Lawyers often know what to focus on in drafting and negotiating warranties in M&A transactions. But when they start working as in-house counsel, they need to catch up with different dynamics. In this blog post I discuss the ‘requirement’ that warranties be printed in all-caps (conspicuous) and the do’s and don’ts of ordinary course business contracts.
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 they 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 (and the meaning of which depends on the particular context). If not, the seller would be selling defective products 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 defective products (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. those 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 third parties’ freedom to use it without infringing another person’s rights). Normally, this is not problematic at all. When the product is subject to a limited licence 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. Generally, merchantability is something that a seller should warrant. However, the complication is that a seller is not always capable of knowing 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 U.S. Uniform Commercial Code, ‘merchantability‘ is equivalent to fitness for ordinary purpose.
Capitals. Many contract drafters believe that in international commerce, a disclaimer or limitation of liability must be printed in capital letters. For example:
THE PRODUCT IS PROVIDED TO PURCHASER “AS IS” WITHOUT ANY WARRANTIES OF ANY KIND. SELLER EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS. SELLER SHALL HAVE NO LIABILITY TO PURCHASER OR ITS AFFILIATES OR ANY OTHER THIRD PARTY FOR ANY DAMAGES, INCLUDING DAMAGES RESULTING OR ALLEGED TO RESULT FROM ANY DEFECT, ERROR OR OMISSION IN THE PRODUCT, ANY USED THIRD PARTY PRODUCTS OR AS A RESULT OF ANY INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OF ANY THIRD PARTY. IN NO EVENT SHALL SELLER BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUFFERED BY PURCHASER OR ITS AFFILIATES OR ANY OTHER THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EVEN IF SELLER HAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Background: ‘conspicuousness’. The requirement to capitalise only applies to a few nominal types of contracts. They can be found in the Uniform Commercial Code (UCC) related to the sale of goods, the licence of software, a lease or warehousing contract: a seller of a product can disclaim implied warranties and limit its exposure to liability conspicuously. The UCC defines the conspicuous requirement as something that is written (i.e. printed) in such a way that a reasonable person against whom it is to operate ought to have noticed it. Language in the body of a contract would be conspicuous if it is in a larger font or other contrasting type or colour (for sales contracts, a broader definition applies). The UCC does not require all-capitals. Whether or not text is conspicuous is for decision by the court. Finally, since the requirement of conspicuousness has its origins in the UCC, it applies only if the contract is governed by the law of certain U.S. states, where such a requirement is also adopted. This is the case only in a limited number of states.
 UCC § 2-314(2).
 UCC, Article 1, General provisions, § 1-210(10).