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Manufacturer’s Corner: Anatomy of a Limited Warranty (Part 1)

It’s a sad fact of life at companies and law firms that sometimes things are done a certain way just because that’s how they’ve always been done. Part of the reason this column spends so much time talking about your terms and conditions, however, is because that’s dangerous: how you do things now should be informed by the past, but not bound by the past.

Because your circumstances and the law are both constantly changing, it’s important that you be able to look at important terms and conditions – like your limited warranty – with a critical eye. The purpose of this series is to give you some of the tools you need to do that.

This is prompted by a recent case out of the Michigan Court of Appeals that I wrote about here. In that case, the Court held that the implied warranty of merchantability expressly extended to future performance of the goods. I was a little hard on the Court for that conclusion – and I still think it was wrong – but it may not have been entirely the Court’s fault. Here’s me a month or so ago:

Blue Bird [the manufacturer] may have muddied its own waters here, however. Its express limited warranty included a provision stating that “any implied warranties, including those of merchantability or fitness, are limited to the warranty period of this written warranty.” (Emphasis omitted). That’s a peculiar clause, and I’m not sure what it is supposed to mean.

That bothered me. Blue Bird is a pretty big company, and I assume that it has lawyers who work in tall buildings and served on law journal and have a one-firm mentality, etc. So I set about determining where that clause came from.

As it turns out, it’s a clause that some manufacturers actually put in their warranty. On purpose!  In a footnote, I speculated that:

Ordinarily, I would think [the clause] was intended to shorten the limitations period, but Blue Bird did that elsewhere in its agreement, and it limited it to one year, which was not the term of the written warranty.  [Incidentally, this is also what makes me think the intent wasn’t necessarily to comply with Magnuson-Moss restrictions on disclaiming implied warranties in consumer sales, which I probably should have made clearer in the original post].

And looking at the case law, it appears that this is indeed the intended purpose of the clause – courts have held that when an express warranty has a duration of X years, defects that manifest outside of the X-year period are not actionable under implied warranty when you have a clause like this.[1] So that’s good, unless you encounter a court that just thinks it’s confusing and uses it to do other stuff you didn’t intend, like the Michigan court did. In that case, it just hurts you (there, the clause essentially had the opposite effect – the Court found that the clause expressly extended the implied warranty to future performance of the goods, and as a consequence, the statute of limitations hadn’t run on the plaintiff’s claim).

If the goal is to hedge your exposure to the risk that a defect develops in your product over time, there are clear ways to do that that don’t involve intertwining express warranties with implied. In the Blue Bird case, that way was to disclaim implied warranties altogether, impose an express warranty, and shorten the limitations period by contract.[2]

Since it looks like Blue Bird had two conflicting contractual provisions – the clause at issue and the shortened limitations provision – that were apparently intended to serve the same purpose, I have to imagine that someone, somewhere, was building off a form warranty provision and didn’t understand how the pieces worked together. It’s a thing that happens.  There’s a subsidiary issue here (complying with the federal Magnuson-Moss requirements on limiting implied warranties while giving a limited express warranty), but it can also be handled more deftly than Blue Bird did.

So over the next few weeks, we’re going to explore the anatomy of an effective limited warranty, and how the pieces fit together. One essential piece, of course, is a disclaimer of implied warranties. I’m going to skip that, because I already did a six-part series where I pretty much berated you for two months straight to disclaim them (here’s the last installment if you want to go straight to the grand finale). Instead, our next installments will cover the express warranty, the limited remedies provision, and the shortened limitations provision. I hope that by the time we’re done, you’ll be able to examine your limited warranty critically, and correct troubling or conflicting provisions.

[1] There’s a distinction between the warranty duration and the time to bring an action for breach of warranty, but the cases really blur that distinction in the implied warranty context. That’s because a cause of action for breach of implied warranty accrues upon tender of delivery, regardless of the discoverability of a defect that would breach the implied warranty. So imposing a contractual limitations period of, say, one year, has the practical effect of barring claims for defects that manifest outside of the limitations period, even if they were lurking undiscovered at the time of delivery.

[2] In fairness to Blue Bird, it tried to shorten its limitations period by contract, but the Court found it ineffective. The Court was wrong on that, and that’s sort of a tough risk to manage.