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Ready for more disclaimer talk? Today’s post talks about disclaimers and their use in contracts. It fit in nicely with all the Draw the Law’s talk on warranties.

Disclaimers are Exculpatory Clauses

In contract lingo a disclaimer is apart of group of clauses that are known as exculpatory. Exculpatory clays not only include disclaimers, but indemnification and waivers as well. I will cover those eventually, but just know that exculpatory works by reliving one or both parties to a contract from liability in certain circumstances.

Generally, an exculpatory clause will not be enforced by a court if the offending clause is extremely unfair (“unconscionable”) or it is against public policy. Sorry, there are just some liabilities that cannot be waived. This goes back to what I say a lot to clients and in this blog, an attorney can put down whatever you want, but that does not mean it is going to be enforced if there is a dispute.

However, this situation is usually in a one-sided agreement where one party was not able to negotiate the terms of the deal. This type of contract is known contract of adhesion. You are basically stuck with the terms of the deal because the other side has too much leverage in the negotiation. Typically, this situation is an average consumer versus a large corporation.

More on Disclaimers and an Example

Disclaimers are great contracting tools for limiting risk for a company when it is putting a product or service out there. Often times, when you do not know what the end results may be, such as behavior or actions by a consumer with a new product, you may want to limit damages, in particular a certain type, consequential damages. I will talk about damage types in another post. For now, just understand that a disclaimer can limit the amount of damage for injuries that might indirectly stem from the main harm in a breach of contract situation.

An example of a disclaimer is as follows:

Although the information and recommendations at this internet site are presented in good faith and believed to be correct, COMPANY X makes no representations or warranties as to the completeness or accuracy of the information.

Information is supplied upon the condition that the persons receiving same will make their own determination as to its suitability for their purposes prior to use. In no event will COMPANY X be responsible for damages of any nature whatsoever resulting from the use of or reliance upon information from this site or the products to which the information refers.

COMPANY X does not warrant the accuracy or timeliness of the materials on this site and has no liability for any errors or omissions in the materials.

THIS SITE IS PROVIDED ON AN “AS IS” BASIS. NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER NATURE ARE MADE HEREUNDER WITH RESPECT TO INFORMATION OR THE PRODUCTS TO WHICH INFORMATION REFERS.

I took this off a company’s website, and just kept the name out, as to focus on the disclaimer itself. Notice that it accomplishes several things. It tells the reader the information is only presented on a “good faith” basis and there is no warranty for “accuracy.” Also it is indicating to the reader if you rely on the information on the website you do so at your own risk. Lastly, it uses the disclaimer I talked about on Friday’s post, “as is.” Notice it disclaims the warranties that I discussed.

Anyway, why don’t you take a peek at some of your products, websites, marketing materials, etc . . . and see what disclaimers are on those. You might be surprised. Finally, you can take a peek at my disclaimer at the end of this and every post.

Don’t forget to “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

Hey contract junkies you are in luck this week’s Draw the Law and next week’s Boilerplate Blurb will give you a double shot of disclaimer information.
If you are a small business owner drafting your own agreements or have an attorney doing them for you, you definitely want to have an idea about what are the expectations a customer is supposed to have about your product. One way you manage those expectations is through disclaimers of the warranties I discussed last post.

Requirements of a Disclaimer

Recall that warranties of merchantability and fitness for a particular purpose means that the seller is saying that their product will do what it is supposed to do and it will serve a particular role. Many times salespeople or advertising may puff a product a little too much, and the maker or seller needs to dial that back. They will use a disclaimer to cut off those warranties. A for a disclaimer to be effective it MUST BE the following:

  • Clear;
  • Unambiguous;
  • And if written, conspicuous.

Therefore, when you read those encyclopedia agreements notice that the text and font changes to all CAPS (like so), that is definitely the drafters way to call your attention there. In many occasions one of those bolded, all caps provisions will be a disclaimer.

Specifics of Disclaiming Warranties

Here are some specifics when trying to disclaim the warranties I discussed last week:

  • In the case of a warranty of merchantability (either expressed or implied) it can be disclaimed through oral or written means.
  • However, for an implied warranty of fitness for a particular purpose the disclaimer MUST be in writing.
  • If you use Ebay or Craiglist for all your goods purchases you will probably see these phrases a lot “as is” or “with all faults.” Why? They are disclaimers that BOTH work against the implied warranties of merchantability and fitness for a particular purpose (in most cases).
  • You cannot disclaim a warranty after the buyer has purchased your product. Basically, that would defeat the purpose of consumer protection laws. Consider, how it feels after you get something, and then someone says “Oh yeah, by the way, I forgot to mention . . .” The law would like to avoid those kinds of deals.

Finally, you should realize that there are some things you cannot disclaim. One of the primary things a manufacturer and retailer always want to think about with products is their safety when used by the public, in particular in the context of quality control. Why?Any personal (physical) injury that is caused by a product’s defect will result in damages for the injured customer. This is a responsibility that one cannot disclaim.

Hope you enjoyed today’s Draw the Law, and remember to check back on Monday for more on Disclaimers with Boilerplate Blurb. Some examples will be given.

Don’t forget to “Subscribe” to this blawg and enjoy your weekend!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Hey everyone, made a mistake, I forgot there were some additional things that I wanted to cover this week on warranties.  So the discussion on disclaimers will follow next week. Anyway, let’s get to it.

Magnuson-Moss Act

The Magnuson-Moss Act is a federal law that covers written warranties in the situation of consumer goods (personal, household use items) that cost more than $10. It does NOT require you to produce a written warranty, it only requires certain things if you do decide to have one. It only applies to written and not oral warranties. Lastly, it does not apply to service warranties, unless you are providing the parts and workmanship in doing a repair, then it does.

The Basics

The Federal Trade Commission is responsible for administering this law. There are three basic requirements that you as a warrantor or seller must do in your written warranties:

  1. You must state whether the warranty is “full” or “limited” (to be explained later);
  2. As a warrantor, you must state specified information (listed later) about the warranty coverage and it must be in plain language (no legalese!);
  3. You must ensure that the warranty is available to read BEFORE purchase by the consumer.

 Full vs. Limited Warranties

A full warranty is a promise that the good will be repaired or replaced for free during a warranty period.  It functions like a Lemon Law. To have a full warranty you must do the following:

  • You do not limit the duration of implied warranties.
  • You provide warranty service to anyone who owns the product during the warranty period; that is, you do not limit coverage to first purchasers.
  • You provide warranty service free of charge, including such costs as returning the product or removing and reinstalling the product when necessary.
  • You provide, at the consumer’s choice, either a replacement or a full refund if, after a reasonable number of tries, you are unable to repair the product.
  • You do not require consumers to perform any duty as a precondition for receiving service, except notifying you that service is needed, unless you can demonstrate that the duty is reasonable.

Anything short of that, you will have a limited warranty.  Some retailers like to offer a full warranty of their own above what the manufacturer offers as a competitive edge.

A limited warranty is the one you see more often, and it is probably one that is favored by starting businesses, as it is less costly. As you would expect, it is limited in what it covers, which is usually only parts and rarely the cost of labor beyond the first month.  Some expensive items manufacturers may offer limited warranties for a longer period of time due to the relative cost of the item.

The Specified Information

In plain language you must state the following in your written warranty:

  1. Name and address of the company making the warranty;
  2. The product or parts covered;
  3. Whether the warranty promises to replace, repair, or refund, and any expenses that the consumer has to pay associated with those actions;
  4. The length of the warranty;
  5. If the warranty does not cover certain legal damages beyond the cost of the product;
  6. What the consumer has to do if something goes wrong;
  7. If the company requires that the consumer waive certain rights in dispute or go through arbitration, then a statement on that must be included;
  8. Finally, a brief description of the consumers’ legal rights.

There are a lot more issues with warranties, that would probably require a discussion with an attorney or a more in-depth analysis than one post would take. So that will be it for this week on warranties.

Come back next week where I will discuss disclaimers, and I am sure many of you already know the big one from buying things on Craigslist and Ebay. So see you then and also don’t forget to “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Last week, I discussed express warranties. Today’s discussion follows that up with implied warranties. To bring some perspective to this topic I am focused on warranties as they tend to come up in the context of selling goods and breach of warranty claims when the product does not live up to the customer’s expectations.

What are Implied Warranties?

Implied warranties are ones that are not spoken or written. In fact, they are simply imputed as a warranty from the seller to the buyer because it is based on reasonable customer expectations.

As for implied warranties, there are two that a seller of goods should always been keenly aware about. They are the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

Merchantability

For goods to be merchantable they must meet at least this level of standard:

    (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 promises or affirmations of fact made on the container or label if any.

See HRS §490:2-314

Basically, a merchant warrants that the goods sold by them are fit to be sold for what they are going to used for. Another key thing about merchantability is that you (as the seller) have to be a merchant.  I realize that it may seem obvious, but people get caught up in the legalese.  So if you like to use Craigslist or Ebay to sell your stuff (not as a merchant) there is no warranty of merchantability. So how does this work?

Example 1: This is the most common example, Uncle buys a used car from Duke. Duke is a merchant. As soon as Uncle drives the car off the lot the engine falls out. Duke has breached the implied warranty of merchantability, as the car clearly was not fit for the ordinary purpose of a car, which is driving.

Example 2: If someone buys pork or chicken from the local neighborhood butcher, that customer does not cook the meat item thoroughly and gets sick. So long as the butcher did not do anything else to the product, and he sells the meat as it is supposed to be, he has NOT breached his warranty of merchantability. He sold the meat in the common condition that requires thorough cooking my the customer.

Fitness for a Particular Purpose

Fitness for a particular purpose on the other hand IS applied to both merchants and non-merchants. This is how it is defined:

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.

See HRS  §490:2-315

What does that mean? Basically, something you sell ought to do what is supposed to for a particular reason. The best way to think about this is how the problem usually arises. This warranty is problematic for a seller is when the customer or person asks, “Can item X do this?” or “Or I am looking for a particular widget that does A, B, and C things, can you recommend one?” The salesperson then recommends something to the customer, they buy it, and then it does not do as expected to what was warranted. I’ll use a ridiculous example first, and then show how it becomes nuanced with a second one.

First example: A customer comes in to a toilet store. He asks, “Do you have a bidet that plays techno music when I turn it on?” The store clerk says, “Sure. This is the model you want,” giving the customer a bidet that does not in fact play techno music, but classical thinking that the customer is crazy to want a techno-playing bidet. The problem comes when the customer installs the product, uses it, and discovers that it does not do the particular purpose he asked about.

Second example: A customer comes into a shoe store. She states to the sales clerk, “I do a lot of walking and hiking. I’m thinking of walking to Manoa Falls for a hike this weekend. I need hiking boots.” The clerk responds by presenting a pair of shoes he thinks are perfectly suited for hiking, but are made for walking. He is warranting the fact that the shoes he selected would meet her purposes. The problem comes when she attempts to hike with those shoes, then slips and falls. She would claim he warranted that they would be good enough for hiking. Then the legal fight would ensue, and now you can see the problem of implicitly warranting that you did not intend.

Breach of Warranty and Other Claims

In general, when your products fail to live up to expectations and your salespeople have overstated or overpromised what can be delivered you will probably see a breach of warranty claim. In addition, depending on their injury your now upset customer will likely also claim negligence, misrepresentation, and strict liability. The way to deal with the problem of overhyping is to train sales force to know what they are selling and to watch how they phrase things. Finally, you want to do internal testing and research to make sure your product does what supposed to do.

Next week, I will be discussing the Magnuson-Moss Act, which is a federal law covering written warranties for consumer goods and the difference between full and limited warranties! Also don’t forget to “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Last week I talked about the basics of the CAN-SPAM Act (or advertising through e-mails) and I provided this silly, fake e-mail to show you what NOT to do in your e-mail advertisements.

Anyway, moving to today’s topic about warranties, which will also continue onto next week as well . . . .

What is the Purpose of a Warranty?

Warranty law’s goal is “to determine what it is that the seller has in essence agreed to sell.” Some warranties apply to all transaction of goods (and is not just between merchants as some believe).  Basically, when a seller makes a sale of something they guarantee certain aspects and qualities that should be in the product so that the customer is getting what they bargained for.

Types of Warranties

There are two types of warranties, express and implied.  I will cover express this week and follow-up next week with implied.

Express Warranty

An express warranty is exactly as it sounds. It is all of the following:

(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.

(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.

See HRS §490:2-313

So based on those definitions these are the typical ways an express warranty can be formed:

  1. oral representations
  2. written representations
  3. description of goods
  4. samples
  5. plans
  6. tech specs
  7. reference to a some sort of standard
  8. the past same goods a seller sends to the buyer
  9. advertisements

For the creation of an express warranty there are no magic formal words. You need not say “I warrant this car gets 30 miles to the gallon in downtown Honolulu.” It can be more casual and conversational, so long as you make a affirmative statement that someone takes is a part of the deal and that the good will conform to what you said, you have an express warranty. In fact, sometimes words do not need be exchanged about the good. Showing a customer a sample or floor model can suffice and saying “this is exactly what you will get” while gesturing to that model can create an express warranty.

Bottom line: While, this looks troublesome for sellers there are ways to disclaim warranties and avoid some liability, especially with overzealous salespeople.  However, let me close out this post with these general thoughts:

  1. When selling stuff to your customers do not make promises you cannot keep.
  2. The line sometimes between “puffing” and over-promising is very fine.
  3. You always want to practice your pitches and sales lines, and go over the script with your sales force.
  4. Finally, any paper (including e-mails and social media stuff) related to the selling of the good you want to make sure you have not inadvertently created express warranties that you cannot keep.

Next week will be a further discussion of warranties, specifically the implied ones of merchantability and fitness for a particular purpose. Also don’t forget to “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

In my previous post I discussed raising capital through governmental loans and programs.  Today’s Draw the Law topic is about deciding to buy a business or its assets and franchise agreements.

Say you come to the realization that you don’t mind owning a business that someone else has built up.  The culture, the image, the stuff walls and tiles – all of it looks great!  You probably would then explore buying the business or if it is a part of a chain entering into a franchise agreement.

Buying a Business: Why Start from Scratch?

Exchanging Information: Getting to Know Each Other

Let’s say you want to buy the mom and pop store that makes shave ice down the road.  The first thing you will always need, and it remains true of all business transactions, is information.   The information you will need is your credit worthiness, financials, and the like – why?  Because the seller of the business wants to know if you can afford the business and in exchange you will ask for the books from the shave ice store.  Just because the business is always crowded with tourists does not necessarily make it the moneymaker you are expecting.  You want to know if they own the space they are in or leasing, is all the equipment paid up or are there liens on them, what are the terms of the current employees’ contracts, etc . . .  The only way you as the buyer of the business know it is worth it for you is to see if you are getting what you bargained for, and that means you will need to prove to the seller that you can pay them the price you will settle on.

Buy the Business or the Assets?

Do you want the body or the guts?  That is one of the most basic questions you want to know.  Do you just want the stuff that makes up the business, which includes equipment, facilities, and intangible property like trademarks?  Or has the business been successful over the years because of the contracts it has in place (as it is the business entity that signed all those agreements)?

You will have to decide which is more beneficial.  Just buying the assets is like removing the hermit crab from its shell; you leave behind the corporate entity and anything attached to it similar to how an anemone is left on the shell when the crab moves.  Similarly, any contracts, lawsuits, and such liabilities are left with the corporation.

The Process: Start to Close

In general, the process is a lot of review, negotiating, and the finalizing of details.  Are the sellers telling you everything?  Can you get a look at the records and books?  How will you pay for the business?  If it is in monthly installments how will they accept payment?  Operationally, how will the transfer work out?  Like the transfer of accounts, titles, etc. . . .  Finally, when all that is reduced to writing you can sign the contract.  Of course, this does not happen overnight and you will probably need to work with a group of experts, such as a business broker, an accountant, your banker, an attorney, and the seller’s people to get this to all happen.

Non-compete Agreement and Warranties

Non-competes and warranties are things you will agree to before the deal is completed, but care about what happens after the business is in your hands.  The business you just bought or its assets are not worth much if the seller goes and starts the same exact business.   Therefore, you get assurances from the seller that they will not be your competition by placing a non-compete clause in the sales agreement or draft a completely separate document.  Either way, there are some restrictions on how much you can limit or prevent the seller from starting a similar business. Oft times, a buyer will actually retain the seller on as an employee or consultant to ease the transition, and thus is another way to prevent competition from the former business owner.

A warranty gives you, the buyer a right to go after the seller if an undisclosed liability comes up after the transaction is complete.  Let’s say you buy the shave ice store, but the former owners forgot to tell you that some of their customers had gotten stomachaches from food poisoning.  Those customers then sue you, as you have become the new owner of the business.  If you had a proper warranty clause you would be able to go after the former owners for what the customers are suing you for.

Franchising: What Comes with the Name?

When you buy a franchise you are buying a business.  Generally, it is a business with brand recognition and with that recognition comes all the inner workings of that brand from its trademark to its secret recipes you get it all.  It even includes how the storefront will look.  Typically, especially if it is one of the national brands, you will be paying a lot of money, and why not?  You would be paying for a brand name that has a proven track record (but like any business, you should realize that does not always mean success).

Pros

  • Experience – the franchisor (the entity you are buying the franchise from) will help you with all their experience and knowledge get started.  If you are new, this is definitely something that will help you get up to speed.
  • Advertising – you are now apart of the franchises chain of distribution, therefore it is in their interest to coordinate marketing and advertising with you.  National sales campaign?  You will probably be sent all the material and have it all set-up for you.
  • Established – all the time spent creating a name and image has paid off for the company, and you are paying a fee or royalties so you can use that name and everything associated with it.
  • Lower operational costs – because you are getting all your products and supplies from the franchisor it is usually at a reduced cost and therefore, it is less costly for you to operate than if you had to buy all that stuff on your own.

Cons

  • Lost of control – the strength of a brand name and image comes from consistency.  When you enter a famous fast food chain in another state or even country you expect the same products and services you would expect locally.  To accomplish this feat, the franchisor restricts what you can do with the storefront.
  • Favoring the Franchisor – the franchisor is in the business of making money, naturally, the agreement they are going to have you sign favors them.  Some factors that favor them are the following:
    • Royalty fees – usually, paid on monthly gross sales and not profit, therefore you pay even if you aren’t making money
    • Restriction on transfer – you may not be able to sell the franchise and it may only be back to the franchisor
    • Termination at their discretion – the franchisor may end the agreement when they feel you are not cooperating leaving you high and dry
    • Competition – the franchisor can sell as many franchises as they wish, which includes your neighbor who also wants to buy into the franchise
    • Trapped – you might be forced to only buy supplies and products from the franchisor and be unable to go to outside supplies
    • Paperwork – the franchise wants to see you are making the most of your relationship with them, and thus would like to see reports from you, on a monthly, even weekly basis.

Just as a heads up the next several draw the posts will concern itself selecting a location for your business and the people involved with your business (employees, vendors, and customers).  Don’t forget if you enjoy this series or any of the other series on my blawg feel free to subscribe in the right-hand corner of this page to receive e-mail updates on posts.  If you are on Facebook be sure to “Like” “Ryan K. Hew” to get updates there as well.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.