Warranties and Breach of Contractual Duty

1
Warranties and Breach of Contractual Duty

• Warranties
• Relationship between Breach of Warranty and
  Nonperformance

2
Warranties

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

3
Definition of the Liability of Warranties

• A constructive liability which the seller shall
  take if the object sold is defect or void title.

4
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.

5
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 (354I)
• The warranty of function agreed(354I)
• The warranty of quality guaranteed (354II)

6
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)

7
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)

8
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.

9
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.

10
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)   

11
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)

12
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)

13
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)

14
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 354I)
• 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)

15
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)

16
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)

17
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)

18
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)

19
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)

20
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)

21
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).

22
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.( Article154)

23
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 MatterUpon 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.

24
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)

25
Comparative study of Warranties
26
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.

27
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.

28
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.

29
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.

30
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.

31
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.

32
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."

33
Termination of Contract
34
Termination by Agreement

• The parties may terminate a contract if they have
  so agreed. (PCL art 93I)
• 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 93II)

35
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)

36
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)

37
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)