Warranties and Breach of Contractual Duty Warranties Relationship

Warranties and Breach of Contractual Duty Warranties Relationship between Breach of Warranty and Nonperformance

Warranties • Definition • Nature • Types – The Warranties of Title – The Warranties of quality

Definition of “the Liability of Warranties” • A constructive liability which the seller shall take if the object sold is defect or void title.

Warranties under Uniform Commercial Code (UCC) in the USA • Warranties – Warranty of Title (Implied warranty) • The title shall be good and its transfer rightful – Warranty of Quality • Express Warranties – Part of the basis of bargain – by Affirmation, Promise, Description, Sample or model. • Implied Warranty – Merchantability – Fitness for Particular Purpose.

Classification of Warranty • ROC civil Code – Warranty of “defect of title” • The warranty of quiet possession (349) • The warranty of legal existence of the right(350) – Warranty of “defect of thing” • The warranty of value (354 I) • The warranty of function agreed(354 I) • The warranty of quality guaranteed (354 II)

Classification of Warranty • PRC Contract Law – Warranty of title ( “defect of title”) • The warranty of quiet possession (150) • The warranty of legal existence of the right(350) – Warranty of thing (“defect of thing”) • The warranty of quality agreed(153) • The implied warranty of quality (154)

The Liability for Warranties of Title • The buyer may claim damages or avoid the contract of sale – If the seller does not perform his duties specified in Articles 348 -351, the buyer may exercise his rights in accordance with the provisions concerning non-performance of obligations. (RCC Article 353)

The Requirements to Establish the Liability for Warranties of Title • The defect on title must be existed at the time the contract is formed. • The warranty for good title • The seller shall warrant that the thing sold is free from any right enforceable by third parties against the buyer. (RCC Article 349) • Apply to any kinds of objects sold. • The warranty for the actual existence of the title • The seller of a claim of prestation or any other right shall warrant the actual existence of such prestation or right. The seller of valuable securities shall also warrant that it shall not be declared voidance through public summons. (RCC Article 350) • Apply to any kinds of objects sold except chattels and real estate.

The Requirements to Establish the Liability for Warranties of Title • The buyer shall be in good faith. – If the buyer knew at the time of concluding the contract the defect of the right sold, the seller is not bound to warrant such defect, unless otherwise provided by contract. (RCC Article 351) • The defect on title has yet to removed when the buyer claim damages.

Warranty of title in PRC • Classification – The warranty of quiet possession • The seller is obligated to warrant that the buyer will be free from any third party claim against it in respect of the subject matter delivered, except otherwise provided by law. (PCL Article 150)

Warranty of title in PRC • Prerequisites – The defect exists before delivery – The buyer has no knowledge about the defect • Where the buyer knew or should have known that the subject matter was subject to a third party claim at the time of conclusion of the contract, the seller does not assume the obligation prescribed in Article 150 hereof. (PCL Article 151) •

Warranty of title in PRC • Effect – PCL • Where the buyer has conclusive evidence establishing that a third person may make a claim on the subject matter, it may withhold payment of the corresponding price, except where the seller has provided appropriate assurance. (PCL Article 152) (compare PCL art 66 & 67) • Terminate the contract (PCL art 94) • Claim damage (PCL art 97)

The Requirements to Establish the Liability for Warranties of quality • The existence of defect in quality – The seller of a thing shall warrant that the thing sold is, at the time when the danger passes to the buyer according to the provisions of Article 373, free from any defect in quality which may destroy or impair • its value, or • its fitness for ordinary efficacy , or • its fitness for the efficacy of the contract of sale. – However, if the extent of the impairment is of no importance, such impairment shall not be deemed to be a defect. – The seller also shall warrant that, at the time the danger passes; the thing has the guaranteed qualities. (RCC Article 354)

The Requirements to Establish the Liability for Warranties of quality • Defect in quality shall be existed at the time of delivery – The seller of a thing shall warrant that the thing sold is, at the time when the danger passes to the buyer according to the provisions of Article 373, free from any defect in quality (RCC Article 354 I) – The profits and dangers of the object sold pass to the buyer at the time of delivery, unless otherwise provided by contract. (RCC Article 373) – If the buyer requests that the object sold be delivered at a place other than the place where delivery ought to be made, the dangers pass to the buyer at the time when the seller delivers the object to the person who transports it or is entrusted with its transportation. (RCC Article 374)

The Requirements to Establish the Liability for Warranties of quality • The buyer shall be in good faith and without gross negligence – A seller is not responsible for such defect of quality in the thing sold as specified in the first paragraph of the preceding article, if the buyer knew of the defect at the time when the contract was made. – If a defect of the kind specified in the first paragraph of the preceding article has remained unknown to the buyer in consequence of gross negligence, the seller is not responsible if he has not guaranteed that the thing is free from the defect, except in the case that he has intentionally concealed it. (RCC Article 355)

The Requirements to Establish the Liability for Warranties of quality • The buyer shall inspect the object sold and seasonally notify the seller – The buyer is bound to examine without delay the thing received in accordance with the nature of such thing and as far as the ordinary procedure of affairs allows it, and should he discover any defect for which the seller is responsible, he shall immediately notify the seller of such defect. – If the buyer delays giving the notice mentioned in the preceding paragraph, he is deemed to have accepted the thing, except in case where the defect is one which would not have been revealed by ordinary examination. – Should a defect, which could not have been discovered immediately, be discovered subsequently, notice shall be sent to the seller without delay after the discovery. If the buyer delays giving such notice, the thing is deemed to be accepted. (RCC Article 356)

The Liability for Warranties of quality • General liability – Reduction of the price • When there is a defect in the thing sold for which, according to the provisions of the five preceding articles, the seller is responsible for a warranty, the buyer has the option to rescind the contract or to ask for a reduction of the price, unless in the case specified, that a rescission of the contract would constitute an obvious unfairness of the transaction the buyer is only entitled to ask for a reduction of the price. (RCC Article 359)

The Liability for Warranties of quality – Rescission of the contract • When there is a defect in the thing sold for which, according to the provisions of the five preceding articles, the seller is responsible for a warranty, the buyer has the option to rescind the contract or to ask for a reduction of the price, unless in the case specified, that a rescission of the contract would constitute an obvious unfairness of the transaction the buyer is only entitled to ask for a reduction of the price. (RCC Article 359)

The Liability for Warranties of quality • Particular liability – Tender another object without defect • When the thing sold is a thing designated only as to its kind, and the thing is defective, the buyer may, instead of rescission of the contract or a reduction of the price, immediately request the seller to deliver in exchange another thing free from defect. • The seller is also bound to warrant that the thing delivered in exchange under the preceding paragraph is free from defect. (RCC Article 364)

The Liability for Warranties of quality – Right to damages • In the absence of a quality of the thing sold, which was guaranteed by the seller, the buyer may demand to compensate for the injury of nonperformance, instead of rescission of the contract or of a reduction of the price. • The same rule shall be applied if the seller has intentionally concealed a defect in a thing. (RCC Article 360)

Exclusion of Warranties – (3) Notwithstanding subsection (2) • (a) 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 • (b) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and • (c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade. – (4) Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy (Sections 2 -718 and 2 -719).

Warranties of quality in PRC Contract Law • Requirements – Non-compliance of quality requirements • If the subject matter delivered by the seller fails to comply with the quality requirements, the buyer may hold the seller liable for breach of contract in accordance with Article 111 hereof. (Article 155) • quality requirements – The seller shall deliver the subject matter in compliance with the prescribed quality requirements. Where the seller gave quality specifications for the subject matter, the subject matter delivered shall comply with the quality requirements set forth therein. (Article 153) – Where the quality requirements for the subject matter were not prescribed or clearly prescribed, and cannot be determined in accordance with Article 61 hereof, Item (i) of Article 62 hereof applies. ( Article 154)

Warranties of quality in PRC Contract Law – Defect in quality shall be existed at the time of delivery – The buyer shall be in good faith and without gross negligence – The buyer shall inspect the object sold and seasonally notify the seller • Article 157 Inspection upon Receipt of Subject Matter Upon receipt of the subject matter, the buyer shall inspect it within the prescribed inspection period. Where no inspection period was prescribed, the buyer shall timely inspect the subject matter. • The subject matter is not bought from compulsory auction.

Warranties of quality in PRC Contract Law • Where an inspection period was prescribed, the buyer shall notify the seller of any non-compliance in quantity or quality of the subject matter within such inspection period. Where the buyer delayed in notifying the seller, the quantity or quality of the subject matter is deemed to comply with the contract. (Article 158) • Where no inspection period was prescribed, the buyer shall notify the seller within a reasonable period, commencing on the date when the buyer discovered or should have discovered the quantity or quality non-compliance. If the buyer fails to notify within a reasonable period or fails to notify within 2 years, commencing on the date when it received the subject matter, the quantity or quality of the subject matter is deemed to comply with the contract, except that if there is a warranty period in respect of the subject matter, the warranty period applies and supersedes such two year period. Where the seller knew or should have known the non-compliance of the subject matter, the buyer is not subject to the time limits for notification prescribed in the previous two paragraphs. (Article 159)

Comparative study of Warranties

Warranty of Title • UCC § 2 -312. Warranty of Title and Against Infringement; Buyer's Obligation Against Infringement. – (1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that • (a) the title conveyed shall be good, and its transfer rightful; and • (b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

Warranty of Title – (2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have. – (3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

Express Warranties • UCC § 2 -313. Express Warranties by Affirmation, Promise, Description, Sample. – (1) Express warranties by the seller are created as follows: • (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. • (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

Express Warranties • (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model. – (2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

Implied Warranty: Merchantability • UCC § 2 -314. Implied Warranty: Merchantability; Usage of Trade. – (1) Unless excluded or modified (Section 2 -316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. – (2) Goods to be merchantable must be at least such as • • (a) pass without objection in the trade under the contract description; and (b) in the case of fungible goods, are of fair average quality within the description; and (c) are fit for the ordinary purposes for which such goods are used; and (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and • (e) are adequately contained, packaged, and labeled as the agreement may require; and • (f) conform to the promise or affirmations of fact made on the container or label if any. – (3) Unless excluded or modified (Section 2 -316) other implied warranties may arise from course of dealing or usage of trade.

Implied Warranty: Fitness for Particular Purpose • UCC § 2 -315. Implied Warranty: Fitness for Particular Purpose. – 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.

Exclusion of Warranties • UCC § 2 -316. Exclusion or Modification of Warranties. – (1) 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 subject to the provisions of this Article on parol or extrinsic evidence (Section 2 -202) negation or limitation is inoperative to the extent that such construction is unreasonable. – (2) Subject to subsection (3), 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. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof. "

Termination of Contract

Termination by Agreement • The parties may terminate a contract if they have so agreed. (PCL art 93 I) • The parties may prescribe a condition under which one party is entitled to terminate the contract. Upon satisfaction of the condition for termination of the contract, the party with the termination right may terminate the contract. (PCL art 93 II)

Termination Prescribed by Law • The parties may terminate a contract if: (i) force majeure frustrated the purpose of the contract; (ii) before the time of performance, the other party expressly stated or indicated by its conduct that it will not perform its main obligations; (iii) the other party delayed performance of its main obligations, and failed to perform within a reasonable time after receiving demand for performance; (iv) the other party delayed performance or otherwise breached the contract, thereby frustrating the purpose of the contract; (v) any other circumstance provided by law occurred. (PCL art 94)

Extinction of Right of Termination • Where the law or the parties prescribe a period for exercising termination right, failure by a party to exercise it at the end of the period shall extinguish such right. • Where neither the law nor the parties prescribe a period for exercising termination right, failure by a party to exercise it within a reasonable time after receiving demand from the other party shall extinguish such right. (PCL Article 95)

Remedies in Case of Termination • Upon termination of a contract, a performance which has not been rendered is discharged; if a performance has been rendered, a party may, in light of the degree of performance and the nature of the contract, require the other party to restore the subject matter to its original condition or otherwise remedy the situation, and is entitled to claim damages. (PCL Article 97)