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Manufacturer’s Corner: Recent Development in Implied Warranties (Part 2)

We continue our discussion of June’s interesting implied warranty cases with a trip south to the Supreme Court of Texas. As I mentioned in theprevious installment of the Manufacturer’s Corner, the Courtdeclared a simple, bright-line rule on how a valid disclaimer of theimplied warranty of merchantability affects remote purchasers.

The plaintiff purchased a used yacht. It didn’t work, so he sued the manufacturer for, among other things, breach of the implied warranty of merchantability. The manufacturer argued to the Court that it could not be liable for breach of that warranty, because it was not in contractual privity with the plaintiff.[1]

The Court rejected the manufacturer’s argument, holding that the warranty of merchantability passes downstream to second-hand buyers of the goods. It observed that the relevant question in a breach of warranty case is the condition of the goods at the time they left the manufacturer or seller (depending on who the defendant is), and that there is no justifiable reason to limit the warranty’s application to the first purchaser.

The manufacturer argued that, in fact, there are good reasons to limit the warranty’s application to the first purchaser. First, remote liability raises the possibility of multiple claims by multiple people arising from a single defect. The Court rejected this argument based on earlier holdings.[2] Second, it is exceedingly difficult to effectively disclaim the warranty of merchantability against remote purchasers, because the disclaimer must be oral or, if made in writing, it must be conspicuous. This is where the Court made its most important holding. “[I]f the manufacturer at the point of original sale makes a valid disclaimer of implied warranties,” the Court wrote, “that disclaimer extends to subsequent purchasers.”

It’s that easy in Texas (I think – see me in the footnotes![3]). Make a valid disclaimer to your immediate buyer, and you cut off claims by remote purchasers. As I have written before (see the third footnote), this strikes me as an appropriate rule, but there are reasonable arguments to the contrary – namely, that a remote buyer has no way of knowing whether an effective disclaimer has been made upstream. That said, in an ordinary retail situation, the remote buyer could always rely on the implied warranty given by her immediate seller,[4] rather than one that may or may not have been given by the manufacturer.

So what are the lessons for manufacturers? One: disclaim your implied warranties! The manufacturer in this case could have avoided implied warranty liability entirely if it had taken that first step. Two: you may want to consider a Texas choice of law provision in your terms and conditions if there’s a reasonable basis for doing so.[5] The law on effectiveness of disclaimers against remote purchasers is not uniform, and liability to remote purchasers can be a significant source of risk.

Thanks for bearing with us during our little detour back into implied warranties.  We’ll return to our regularly-scheduled programming next week. 

[1] There were other questions presented too, which are of more interest to attorneys than manufacturers.  First, the Court held that warranty disclaimers must be asserted as an affirmative defense.  The Court also noted that, in Texas, privity questions are decided by the courts, because Texas did not adopt the UCC provision on privity.  Third, the Court found that whether the plaintiff purchased the goods new or used does not affect the manufacturer’s liability for breach of warranty.

Unfortunately, the Court (correctly, I think) found that it was not able to reach the question of what impact a downstream as-is sale has on the manufacturer’s liability for breach of implied warranty.  That’s a fascinating question, and it’s a shame that the Court didn’t have a chance to answer it.

[2] I have voiced the same concern.  I can’t fault the Court for adhering to its prior holdings, but I do question its conclusion that there is “no need to depart from this position.”

[3] As the Court noted, Texas did not adopt the UCC provision on privity.  Does the Court’s holding on disclaimers rest on Texas’ privity statute?  I don’t think so.   The Court doesn’t expressly rely on the privity statute in reaching its conclusion (though it does note that disclaimer to remote purchasers only becomes an issue if the privity statute allows for claims by remote buyers), and the opinion is better read as a straightforward interpretation of the disclaimer statute.

[4] And if that’s disclaimed, the buyer can hardly complain about it, because the disclaimer was given directly to the purchaser.

[5] Of course, I wouldn’t do it for just this reason.  You’ll want to take a look at how else Texas law may affect what you do.