U.C.C. Article 2

IS PRIVITY REQUIRED FOR A BREACH OF EXPRESS WARRANTY CLAIM? AN EMERGING CONSENSUS SAYS “NO”

A pair of recent decisions from the S.D.N.Y. reaffirms the growing consensus among district courts within the Second Circuit that establishing privity is not a requirement for breach of
express warranty claims seeking recovery for purely economic loss.[1]

In general, “To prevail on a claim of breach of express warranty, a plaintiff must show 'an affirmation of fact or promise by the seller, the natural tendency of which was to induce the buyer to purchase and that the warranty was relied upon.” Factory Assocs. & Exporters, Inc. v. Lehigh Safety Shoes Co., LLC, 382 F. App'x 110 (2d Cir.  2010).  For contracts for the sale of
goods, the UCC further provides that “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." N.Y. U.C.C. § 2-313(1)(a). Moreover, "[a]ny 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." Id. § 2-313(1)(b).  It should also be noted that federal jurisdiction exists over many warranty claims due to the Magnusson-Moss Warranty Act, 15 U.S.C. § 2301 et seq., though that act expressly does not restrict state law rights and remedies.  15 U.S.C. § 2311(b)(1).

Turning to the specific issue of privity, the New York Court of Appeals in Randy Knitwear, Inc. v. Amer. Cyanamid Co., 11 N.Y.2d 5 (1962), modified the previous common-law rule requiring privity for breach of express warranty claims, recognizing that “the significant warranty, the one which effectively induces the purchase, is frequently that given by the manufacturer through mass advertising and labeling to ultimate business users or to consumers with whom he has no direct contractual relationship.” Id. at 12.

However, Randy Knitwear predated New York’s 1975 adoption of the U.C.C., § 2-318, which provides that express (and implied) warranties extend to any natural person if it is reasonable to expect that such a person might use the goods and suffers a personal injury.  However, this section is silent on the question of purely economic loss, an exclusion that is especially notable considering that the drafters of the UCC provided three alternative versions of this section for states to consider enacting, one of which states that warranties extend to any injury suffered by anyone who might be expected to use the goods, not just personal injuries. Compare U.C.C. § 2-318 Alternative B (adopted by N.Y.) with Alternative C.  Accordingly, a series of district court decisions held that New York’s enactment of the U.C.C. abrogated Randy Knitwear and restored the privity defense for express warranty claims.  See, e.g., Koenig v. Boulder Brands, Inc., 995 F. Supp. 2d 274 (S.D.N.Y. 2014); Ebin v. Kangadis Food, Inc., No. 13 Civ. 2311(JSR), 2013 WL 6504547 (S.D.N.Y. Dec. 11, 2013); Dibartolo v. Abbott Laboratories, 914 F. Supp. 2d 601 (S.D.N.Y. 2012).  Similar conclusions were reached by several state appellate courts.  See, e.g., Mfrs. & Traders Trust Co. v. Stone Conveyor, Inc., 91 A.D.2d 849 (4th Dept. 1982); Hole v. General Motors Corp., 83 A.D.2d 715, 716 (3d Dept. 1981).

Additionally, a series of decisions described Randy Knitwear as a narrow exception to the general rule, holding that the requirement of privity was waived only for express warranties contained in public advertising or sales literature.; Silva v. Smucker Natural Foods, Inc., Case No. 14-CV-6154 (JG)(RML), 2015 WL 5360022 (E.D.N.Y. Sep. 14, 2015); Weisblum v. Prophase Labs, Inc., 88 F. Supp. 3d 283 (S.D.N.Y. 2015); Arthur Glick Leasing, Inc. v. William J. Petzold, Inc., 51 A.D.3d 1114 (3d Dept. 2008); Murrin v. Ford Motor Co., 303 A.D.2d 475 (2d Dept. 2003); Carcone v. Gordon Heating & Air Conditioning Co., Inc., 212 A.D.2d 1017 (4th Dept. 1995).

Finally, yet another line of authority has held that Randy Knitwear continues to waive the requirement of privity for all express warranty claims, based upon Comment 2 of the Official Comments UCC § 2-313, which states that, “[a]lthough this section is limited in its scope and direct purpose to warranties made by the seller to the buyer as part of a contract for sale, the warranty sections of [Article 2] are not designed in any way to disturb those lines of case law growth which have recognized that warranties need not be confined either to sales contracts or to the direct parties to such a contract.”  See Sitt v. Nature's Bounty, Inc., 15-CV-4199 (MKB), 2016 WL 5372794 (E.D.N.Y. Sep. 26, 2016); Mahoney v. Endo Health Sols., Inc., 15-cv-9841(DLC), 2016 WL 3951185 (S.D.N.Y. July 20, 2016). 

The most recent decisions on this issue have generally agreed with the most expansive line of authority.  For example, the court in Brady v. Anker Innovations Ltd., No. 18-cv-11396 (NSR), 2020 WL 158760 (S.D.N.Y. Jan. 13, 2020) conducted an extensive review of the case law on this issue, before explicitly following Mahoney and Sitt, while rejecting Koenig and Ebin.  A similar result was reached in Wedra v. Cree, Inc., 19 CV 3162 (VB) (S.D.N.Y. Mar. 20, 2020), where the court found that privity was not required though it dismissed the claim on other grounds.  Accordingly, until the Second Circuit provides definitive guidance in this area, it appears that the current trend is to waive the requirement of privity for breach of express warranty claims.

[1] Notably, this analysis does not extend to claims for breach of implied warranties of merchantability and fitness for a particular purpose where the only loss claimed is economic.  In such cases, it is well-established that privity is a requirement.  See Wedra v. Cree, Inc., 19 CV 3162 (VB) (S.D.N.Y. Mar. 20, 2020); Catalano v. BMW of North America, LLC, 167 F. Supp. 3d 540 (S.D.N.Y. 2016)

Coronavirus and Commercial Impracticability:An Analysis of U.C.C. § 2-615

 

As the Coronavirus crisis of 2020 has led to the voluntary or mandatory shutdown of innumerable businesses, it is likely that many companies have orders for the sale of goods that they either can no longer fulfill or that can only be fulfilled at exorbitant cost.[1] In such cases, rather than face liability for breaching its contracts, the seller’s performance may be excused in situations that meet the requirements of Section 2-615 of New York’s Uniform Commercial Code (the “U.C.C.”).

1.      U.C.C. § 2-615(a): Is The Seller Off The Hook?

For contracts for the sale of goods governed by the U.C.C., Section 2-615 will excuse a seller from performance of its contractual obligations when such performance has been rendered impracticable by either (a) unforeseen and uncontracted-for contingencies or (b) supervening foreign or domestic governmental regulations.  U.C.C. § 2-615(a).  In either event, the test is whether the delivery of goods has become impracticable because of unforeseen supervening circumstances that were not within the contemplation of the parties when the contract was formed.  U.C.C. § 2-615, cmt. 1. 

The first of these tests excuses a seller from performance where it can show the existence of (1) a contingency (2) the impracticability of performance as a consequence of the occurrence of that contingency, and (3) that the nonoccurrence of the contingency was a basic assumption of the contract. See Dell's Maraschino Cherries Co. v. Shoreline Fruit Growers, Inc., 887 F. Supp. 2d 459 (E.D.N.Y. 2012). The official comments to Section 2-615 list as examples of possible contingencies: “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from
securing supplies necessary to his performance.”  U.C.C. § 2-615.  Performance under this doctrine will only be excused when it can only be done at extreme and unreasonable cost. See Asphalt Intern., Inc. v. Enterprise Shipping Corp., 667 F.2d 261, 266 (2d Cir. 1981) (applying maritime law but incorporating UCC §2-615 by analogy); Transatlantic Fin. Corp. v. U.S., 363 F.2d 312 (D.C. Cir. 1966).  However, mere financial hardship is not sufficient to excuse performance. See Rochester Gas Electric Corporation v. Delta Star, Case No. 06-CV-6155-CJS-MWP, 2009 WL 368508 (W.D.N.Y. Feb. 13, 2009); Maple Farms v. City Sch. Dist., 76 Misc. 2d 1080, 1083 (Sup. Ct., Chemung Cty. 1974) see also U.C.C. § 2-615, cmt. 4.

In addition, if the hardship was foreseen by the parties, the doctrine of impracticablilty will not apply.  See, e.g., Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987); U.S. v. Brooks-Callaway Co., 318 U.S. 120, 122-23 (1943); Ahlstrom Machinery, Inc. v. Associated Airfreight, Inc., 251 A.D.2d 852, 853 (3d Dept. 1998).  For example, if the contract between the parties include a force majeure clause specifically or impliedly covering epidemics, the terms of that contractual provision would control instead of the U.C.C.  Similarly, companies that continued accepting orders as it became foreseeable that the Coronavirus would create considerable economic disruption may not be able to invoke the protections of Section 2-615. See Cliffstar Corp. v. Riverbend Prods., 750 F. Supp. 81, 84 (W.D.N.Y. 1990) citing Roth Steel Prods. v. Sharon Steel Corp., 705 F.2d 134, 149-50 (6th Cir. 1983).

Turning to the second prong of the UCC 2-615(a) test, the imposition of governmental regulations is an excuse to performance if it both renders performance genuinely impractical and was unforeseen at the time of contracting.  See, e.g., Matter of A S Transp. Co. v. Cty. of Nassau, 154 A.D.2d 456, 459 (2d Dept. 1989); Moyer v. City of Little Falls, 134 Misc. 2d 299, 301 (Sup. Ct., Herkimer Cty. 1986) see also Barton Windpower, LLC v. N. Ind. Pub. Serv. Co., 13-cv-5329 (N.D. Ill. June 18, 2018) (applying N.Y. law). 

For example, regulations that would render performance illegal would excuse the seller, assuming they were not foreseen at the time the contract was entered into.  See, e.g., Matter of Kramer Uchitelle, Inc., 288 N.Y. 467, 471 (1942); Boer v. Garcia, 240 N.Y. 9, 16 (1925).  Similarly, regulations that supersede existing contracts and require goods to be sold at the government’s direction would also constitute an excuse if unforeseen. Nitro P. Co. v. Agency of C.C. and F. Co., 233 N.Y. 294 (1922); Mawhinney v. Millbrook Woolen Mills, 231 N.Y. 290 (1921). 

Accordingly, it is likely that a court addressing recent regulations such as N.Y. Executive Order 202.6, which required the closure of various “non-essential” businesses, would conclude that the affected businesses had a valid excuse for non-performance.[2]

Similarly, non-performance of contracts for the sale of goods that were superseded by the invocation of the Defense Production Act, 50 U.S.C. §§4501 et seq. or other legal provisions, is also likely excusable.  There are, however, two possible caveats to that analysis.  First, if a seller was found to have caused or colluded in the government action preventing performance, then this excuse would not apply, which may present problems for companies that affirmatively request that the Defense Production Act apply to them in order to supersede existing contractual obligations. MG Refining & Marketing, Inc. v. Knight Enterprises, Inc., 25 F. Supp. 2d 175 (S.D.N.Y. 1998); Cliffstar Corp. v. Riverbend Products, 750 F. Supp. 81, 84 (W.D.N.Y. 1990) citing Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134, 149-50 (6th Cir. 1983). Second, performance is not excused if the supervening regulation was foreseeable, which may create some ambiguity regarding contracts entered into after the start of the Coronavirus crisis.

2.      U.C.C. § 2-615(b): How Should Goods Already Produced Be Allocated?

If, despite commercial impracticability, a seller is able to produce some, but not all, of the contracted-for goods, Section 2-615(b) requires that the seller allocate production and delivery between existing customers, regular customers not then under contract, and their own manufacturing requirements in a fair and reasonable manner.  U.C.C. § 2-615(b).  As the official comments to Section 2-615 explain, this section is intended to provide “reasonable business leeway” to sellers in order to determine a fair and reasonable method of allocation.

Courts in New York have not had much opportunity to address whether allocations under Section 2-615(b) are fair and reasonable, and the courts which have looked at this issue have generally found that whether an allocation is reasonable is a question of fact for the jury. See, e.g., Cliffstar Corp., 750 F.Supp. at 87.  In general, courts in other jurisdictions have upheld allocation schemes where goods were distributed according to objective, consistently applied criteria, such as prior sales volume.  See, e.g., Cecil Corley Motor Co., Inc. v. General Motors Corp., 380 F. Supp. 819 (M.D. Tenn. 1974); Intermar, Inc. v. Atlantic Richfield Company, 364 F. Supp. 82, 99 (E.D. Pa. 1973). It can be permissible to include subsidiaries and affiliates in an allocation scheme assuming that they already either had contracts to receive goods and
were regular customers and were not given favorable treatment over other customers under the allocation criteria the seller determined.  See Intermar, 364 F.Supp. at 99.

On the other hand, courts have generally been skeptical of allocation schemes that can be characterized as unfair self-dealing.  See, e.g, Chemetron Corp. v. McLouth Steel Corp., 381 F. Supp. 245 (N.D. Ill. 1974); Haley v. Van Lierop, 64 F. Supp. 114, 116 (W.D. Mich. 1945), Courts have rejected allocation schemes that include parties other than customers with existing contracts or regular customers, such as new customers or newly formed subsidiaries.  See, e.g., Roth, 705 F.2d at 151.  Allocation schemes that completely cut out certain disfavored buyers have also been found to be unreasonable. Cosden Oil & Chemical Co. v. Karl O. Helm Aktiengesellschaft, 736 F.2d 1064 (5th Cir. 1984). 

3.     U.C.C. § 2-615(c):  How Quickly Must Customers Be Told The Bad News?

Finally, Section 2-615 requires that sellers “seasonably” notify buyers that there will be delay or non-delivery and, in the event that there will be an allocation of goods under Section 2-615(b), the quota of goods available to the buyer. U.C.C. § 2-615(c).  “Seasonable” is defined in U.C.C. as an action undertaken within a reasonable time depending on the nature, purpose and circumstances of that action.  U.C.C. § 1-205.  The U.C.C. does not specify a form that this
notice must take, just that the seller take such steps as reasonably required to inform the buyer in the ordinary course of business.  U.C.C. § 1-202(d).

While I am not aware of any New York courts that have ruled upon what seasonable notice is in the context of Section 2-615, most courts that have considered similar requirements in other provisions of the U.C.C. have tended to treat the question of whether an action was done seasonably as a question of fact to be determined by the jury. See, e.g., Sherkate Sahami Khass Rapol v. Henry R. Jahn & Son, Inc., 701 F.2d 1049, 1051 (2d Cir. 1983).  However, courts will determine what constitutes a reasonable time before trial when the facts will admit of only one inference. Tabor v. Logan, 114 A.D.2d 894 (2d Dept. 1985).   Among the factors courts have considered in other contexts that may be relevant to disputes under Section 2-615(a) are whether the goods at issue were subject to rapid fluctuations in price and whether the aggrieved party was substantially prejudiced by the delay in notice.  See, e.g., Simply Natural Foods LLC v. Polk Mach. Co., Case No. 11-CV-3911(JS)(SIL), 2015 WL 5599152 (E.D.N.Y. Sep. 22, 2015); Levin v. Gallery 63 Antiques Corp., Case No. 04-CV-1504 (KMK), 2006 WL 2802008, (S.D.N.Y. Sep. 28, 2006).

4.     Conclusion

For companies faced with contracts for the sale of goods that they are unable to fulfill due to Coronavirus-related disruptions, they may be excused performance under U.C.C. § 2-615 if they can show that performing is either commercially impracticable or prohibited under
governmental mandates and that the disruption was not foreseeable.  In addition, for companies that can partially fulfill orders, they must allocate goods between customers in a fair and reasonable manner, ideally in accordance with objective and consistently
applied criteria.  Finally, companies wishing to invoke U.C.C. § 2-615 must notify customers within a reasonable time, with prompt notification especially necessary if the goods in question are subject to rapid fluctuations in price of if counterparties are likely to be substantially prejudiced by delay.

[1] This blog post only addresses contracts for the sale of goods.  Other contracts are governed by a somewhat different legal regime, which will be addressed in a subsequent post.

[2] With the possible exception of contracts entered into shortly before the issuance of Executive Order 202.6, when it arguably became foreseeable.