As I’ve noted before in these columns, an implied warranty disclaimer is an essential part of your terms and conditions.  But giving an effective disclaimer is sometimes easier said than done, especially when you do not sell your product directly to the end user, but rather through a wholesaler, retailer, or other intermediary.

Here’s the scenario: you sell your non-consumer product to a wholesaler, who sells it to a retailer, who sells it to the end user.  The terms of your sale contract with the wholesaler include a conspicuous, written disclaimer of all implied warranties.  This is clearly effective to disclaim implied warranties between you and the wholesaler.

But what about between you and the retailer?  Or you and the end user?  I present to you two recent decisions that reach conflicting outcomes.

The first we’ve discussed before.  It’s MAN Engines & Components, Inc. v. Shows, a decision by the Supreme Court of Texas.[1]  The second is Telco Supply Co. v. Remee Prods. Corp., a decision from the U.S. District Court for the Eastern District of Oklahoma.[2]

In Shows, a yacht manufacturer was sued by a person who purchased a used yacht.  The manufacturer disclaimed implied warranties in its contract with the original buyer, and argued that the disclaimer was binding on the downstream buyer.[3]  Although the manufacturer ultimately failed in asserting its warranty disclaimer, the Court observed that “[i]f the manufacturer validly disclaims implied warranties at the first sale, as is commonly done, that disclaimer carries with the good, just as the warranty would.”

The Telco Court was confronted with a similar factual scenario: a manufacturer sold goods to an intermediary, who then sold them to an end user.[4]  The manufacturer’s website included a disclaimer of implied warranties.  Assuming without deciding that the disclaimer would have been enforceable against the manufacturer’s immediate buyer, the Court rejected the manufacturer’s claim that the disclaimer became binding on the end user, holding instead that an upstream disclaimer is entirely irrelevant to whether implied warranties run to the end user.

Unfortunately, the Uniform Commercial Code itself sheds little light on the correct answer to the question.  This won’t surprise you, but I find Shows to be more persuasive: if we are to permit remote buyers to enforce a manufacturer’s implied warranties,[5] it is only fair that the manufacturer’s warranty disclaimers travel with the goods; otherwise, the manufacturer is given the difficult task of tendering its disclaimer to end users whom the manufacturer does not know and with whom it has no contact.

Of course, if we’re talking about fairness, we also have to consider the end user who may purchase goods without knowledge of an effective disclaimer made upstream.  Frankly, I have little sympathy for them: either they have implied warranties from their immediate seller or they don’t, and if they don’t, why should they be surprised that the manufacturer also disclaimed its implied warranties?  If they do have implied warranties from their own seller, on the other hand, their recourse is to sue their seller.

But you don’t operate based on what I think the law should be, you act on what it is.[6]  And right now, the law is not clear.  Accordingly, you need to take steps to disclaim your downstream warranties or otherwise protect yourself.  The steps you take will depend on your circumstances.  For instance, if your product is resold in the same packaging you provide, you can place the warranty disclaimer language conspicuously on the outside of the package.  Another common step is to include a warranty slip (with disclaimer language) inside the packaging or to include the disclaimer in the user manual for the product, though some courts (wrongly) may not accept this as being sufficiently conspicuous to constitute an effective disclaimer.[7]  Similarly, some courts have allowed disclaimers to appear in catalogs or the like.  An entirely different approach is to require your buyer to notify its buyers of your warranty disclaimer, and to indemnify you in the event of its failure to do so, but the effectiveness of this approach hinges on whether your buyer has the resources to indemnify you, and in many instances you may not have the time or the incentive to perform that sort of due diligence.  You could also combine an indemnification provision with your own disclaimers to provide double protection.

Another issue to consider is when the end user learns of the disclaimer.  There is authority that says a disclaimer tendered to the buyer after purchase is ineffective.  This further counsels against placing disclaimers inside the product packaging, as the end user typically will not open a package prior to purchase.  With this in mind, clearly the most effective way to transmit the disclaimer downstream is by placing it in a conspicuous area of the packaging.  This affords you the benefit of being able to argue that it is conspicuous, and being able to argue that the customer saw it (or should have seen it) prior to the purchase.

If all this sounds ridiculously difficult, that’s because it is.  When courts started deciding to permit breach of warranty claims by remote buyers, they failed to consider how that might disrupt the operation of other parts of the UCC.  I hope the UCC drafters and state legislatures will recognize and fix this problem, but so far: silence.