Spencer Fane LLP Logo

It’s Time to Clarify the Law on Breach of Warranty and Vertical Privity

You’re a manufacturer.  If you’re also a client of ours, I hope you’ve already taken our advice and disclaimed your implied warranties under Article 2 of the Uniform Commercial Code (e.g., that the product will be merchantable, fit for its intended purpose, etc.). 

But let’s say you’re not a client of ours or, for whatever reason, you decided to keep the implied warranties, or your disclaimer was ineffective.  You sold your product to a big box store, and an end user purchased it from there.  The end user has decided to sue you for breach of the implied warranty. 

In the good old days, he couldn’t.  Most American jurisdictions once held that a buyer could only state a claim for breach of warranty against his immediate seller.  See, e.g., Randy Knitwear, Inc. v. Am. Cyanide Co., 226 N.Y.S.2d 363, 366-67 (N.Y. App. 1962) (describing the history of the vertical privity requirement and the trend toward relaxing that requirement).  In turn, that seller could sue his seller, and so on up the chain until liability reached the manufacturer (or until one of the sellers was not subject to process, or was insolvent, etc.).  See id.  

But, the vertical privity requirement has now been relaxed in many jurisdictions, so that purchasers can sue remote sellers on implied warranty theories.  Here in Missouri, for instance, “a remote purchaser may bring suit against the manufacturer for breach of implied warranties.” [1]  Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 129 (Mo. banc 2010) (citations omitted).  The abrogation of the privity requirement was intended to eliminate the need for those costly and time-consuming intermediate suits described in Randy KnitwearSee, e.g., Randy Knitwear, 226 N.Y.S. 2d at 403. 

This isn’t particularly troubling in the abstract.  A manufacturer who sells a defective good is put through no more trouble by being sued by the consumer than by its immediate buyer.  But, when considered in context of other law, it can be seriously troubling. 

For instance, in Bartow v. Ford Motor Co., 342 Ill. App. 3d 480 (Ill. App. 2003), a car purchaser sued Ford for breach of implied warranty under the Magnusson-Moss Act, notwithstanding that the purchaser had already resold the car.  Ford, sensibly, moved to dismiss the complaint, urging that the plaintiff lacked standing to bring the claim in light of the resale.  Also sensibly, Ford reminded the Court that, if both the plaintiff and her buyer were entitled to recover against Ford, it would be subject to double liability for a single defect. 

The Bartow Court was “not taken in by [Ford’s] ghost story of double recovery.”  In part, that was because the plaintiff sought incidental and consequential damages in addition to actual damages.  But, the Court also recognized the danger of double recovery on actual damages, and held that the plaintiff was “allowed to recover only for the portion of time during which she was entitled to enforce the warranty.” 

What does that mean?  If both the plaintiff and her buyer suffer the same defects in the same vehicle, how does one segregate their actual damages on a temporal scale?  More importantly, how is a defendant to present proof that a downstream buyer sustained some or all of the actual damages?  Does that require admitting the defect or eliciting testimony that the downstream buyer either suffered from the defect or incurred costs in correcting it? 

Some cases hold that resale of the product (especially at a profit) precludes prevailing on a breach of implied warranty claim.  That seems right, but it is not the majority view.  Hawkland suggests that this view is incorrect because the reseller, while it may hold the cash from the sale, is now exposed to its own breach of warranty claim from its buyer.  That’s reasonable on its face, but it does not withstand close scrutiny, at least in all cases. [2] 

The best solution, however, is for the implied warranty to travel with the goods, and for the present owner of the goods to be the sole party with standing to sue on the warranty. [3]  That eliminates the risk of suits by downstream buyers, because there is no downstream buyer.  And any intermediate sellers sued by the current owner could vouch in any upstream sellers to indemnify them if they are found liable to the current owner.  That eliminates both the risk of double recovery and the difficult valuation issues inherent in the Bartow Court’s holding. 

Of course, what courts should do is of little use to manufacturers seeking to avoid the situation altogether.  Disclaim your implied warranties, and make sure that your express limited warranties extend only to your immediate buyer.  Otherwise, you never know who may haul you to court.  

[1] Note that the quoted language only extends to manufacturers.  I can’t find any authority that Missouri law has ever sanctioned implied warranty suits against intermediate sellers who were not the manufacturer, and that sounds right if the goal is to avoid a multiplicity of suits.

[2] For instance, what if the reseller either (a) is not a merchant, or (b) effectively disclaims implied warranties?  There is no back-end risk of suit in that case.

[3] But what about the buyer who resells at a loss in an effort to mitigate his damages?  Assuming the loss scales to the difference between the value of the product as warranted and the value of the product as delivered, the resale didn’t really mitigate the buyer’s damages.  So, still no problem.