≡ Menu

In a case about dump trucks that had mechanical problems, the Indiana Supreme Court provides a useful explanation of how the statute-of-limitations clock starts ticking for a warranty of future performance of goods when the warranty failure is discovered; this is in contrast to a warranty that the goods as delivered are free from defects, where the clock starts ticking at delivery. See Kenworth of Indianapolis, Inc., v. Seventy-Seven Ltd., No. 19S-PL-37 (Ind. Nov. 12, 2019).

The warranty language read:

Kenworth Truck Company warrants directly to you that the Kenworth vehicle identified below . . . will be free from defects in materials and workmanship during the time and mileage periods set forth in the Warranty Schedule and appearing under normal use and service. 

Id., slip op. at 3 (also at 8-9) (emphasis added). The supreme court said: 

Had Sellers not used future-tense language, for example, or had they omitted a specific future time period for the trucks’ quality and performance, or had they promised only to repair and replace defects rather than warrant against future defects, then this warranty would fall outside the limited future-performance exception. But as written, this bargained-for warranty constitutes a future-performance warranty, and the courts must apply the discovery rule to determine when the breach-of-warranty cause of action accrued.

Id., slip op. at 13-14 (emphasis added). The court vacated and remanded summary judgment in favor of the manufacturer, on grounds that a genuine issue of material fact existed about when the defects should have been discovered by the buyer, and thus when the clock started ticking on the limitation period.

Drafting lesson: When drafting — or reviewing — a warranty about goods, take note of whether the warranty is a “present day” promise about the state of the goods as delivered, or whether instead the warranty is a “future performance” promise of what the goods will or won’t do during a specified time period. Under the Uniform Commercial Code article 2, the distinction makes a difference in when the statute of limitations clock will start to tick.

{ 0 comments }

In my classes I teach the nuclear Navy saying, you get what you INspect, not what you EXpect. In that vein, here’s an excerpt from a Justice Department press release, reported in today’s Houston Chronicle (business section):

KANSAS CITY, Mo. – The manager of a Wilbur-Ellis Company processing facility in Texas pleaded guilty in federal court today to his role in a multi-million dollar conspiracy to sell adulterated ingredients to pet food manufacturers, for which the company has already paid more than $4.5 million in restitution.

William Douglas Haning, 48, pleaded guilty before U.S. Chief District Judge Rodney Sippel in the Eastern District of Missouri to one count of conspiracy to introduce adulterated and/or misbranded food into interstate commerce and one count of money laundering.

“For years, William Douglas Haning orchestrated a scheme similar to charging filet mignon prices for ground beef. He unjustly lined his own pockets at the expense of unsuspecting consumers,” said Acting Special Agent in Charge Alicia Corder of the FBI St. Louis Division. “Corporate fraud is one of the top white-collar crime priorities for the FBI.”

Drafting lesson: Whenever another party is supposed to do something for your client, consider building in some kind of inspection- and/or audit rights; most people are honest, but mistakes do happen — and sometimes out-and-out fraud.

{ 0 comments }

A claim for breach of warranty has a shorter proof checklist than a claim for fraudulent inducement or negligent misrepresentation, but the former also has a more-limited set of remedies available. Think in terms of the American Ninja Warrior TV show, but with a “Hill of Proof” that a plaintiff “Bob” must climb in making a claim against a defendant “Alice”: The Hill of Proof has evidentiary checkpoints along the way up the hill; the “prizes,” i.e., the remedies available to our plaintiff Bob, are positioned at different points up the hill.

(“Hill of Proof” sounds like something from a Harry Potter novel, no?)

Suppose that in our Alice-and-Bob case, Alice only warranted a fact, but she did not represent it; for example, suppose that Alice sold her car to Bob, and she suspected, but didn’t know for sure, that the engine was going to need work. In that case, she might (i) warrant, but not represent, that the car was in good working order, and (ii) limit Bob’s remedy to Alice’s reimbursing Bob for up to, say, $200 in repair costs. In that situation, the first three checkpoints that Bob must hit, in trying to climb the Hill of Proof, would be the following:

(1) Alice warranted a statement of past or present fact, to use Tina Stark’s formulation [I’ll leave out future facts for now]. Here, Alice’s statement is “the car is in good working order.”

(2) Alice’s statement was false: Her car, as delivered to Bob, turned out to need some significant work. and

(3) Bob incurred damages as a result, i.e., repair costs.

If, at the trial, Bob can successfully hit those three checkpoints in climbing up the Hill of Proof, then he will be entitled to recover benefit-of-the-bargain damages for Alice’s breach of warranty — in this case, limited by contract to $200 in repair costs. And that’s it; without more, Bob doesn’t get tort-like remedies for fraudulent inducement or negligent misrepresentation, such punitive damages and/or rescission.

But now suppose that Alice represented and warranted the statement of fact, i.e., that her car was in good working order. In that case, after Bob makes it to the first three evidentiary checkpoints on the Hill of Proof, he can try to keep going to hit still more checkpoints, namely:

(4) Alice intended for Bob to rely on Alice’s representation — that will probably be almost a given, of course, by virtue of the representation’s being expressly set forth in the contract;

(5) Bob did in fact so rely — ditto; and

(6) Alice made the false representation intentionally (or possibly, in some jurisdictions, was negligent or reckless in doing so). This is usually the biggie, from a proof perspective.

If Bob can successfully make it to all of these additional checkpoints as he climbs up the Hill of Proof (and if Alice fails to show that Bob’s reliance on her representation was unreasonable), then Bob would be additionally entitled to more “prizes,” namely tort-like remedies such as rescission and perhaps punitive damages. See, e.g., this blog post summarizing California law.

At trial, Bob might well assert both breach of warranty and fraudulent inducement; if he proves unable to show scienter on Alice’s part, then he can still fall back on his warranty claim. The same would be true if Alice could persuade the factfinder that Bob’s reliance on her (mis)representation was unreasonable: Bob’s fraudulent-inducement claim would fail, but his warranty claim would still be viable.

[ADDED:] Now let’s change up the hypothetical: Suppose that Alice had no reason to think her car had any problems, but she also didn’t want to bear any risk that it did have problems. In that case, Alice might represent, but not warrant, that the car was in good working order. In that situation, if the car did turn out to have problems, then Bob would have to hit all six checkpoints on the Hill of Proof to recover from Alice; the first three alone would not be enough, even though the first three would be enough if Alice had warranted the car’s good condition.

In effect, the Hill of Proof has two different paths up its slopes. The shorter path is for breach of warranty and leads only to benefit-of-the-bargain remedies; the longer path, for misrepresentation, leads to tort-like remedies.

Drafting lessons:

  • If your client is being asked to represent and warrant some fact, then consider whether the client should only represent the fact, or whether the client should only warrant the fact. As a matter of negotiation strategy the client might end up agreeing to do both, but as a drafter it’s worth giving some thought to the question.
  • On the other hand, if your client is asking someone else to represent and warrant a fact, then you’ll want to ask for the contract language to include both a representation and a warranty. Your client might not have the bargaining power to insist on getting both, but if it does, then having both will give the client more flexibility if litigation should come to pass.
{ 0 comments }

In my contract-drafting course we recently talked about how nowadays parties often circulate just signature pages to be signed, and the importance of making sure that the signed version is identified (e.g., with a running header). In a recent Delaware chancery court case, both a privately-held cosmetics company (“theBalm Cosmetics”) and its (former) VP of sales — but mainly the VP — did just about everything wrong in negotiating and signing an agreement to give the VP some equity in the company.

The lawsuit happened because, after leaving the company, the VP sued to compel the company to give her the equity that she claimed was due to her under the “signed” agreement. But the parties, after sending revised drafts back and forth, had apparently signed signature pages for different versions of the agreement. 

The problem was that the two versions contained seriously-different provisions on a critical issue (a post-employment non-competition covenant). Importantly, the parties never did agree on the terms of the noncompete, according to the court. Neither party had any decent paper trail to help the court figure out what happened (not even emails or texts). The only partial paper trail was in the email and document files of White & Case, a major NYC law firm that had drafted the equity agreement on behalf of the company. But the White & Case attorney had worked only with a company representative, not with the VP or her lawyer — and interestingly, the VP couldn’t even remember the name of either her lawyer or the lawyer’s firm.

Here’s the critical point:

So, how did Kotler [the sales VP] come to have a fully executed warrant in her possession that contained her narrow [non-compete] language? From the preponderance of the evidence, the best explanation I can muster is that Kotler printed her modified September 25 Draft from her computer [purportedly based on a conversation of that date with a company representative], added her own signature and attached [the company CEO’s signed] September 17 signature page. She then kept the document in her files, but did not circulate it or discuss it with anyone at the Company.

To be clear, Kotler’s purported fully executed warrant permits her to compete immediately after ending her consulting relationship with the Company while maintaining her warrant rights. In other words, Kotler’s [non-compete] provision effectively gave the Company zero protection. It is not surprising, then, that there is no evidence—beyond Kotler’s “fully executed” warrant—that the Company ever agreed to Kotler’s version of the non-compete.

(Emphasis added.)

The court (after a bench trial) concluded that the former VP had failed to prove that the parties had reached a meeting of the minds about the purported agreement to give her equity in the company; the court awarded judgment for the company.

My thought was:  Why didn’t this mixing-and-matching of signature pages constitute fraud on the part of the former VP? Apparently the same thought occurred to the company, but the court declined to reach the company’s fraud defense, saying, “I need not grapple with the competing evidence regarding Kotler’s mental state, or mens rea, as these events unfolded.”

The case is Kotler v. Shipman Assoc., LLC, No. 2017-0457-JRS (Del. Ch. Aug. 27, 2019). (Hat tip: Gwenn Barney and Lori Smith of White & Williams.)

Drafting lessons:  If you’re going to exchange signature pages:

  1. put a version identifier in a running header on every page — I prefer a hand-typed date and time, e.g., “VER. 2019-09-08 18:00 CDT” — and

  2. if you send out a signature page with your client’s signature, make sure you get the other side’s signed signature page back as well, and that the two versions match.

{ 0 comments }

In response to feedback from colleagues, I’ve tweaked my attorney-client master engagement agreement form and set it up so that any licensed attorney is free to use it (modified if desired) in his or her own practice, possibly by doing a short-form email agreement in the same way that I do with my clients. Of course, the agreement form is published “AS IS, WITH ALL FAULTS”; if a lawyer uses it, that doesn’t mean that the lawyer’s client is in any kind of attorney-client rela­tion­ship or other relationship with me. (Feedback and suggestions are most welcome; I’ll assume I’m free to use them unless otherwise specified.)

{ 0 comments }