Ambassador Steel Co. v. Ewald Steel Co.
190 N.W.2d 275, 33 Mich.App. 495, 9 U.C.C. Rep. Serv. (West) 1019 (1971)
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Rule of Law:
Under the Uniform Commercial Code (UCC), an implied warranty of merchantability arises in a contract for the sale of goods by a merchant, requiring goods to be fit for their ordinary purposes and to pass without objection in the trade under the contract description, determined by trade usage, even if the buyer does not inform the seller of a particular use.
Facts:
- Plaintiff and Defendant, both merchants in the business of selling steel, engaged in a transaction on October 4 and 5, 1966, for the sale of steel priced at $9,856.44.
- Defendant made a partial payment of $4,107.60, leaving an unpaid balance of $5,748.84.
- Defendant subsequently resold the steel to a customer, who reported that the steel cracked after being welded onto railroad cars.
- As a direct result of the defective steel, Defendant's customer charged back losses to Defendant.
- Defendant claimed a setoff against Plaintiff, alleging a breach of implied warranty of merchantability, contending the steel was not "commercial quality" (1010-1020 carbon content) as is customary for orders without specific quality requests.
- Testimony indicated that, by custom and usage in the steel business, when no particular quality is specified, "commercial quality" steel is expected, and the steel supplied by Plaintiff was not within this range, causing it to crack.
- Plaintiff was not made aware of the specific purpose for which Defendant intended to use the steel, and the defect required a specialized test for carbon content, not merely a visual examination, to be discovered.
Procedural Posture:
- Plaintiff brought an action in the common pleas court to recover the unpaid balance of $5,748.84 for the steel sold to Defendant, waiving any amounts over $5,000 to bring the matter within that court's jurisdiction.
- The common pleas court allowed Defendant to set off the entire amount of the customer charge-back (with the exception of a claim for overhead) and entered a judgment for Plaintiff in the amount of $1,055.78.
- Plaintiff, contending the judgment was inadequate, appealed this decision to the circuit court.
- The circuit court affirmed the common pleas court's judgment.
- Plaintiff (appellant) applied for and was granted leave to appeal to the Michigan Court of Appeals (this court).
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Issue:
Does an implied warranty of merchantability apply to a sale of steel between two merchants, even if the seller (Plaintiff) was not advised by the buyer (Defendant) of the specific purpose for which the steel would be used, when industry custom dictates a certain "commercial quality" for unspecified orders?
Opinions:
Majority - Fitzgerald, J.
Yes, an implied warranty of merchantability applies to a sale of steel between two merchants, even if the seller was not advised of the specific purpose for which the steel would be used, when industry custom dictates a certain "commercial quality" for unspecified orders. The court explained that the implied warranty of merchantability (UCC § 2-314) is distinct from the implied warranty of fitness for a particular purpose (UCC § 2-315). The latter requires the seller's knowledge of the buyer's particular purpose and the buyer's reliance on the seller, conditions which were undisputed not to be present here. However, the warranty of merchantability dictates that goods must be of "average quality within the industry" and "fit for the ordinary purposes for which such goods are used," as recognized in the trade. The court found ample testimony establishing a "usage of trade" (UCC § 1-205) in the steel business, where "commercial quality" steel (1010-1020 carbon content) is supplied when no specific quality is ordered. Since the steel supplied by Plaintiff was not "commercial quality" and cracked, it constituted a breach of this implied warranty. The court further held that Defendant's lack of inspection did not negate the warranty because UCC § 2-316(3)(b) only excludes defects discoverable by examination, and the defect here required a specialized carbon content test. Additionally, Defendant successfully proved the breach of warranty, and Plaintiff failed to demonstrate that Defendant did not make every reasonable effort to mitigate damages. The charge-backs from Defendant's customer were deemed appropriate damages to place Defendant in the position it would have been in had the steel been merchantable.
Analysis:
This case clarifies the critical distinction between the implied warranty of merchantability and the implied warranty of fitness for a particular purpose under the UCC, particularly in commercial transactions. It underscores the significant role of "usage of trade" in defining the standard of "merchantable" quality when contract terms are unstated or ambiguous. The ruling protects buyers by confirming that sellers cannot easily evade the warranty of merchantability when goods fail to meet ordinary industry standards, especially if the defect is not obvious or discoverable through routine inspection. This decision reinforces the principle that commercial buyers are entitled to goods of a certain baseline quality according to prevailing trade practices.
