In commercial contract law, when someone buys a good from a seller, there are a number of assumptions that the buyer may make about the purchased product regardless of whether the seller explicitly makes such a statement about the product. These allowed assumptions are referred to as implied warranties. The CPCU® 530 textbook lists them but doesn’t describe all of them in detail, so we’ll do that for you in today’s tip!

The importance of implied warranties is that if a seller breaches any of them, he or she might be found liable and have to give the buyer a refund or pay for any other damages that the buyer suffered. When it comes to selling goods, there are three main implied warranties, but the first one contains five elements within it. Let’s explore that one first.

Implied Warranty of Merchantability

The first warranty is the implied warranty of merchantability. This warranty applies only when the seller is a merchant. Any seller who regularly sells the item in the course of their business would be considered a merchant. In other words, a merchant who regularly sells this product is held to a higher standard of expectations than someone who just happens to be selling the product as a one-time thing. The law allows you to make more assumptions about a product you purchase from Walmart (a retail merchant who regularly sells items) than if you bought it from someone at his garage sale.

The implied warranty of merchantability includes five elements:

1. Must pass without objection in trade under the contract description
2. Fungible goods must be indistinguishable, interchangeable, and of average quality
3. Fit for the ordinary purpose for which they will be used
4. All goods in a batch/lot must be approximately like kind/quality
5. Must confirm to specifications on label/container

#1: Must pass without objection in trade under the contract description

This first element of merchantability is a essentially a test of whether the merchant is reasonably describing or classifying the good. For example, let’s say you order a “hammer” and the merchant sends you a big rock bolted to a tree branch without disclosing beforehand that this is what he is selling. Technically, you could use this item as a hammer but most people would object to the item being passed off as a hammer because it isn’t really what people have in mind when thinking of the term “hammer.” Because there would be objection to it being sold with that description, the merchant would be violating this part of the warranty.

#2: Fungible goods must be indistinguishable, interchangeable, and of average quality

Fungible goods refers to any product where each version is so similar they are interchangeable. The best way to understand this concept is to compare examples of fungible goods to non-fungible goods. Commodities and cash are two examples of very fungible items. If someone is paying you $20, you wouldn’t require a particular $20 bill and would accept any $20 bill because they are basically all interchangeable. Likewise if you were to buy a gallon of gasoline, you would accept any gallon of that grade because they’re all the same and there is no difference between one specific gallon compared to another gallon of the same type of gasoline. On the other hand, artwork is an example of a non-fungible good because you can’t just replace one art piece with another since they are each unique.

Most items are fungible at least to some degree, so this part of the warranty is basically saying that when you buy something, the seller must give you something of at least average quality so that it is still considered acceptably interchangeable with another one of the same thing. They can’t give you something of such poor quality or that is somehow so different that it lose the quality of being acceptably interchangable with another one of the same item.

#3: Fit for the ordinary purpose for which they will be used

This element of the warranty says that the buyer can assume a product will do what it is intended to do. If, for instance, you buy a pair of regular scissors and it is unable to cut a sheet of normal paper, the seller has breached this duty. The seller must expressly state some sort of disclosure if there is any doubt that the product can perform its normal function if they don’t want to be held liable.

#4: All goods in a batch/lot must be approximately like kind/quality

If you purchase a large quantity of goods from a merchant, you can assume that the whole batch should be the same. This puts the burden on the merchant to make sure there are no defective units in the batch. On the other hand, if you had made this purchase from a non-merchant, you are not necessarily entitled to make this assumption and should make the effort to check the batch before buying it. If a merchant does not want to assume the burden of ensuring the quality of an entire batch or lot, they should make an express statement that they are not guaranteeing the quality of the entire batch.

#5: Must conform to specifications on label/container

This part of the warranty is pretty simple and merely states that the buyer can expect that the specifications of the purchased item will match whatever the packaging states about it.

CPCU 530 Study Materials

• Based on 1st edition of CPCU 530: Navigating the Legal Landscape of Insurance
• Delivery method:
  • Online course: 100% digital (instant access by online log-in after purchase is completed)
  • Study guide only: Delivered by email as downloadable PDF
• For buyer's personal use only (non-transferrable and not for resale)

Implied Warranty of Merchantability

The first warranty is the implied warranty of merchantability. This warranty applies only when the seller is a merchant. Any seller who regularly sells the item in the course of their business would be considered a merchant. In other words, a merchant who regularly sells this product is held to a higher standard of expectations than someone who just happens to be selling the product as a one-time thing. The law allows you to make more assumptions about a product you purchase from Walmart (a retail merchant who regularly sells items) than if you bought it from someone at his garage sale.

The implied warranty of merchantability includes five elements:

1. Must pass without objection in trade under the contract description
2. Fungible goods must be indistinguishable, interchangeable, and of average quality
3. Fit for the ordinary purpose for which they will be used
4. All goods in a batch/lot must be approximately like kind/quality
5. Must confirm to specifications on label/container

#1: Must pass without objection in trade under the contract description

This first element of merchantability is a essentially a test of whether the merchant is reasonably describing or classifying the good. For example, let’s say you order a “hammer” and the merchant sends you a big rock bolted to a tree branch without disclosing beforehand that this is what he is selling. Technically, you could use this item as a hammer but most people would object to the item being passed off as a hammer because it isn’t really what people have in mind when thinking of the term “hammer.” Because there would be objection to it being sold with that description, the merchant would be violating this part of the warranty.

#2: Fungible goods must be indistinguishable, interchangeable, and of average quality

Fungible goods refers to any product where each version is so similar they are interchangeable. The best way to understand this concept is to compare examples of fungible goods to non-fungible goods. Commodities and cash are two examples of very fungible items. If someone is paying you $20, you wouldn’t require a particular $20 bill and would accept any $20 bill because they are basically all interchangeable. Likewise if you were to buy a gallon of gasoline, you would accept any gallon of that grade because they’re all the same and there is no difference between one specific gallon compared to another gallon of the same type of gasoline. On the other hand, artwork is an example of a non-fungible good because you can’t just replace one art piece with another since they are each unique.

Most items are fungible at least to some degree, so this part of the warranty is basically saying that when you buy something, the seller must give you something of at least average quality so that it is still considered acceptably interchangeable with another one of the same thing. They can’t give you something of such poor quality or that is somehow so different that it lose the quality of being acceptably interchangable with another one of the same item.

#3: Fit for the ordinary purpose for which they will be used

This element of the warranty says that the buyer can assume a product will do what it is intended to do. If, for instance, you buy a pair of regular scissors and it is unable to cut a sheet of normal paper, the seller has breached this duty. The seller must expressly state some sort of disclosure if there is any doubt that the product can perform its normal function if they don’t want to be held liable.

#4: All goods in a batch/lot must be approximately like kind/quality

If you purchase a large quantity of goods from a merchant, you can assume that the whole batch should be the same. This puts the burden on the merchant to make sure there are no defective units in the batch. On the other hand, if you had made this purchase from a non-merchant, you are not necessarily entitled to make this assumption and should make the effort to check the batch before buying it. If a merchant does not want to assume the burden of ensuring the quality of an entire batch or lot, they should make an express statement that they are not guaranteeing the quality of the entire batch.

#5: Must conform to specifications on label/container

This part of the warranty is pretty simple and merely states that the buyer can expect that the specifications of the purchased item will match whatever the packaging states about it.

Implied Warranty of Fitness for Particular Purpose

The second implied warranty differs somewhat from the previous discussion we had about an item being fit for its ordinary perfect. If you tell the seller that you have a specific purpose you are trying to accomplish and the seller then sells you a particular item, this warranty says you can assume that the item sold to you will meet your particular purpose. For example, if you explicitly say you need a dolly that can hold at least 700 pounds and the seller gives you one that only has a maximum capacity of 500 pounds, the seller would be considered in breach of this warranty. Unlike with the warranty of fitness for ordinary purchase, though, you must explicitly tell the seller what your specific need was for this warranty to apply. In other words, once you informed the seller you have a particular purpose to fulfill, it is the seller’s responsibility to provide only a product that for feels what you need or disclose to you that the product they are showing you might not be able to do what you are looking for.

Implied Warranty of Title

This implied warranty says that a buyer can assume the seller is the legal owner of the item being sold and has no knowledge of anyone else having a rightful legal claim to the property, unless the seller states otherwise. However, this warranty might be waived if the context of the transaction is clear that the seller might not be the owner. For example, if you are buying a home and the person you are dealing with identifies himself or herself as the real estate agent, you can’t assume he or she is the actual owner of the house because you know there is an agent involved.

Conclusion

Here is a recap of the three implied warranties that pertain to the sale of goods as discussed in CPCU 530:

• merchantability
  • applies only when seller is a merchant
  • includes 5 warranties:
    • must pass without objection in trade under contract description (outside parties would agree that the good matches description)
    • fungible goods must be indistinguishable, interchangeable, and of average quality
    • fit for the ordinary purpose for which they will be used
    • all goods in a batch/lot must be approximately like kind/quality
• must confirm to specifications on label/container
• fitness for a particular purpose
  • applies if buyer tells seller he is looking for a something to accomplish a specific goal
• title
  • seller has legal ownership of goods & no knowledge of any other legal claim to the goods
  • may be waived if context of transaction is clear that seller is selling on someone else’s behalf

This is only one set of the many, many concepts you need to know for your CPCU 530 exam. Use our CPCU 530 study guide to make sure you’ve got everything covered!

CPCU 530 Study Materials

• Based on 1st edition of CPCU 530: Navigating the Legal Landscape of Insurance
• Delivery method:
  • Online course: 100% digital (instant access by online log-in after purchase is completed)
  • Study guide only: Delivered by email as downloadable PDF
• For buyer's personal use only (non-transferrable and not for resale)