Consumer Warranty Law: 11.3.4 Remedies for Seller’s Lack of Good Faith
According to comment 1 to section 1-304 of the UCC:
According to comment 1 to section 1-304 of the UCC:
The good faith obligation’s policing function makes it much like the unconscionability provision of section 2-302.192 While unconscionability concerns the written contract, focusing on the harshness of oppressive contract terms on a weaker party, good faith focuses on the seller’s conduct and knowledge.
When a product does not perform as promised or expected, common law fraud and related torts are possible alternatives to a warranty cause of action. For example, an untrue oral statement that a used car has never been in a collision violates an express warranty and also may constitute fraud. The existence of a UCC warranty claim does not prevent the consumer from bringing a fraud claim.199
In most jurisdictions, misrepresentation claims avoid the application of the parol evidence rule.202 Many courts also hold that these claims are unaffected by merger and integration clauses.203 Merger and integration clauses however may be relevant when evaluating whether the buyer’s reliance on the misrepresentation was justifiable.204
Neither the UCC nor the comments define unconscionability. Comment 1 to section 2-302 enunciates the Code’s test for unconscionability in fairly broad terms:
Procedural unconscionability involves the manner and process by which the terms become part of the contract.126 Procedural unconscionability derives from the basic contract law tenet that freedom of contract depends upon the voluntariness and knowledge of the parties. Without meaningful choice by one party, the resulting contract is no longer a true bargain or agreement; it is instead an imposition.
Standards for procedural unconscionability differ depending on whether the two parties to the agreement are businesses or whether one party is a consumer. Between two businesses, there must be more than mere disparity of bargaining power; otherwise, few contracts would ever survive.127 Oppression or unfair surprise must infect the contract formation.128
An important example of lack of meaningful choice and lack of sophistication in consumer cases is a seller’s use of contracts written in English when the seller knows the buyer cannot speak or read that language. In Jefferson Credit Corp. v. Marcano,133 a used car buyer who had, “at best a sketchy knowledge of the English language,” purchased a car with implied warranties disclaimed.
Several courts have emphasized the uniformity of contracts within the industry as demonstrative of lack of meaningful choice. In the leading case of Henningsen v. Bloomfield Motors, Inc.,139 the new car buyer sued the manufacturer and dealer for breach of warranty for personal injuries. The defense raised the typical warranty disclaimer clause in the purchase order.
Substantive unconscionability focuses on the terms of the agreement and whether they are unreasonably favorable to one party or are so one-sided as to shock the conscience.145 For example, courts have struck down waivers of various sorts146 and a clause in a lease requiring the lessee to assume full risk of loss of the merchandise.147 Giving the consumer one-sided contract terms in the form of a warranty that is so riddled with limitations as to be
Courts take differing views about the necessity of proving both procedural and substantive unconscionability. Some courts require a showing that both types of unconscionability are present.152 However, a weak showing of procedural unconscionability can be compensated by a strong showing of substantive unconscionability, and vice versa.153
While the burden of proof is on the party asserting unconscionability,156 the amount and type of evidence needed to meet that burden will vary. In one case it may be sufficient to show that the consumers do not understand English, that the seller knew it but did not explain the contract to them, and that the contract or clause is injurious to the consumers. In another case it may be necessary to have expert testimony on the reasonable retail value of an item sold at an exorbitant price.
The remedy of voiding the whole contract is appropriate when the unconscionability goes to the inducement to enter the contract, such as when there was deception about the benefits or terms of the contract.158 Voiding the contract is also appropriate when the unconscionability permeates the entire transaction so that the total effect of the contract is unconscionable.
Unfair and deceptive practices (UDAP) claims present the same advantages as misrepresentation claims, and the UDAP deception standard will be easier to meet than an intentional or even negligent misrepresentation standard. Furthermore, unlike common law fraud, UDAP statutes usually allow the recovery of attorney fees.
The elements of “intentional misrepresentation,” “fraudulent misrepresentation,” or “common law fraud” are most often stated as follows:
Under the economic loss rule, discussed in § 12.2, infra, the only damages available on a negligence or strict liability claim based on a defective product are damages for personal injury or injury to other property. The rule bars “economic loss” damages—repair costs, diminution in value, lost profits, and the like—on these claims.
Misrepresentations do not have to be intentional in order to form a basis for tort liability. Even if a seller believes the false statement it is making to be true, the misrepresentation is actionable if the seller has not exercised reasonable care in ascertaining the facts.224 A tort claim based on such a misrepresentation is one for negligent misrepresentation.225 The following is a typical list of elements of such a claim:
Jurisdictions differ as to whether a plaintiff may recover for purely economic loss as opposed to personal injury or property damage in a negligence action.231 While there is less case law on negligent misrepresentation than negligence on this issue, a number of cases do allow recovery for economic loss caused by negligent misrepresentation.232 Other courts do not.233 Some jurisdictions allow recovery of economic loss on a negligent misrepresentati
In states that do not overtly recognize the tort of negligent misrepresentation, a plaintiff may be able to prevail on a claim labeled as intentional misrepresentation that might otherwise be pleaded as negligent misrepresentation. For its scienter requirement the intentional misrepresentation claim would rely not on the claim that the defendant knew that the representation was false, but that the defendant acted in reckless disregard of the truth.239
A seller may make a statement, reasonably believing it to be true, which later turns out to be false. For example, a seller of a used car might tell a buyer that the car had never been in an accident. If the representation was based on information offered by the person trading in the car, who concealed that the car had been in a collision and there was nothing to suggest the contrary to the seller, the seller has made an innocent misrepresentation.
Fraud by silence is a species of fraud. The Florida Supreme Court has stated that “the law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.”247
A Maryland decision summarizes the elements of this tort as follows:
Regardless of whether the claim asserts intentional, negligent, or innocent misrepresentation, a plaintiff must show reliance on the representation and that such reliance was reasonable.259 Reliance that might otherwise be justifiable may be deemed unjustifiable if contradictory information is present but the consumer fails to investigate it.260 Whether a buyer had a reasonable opportunity to inspect the property or whether a seller prevented a buyer from fully inspecting it should generally be
Many jurisdictions permit plaintiffs who prove intentional misrepresentation or fraud to obtain benefit of the bargain damages.262 The Restatement (Second) of Torts measures damages for negligent misrepresentation as (1) the difference between the purchase price and the value of what the buyer received, plus (2) other pecuniary loss suffered as a consequence of the buyer’s reliance on the misrepresentation.263 For innocent misrepresentation, the Restatement limits damages to th
The count or counts in a complaint or counterclaim alleging misrepresentation should include each element of the tort in a separate paragraph. Plead as many different types of misrepresentation as the known facts will permit, and move to amend to include more as the facts are developed. The same fact pattern may well give rise to a complaint for intentional, negligent, and innocent misrepresentation.