentality as a defectively made automobile.
Chrysler's attempted disclaimer of an implied warranty of merchantability and of the obligations arising therefrom is so inimical to the public good as to compel an adjudication of its invalidity. And the same for the dealer. The disclaimer of an implied warranty of merchantability by the dealer, as well as the attempted elimination of all obligations other than replacement of defective parts, are violative of public policy and void.
One more holding, and it reaches past the contract. Mrs. Henningsen had not signed anything and had bought nothing from Chrysler. The court swept away privity. With the advent of mass marketing, the manufacturer became remote from the purchaser, sales were accomplished through intermediaries, and the demand for the product was created by advertising media. We see no rational doctrinal basis for differentiating between a fly in a bottle of beverage and a defective automobile.
Now read the Code against Henningsen, and you see what it did. It did not ban disclaimers. It made them visible. Mention merchantability. Make it conspicuous. Or use as is, which everyone understands. And for the worst case in Henningsen, personal injury from consumer goods, section two dash seven nineteen makes the limitation prima facie unconscionable. The six point script above the signature would fail the Code on every count.
Now the limited remedy, and a commercial case. New York, the nineteen sixties. A yarn seller sells yarn to a sweater maker. The contract says no claims relating to shade shall be allowed if made after weaving, knitting, or processing, or more than ten days after receipt of shipment. In another clause the seller's obligation is limited to the delivery of good merchantable yarn of the description stated.
The yarn is knitted into sweaters. The sweaters are washed. Only then does the defect appear. The color of the yarn had shaded, that is, there was a variation in color from piece to piece and within the pieces. The sweaters are unmarketable. The buyer refuses to pay. The seller sues for the price and wins summary judgment, because the claim came after knitting.
The Court of Appeals, in Wilson Trading against David Ferguson, nineteen sixty eight, Judge Jasen, reversed. It began with the policy of section two dash seven nineteen, quoting the official comment. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract.
The general rule. It follows that contractual limitations upon remedies are generally to be enforced unless unconscionable. Parties to a contract are given broad latitude within which to fashion their own remedies. Ten days to complain is an ordinary commercial term.
But the court did not need unconscionability, because of subsection two. Where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article. And here is how this one failed. Its effect is to eliminate any remedy for shade defects not reasonably discoverable within the time limitation period.
If the buyer's affidavits were true, the limited remedy established by paragraph two has failed its essential purpose and the buyer is, in effect, without remedy. So the time limit, insofar as it applies to defects not reasonably discoverable within the time limits established by the contract, must give way to the general code rule that a buyer has a reasonable time to notify the seller of breach after he discovers or should have discovered the defect.
And a second route, through two dash three sixteen. The contract expressly promised merchantable yarn, and in a separate clause purported to indirectly modify the warranty without expressly mentioning the word merchantability. An attempt to both warrant and refuse to warrant goods creates an ambiguity which can only be resolved by making one term yield to the other. The warranty language prevails over the disclaimer if the two cannot be reasonably reconciled.
Chief Judge Fuld concurred on narrower ground. He would have asked only whether the ten-day limit was manifestly unreasonable as applied to this type of defect. Note that. Even the cautious judge thought a deadline that expires before a defect can be found is suspect.
Put the two cases side by side. Henningsen, a consumer, an adhesion form, a disclaimer buried in six point script, personal injury, and the court strikes the disclaimer as against public policy. Wilson Trading, two merchants, an ordinary commercial term, a latent defect the term never contemplated, and the court lets the general remedies return because the limited remedy failed of its essential purpose. The first polices who agreed. The second polices whether the agreed remedy still works.
Now let's change one fact. The Henningsen purchase order had said on its front, in bold capitals as large as the price, that the dealer and manufacturer disclaim the implied warranty of merchantability, and the salesman had pointed to it before the signature. Choose an answer before I go on.
Under the Code the disclaimer of merchantability is now effective as to the warranty itself. It mentions merchantability and it is conspicuous. But the limitation of damages for her injuries is a different matter. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable. The seller can make the promise smaller in plain words. It cannot easily make a consumer bear her own injuries from a defective car.
Change one fact again. The yarn defect had been visible on the cones of yarn, to anyone who looked, the day the shipment arrived, and the buyer knitted it anyway and complained a month later. Choose.
Then the ten-day clause holds. The Wilson Trading court let the clause yield only for defects not reasonably discoverable within the time limits. A defect that inspection would have revealed within ten days is exactly what the clause was for. The limited remedy did not fail of its essential purpose. The buyer simply did not use it.
Change one fact a third time. The contract had limited the buyer's remedy to replacement of defective yarn, and the seller, when told of the shading, refused to replace any of it or sent more yarn with the same defect. Choose.
Then the exclusive remedy has failed of its essential purpose, and the buyer may have the Code's general remedies. A repair or replace remedy is fair only so long as the seller actually repairs or replaces. A seller who will not, or cannot, deliver conforming goods has left the buyer without the substantial value of the bargain, and remedy may be had as provided in this Act.
Here is what people get wrong here, and why it is tempting. The first mistake is to treat a disclaimer and a remedy limitation as the same thing. A disclaimer shrinks the warranty under two dash three sixteen. A limitation leaves the warranty and caps what breach costs under two dash seven nineteen. Different tests apply. The second mistake is to think the signature ends the inquiry.
Henningsen says that for a disclaimer imposed by gross inequality on a matter of public safety, it does not, and the Code makes the formal requirements do much of that work.
The third mistake is to think a remedy clause is judged only when it is signed. Section two dash seven nineteen, subsection two, judges it by how it works when the breach comes. A fair clause that leaves the buyer with nothing gives way.
Here is the rule, in one breath. A seller may exclude the implied warranty of merchantability only by language that mentions merchantability and, in a writing, is conspicuous, and any implied warranty of fitness only by a conspicuous writing, or all implied warranties by as is or like language, but words creating an express warranty prevail over words negating it where the two cannot reasonably be reconciled.
The parties may limit remedies, as to repair or replacement, but an exclusive remedy that fails of its essential purpose gives way to the Code's general remedies, a limitation of consequential damages fails if unconscionable and is prima facie unconscionable for personal injury from consumer goods, and a court may refuse a disclaimer imposed by grossly unequal bargaining power as against public policy. Now, five questions.