Understanding The Warranty Of Fitness For Particular Purpose In The Automotive Supply Chain

For automotive suppliers, some of the most important terms in any contract for the purchase or sale of goods are the warranties that apply to those goods. This article will address one particular kind of warranty – the warranty of fitness for particular purpose.

A warranty of fitness for particular purpose generally arises in one of two ways.  First, similar to the implied warranty of merchantability addressed in previous posts on this blog, a warranty of fitness for particular purpose will be implied by law under the Uniform Commercial Code (“UCC”) if certain conditions are met.  Specifically, UCC 2-315 provides that:

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.

In other words, unless properly disclaimed in the contract, an implied warranty of fitness for particular purpose arises when: (1) the seller knows, or should know, buyer’s purpose for the goods; and (2) the seller knows, or should know, that buyer is relying on seller to determine what the buyer needs for that purpose. Imagine that a customer walks into a watch store, and tells the proprietor that he intends to go scuba diving and needs a watch to monitor his dive time. The customer then asks the proprietor to recommend a watch for the trip. In such circumstances, any recommendation by the proprietor almost certainly will be deemed to include a warranty that the watch is waterproof and otherwise suitable for scuba diving.

Second, the seller may expressly warrant in the contract that the goods will be fit for the buyer’s intended purpose. In the automotive industry, express warranties that goods will be fit for the buyer’s intended purpose often appear in the customer’s purchase order terms and conditions. In such cases, the supplier should take care to make sure that it really does know of customer’s purpose and that the goods are, in fact, fit for that purpose. Unlike in the case of implied warranties, lack of knowledge generally does not allow the seller to avoid an express warranty that the goods are fit for buyer’s purpose.

A supplier trying to assess its risk may ask, what is the particular purpose for which its goods must be fit?  The answer is highly situational. In some cases, the answer may be relatively simple. Similar to the scuba diving example above, a customer may identify generally the use to which it intends to put the goods. For example, a customer may issue a request for quotation for a product that will be used on the outside of the vehicle. In such cases, even if not expressly stated in the request for quotation, the UCC likely would deem any contract to include warranties that the product be fit for external use, such as having some resistance to water and corrosion.

More often in the automotive industry, the answer involves looking at the specifications or other requirements provided by the customer. In the automotive industry, it is common for the customer to provide detailed tolerances and specifications that the product must meet. These requirements, together with any additional requirements provided throughout the process, generally will be considered to describe the “purpose” for which the goods will be used. In some cases, the specifications may be so detailed and all-encompassing as to effectively swallow any separate purpose for which buyer may have intended the goods. If a customer provides the supplier with detailed engineering drawings and tolerances such that the supplier is effectively building to print, most courts will hold that the buyer is no longer relying on the supplier to select the goods and, therefore, the implied warranty of fitness for particular purpose under UCC 2-315 does not apply. Although an express warranty of fitness for particular purpose does not require the customer to have relied on the supplier to select the product, a sufficiently detailed set of specifications generally will be found to have fully described the customer’s purposes such that compliance with the specifications usually is the same as finding that the goods were fit for the particular purpose intended by the customer. For example, a customer who specifies that it needs a product with a certain weight tolerance generally will not be able to claim a breach of the express warranty of fitness if it uses the product in an application requiring a different weight tolerance.

Where commercial realities permit, suppliers should consider disclaiming the implied warranty of fitness for particular purpose and rejecting any express warranty of fitness for particular purposes. This is particularly true where the supplier has only partial information regarding the purpose for which the goods will be used. While many buyers may question efforts by a supplier to disclaim warranties that goods will be free from defect or merchantable, many buyers can be persuaded that it is not reasonable to require a supplier to warrant that the goods will be fit for a purpose which the customer knows better than the supplier.

Accordingly, when contracting for the sale or purchase of goods, suppliers should be aware of the any warranties (express or implied) that the goods may be fit for a particular purpose. Like all warranties, both buyers and sellers must consider whether the warranties are appropriate for the transaction or whether they should be disclaimed or excluded from the contract.