A Proposed Penalty Default Rule Governing a Seller’s Ability to Disclaim Liability for Preconstractual Misrepresentations

Wednesday, January 1st, 1997 at 12:00 am by Jared M. Levin
Jared M. Levin, A Proposed Penalty Default Rule Governing a Seller’s Ability to Disclaim Liability for Preconstractual Misrepresentations, 1997 Colum. Bus. L. Rev. 399

The U.S. courts are currently split over their treatment of reliance-disclaimer provisions in purchase agreements. In some districts, following the principles of the Uniform Commercial Code, disclaimer provisions in fully-integrated purchase contracts have consistently succeeded in disclaiming buyer’s reliance on extra-contractual representations. In other districts, similar disclaimer clauses have recently failed to disclaim buyer’s reliance, because buyers have been allowed to circumvent contract law and pursue an action in tort. This split among various courts illustrates the difficulties inherent in balancing a respect for freedom of contract with what is arguably a need to protect parties internal or external to the contract that cannot adequately protect themselves. It has also created uncertainty among sellers as to what contractual language in a purchase agreement will succeed in disclaiming buyer’s reliance. This Note addresses the current split among the courts and proposes a “strong” penalty default rule that will ensure freedom of contract while protecting parties to purchase agreements that cannot adequately protect themselves. Part I of this Note identifies and discusses the various stances of the state and federal courts toward disclaimer clauses in purchase agreements. Part II will explore possible solutions to help reconcile the courts. It will first consider whether legislatures should create an “immutable rule” designed to protect all buyers by forbidding sellers from disclaiming extra-contractual misrepresentations, or from omitting material information from a sales negotiation. It will then argue against the adoption of any immutable rule, contending that they are over-inclusive in their protection (i.e., they would protect both layman and sophisticated buyers), and hence, an undue burden on freedom of contract. Part II also discusses the merits of an existing proposal to modify the law of sales by amending Article Two of the Uniform Commercial Code to afford more protection to the buyer. Although this proposal would most likely be effective, a legislative amendment of the U.C.C. is not necessary to unify the courts or provide adequate protection for inexperienced buyers. Part III proposes instead that state and federal courts treat ambiguous disclaimer clauses as gaps in purchase agreements and then universally adopt a “strong” penalty default-rule as a gap filler. This approach to disclaimer clauses is within the current power of the courts, could be adopted immediately, and would protect inexperienced buyers without unduly burdening freedom of contract.

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