Table of contents

Drafting contracts

(g) Fitness for purpose and merchantability

Fitness for purpose and merchantability. In day-to-day business contracts, warranties related to fitness for a particular purpose and ascertaining the merchantability of the products are very common. Also the opposite, that such warranties are specifically disclaimed, is common practice.
What do these disclaimer formulae mean? Most legal systems will require that a sold product must generally be fit for the ordinary purpose for which such products are to be used (whatever that may be). If not, the seller would be selling crap and would rely on a disclaimer allowing it to be in material breach without any remedy or penalty. People call that deceit. A disclaimer that a product may not be deemed to be “fit for any purpose” is therefore ineffective if it allows the seller to deliver total crap (unless the purchaser actually assumed the risk that the seller’s performance could potentially lead to no-result at all). The trick is in the specificity of the purpose and in the extent to which the product should meet the purchaser’s personal intentions (i.e. particular purposes on top of what may generally be expected). A warranty requiring that a product meets the ‘Specifications’ may trigger the purchaser to clarify for which purpose it will use that product. Because this can be very subjective (and probably also subject to changes) it is risky for a seller to make warranties that the product is fit for the particular purpose for which the purchaser will use it.

Disclaiming the merchantability of a product refers to the freedom of the purchaser to sell the product to third parties (and such parties’ freedom to use it). In most cases, this is not problematic at all. When the product is subject to a limited license or if the use of the product independently or in combination with another product infringes the (intellectual property) rights of a third party, however, the product is not merchantable. The same applies if the product is subject to encumbrances or if it cannot be delivered because of any litigation, seizure or embargo. A first response would be that this is obviously something that a seller should warrant. The problem is that the seller is not always able to know which intellectual property rights its competitors own (or in which jurisdiction they apply). Furthermore, it disregards another aspect of merchantability: the seller does not necessarily know how its product will be processed and probably the product is subject to additional regulatory requirements under any local law (e.g. export or import restrictions, registration requirements or specific permits or authorisations). In the US Uniform Commercial Code (§ 2-314(2)), ‘merchantability’ is equivalent to fitness for ordinary purpose.

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Drafting contracts

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