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Manufacturer’s Corner: Recent Developments in Implied Warranties

June is only halfway over, but it has already given us a pair of noteworthy cases on implied warranties under the Uniform Commercial Code. I wrote a six-part series on implied warranties not long ago. If you’re not familiar with implied warranties, I suggest that you skim parts 1 and 4 of that series to better understand this post.

Now, let’s take a look at this head-scratcher from the Michigan Court of Appeals. The plaintiff purchased a recreational vehicle from a company called Holland; the RV was manufactured by a company called Blue Bird. According to the Court of Appeals, the parties agreed that the RV was defective. Blue Bird argued that (1) it was not liable for breach of the implied warranty of merchantability, because there was no “privity of contract” between it and plaintiff, and (2) the time for the plaintiff to bring its warranty action had already passed. The Court made three surprising conclusions of law en route to affirming the trial court.

First, the Court held that “Blue Bird should not be allowed to limit the time to bring suit in a manner that is not conspicuous to the buyer.” The Court would have been correct to hold that a written waiver or modification of the implied warranty of merchantability must be conspicuous to be enforceable. But while the conspicuousness requirement is specified in the portion of the UCC that allows for disclaimer of the implied warranty of merchantability, it does not appear in the part of the UCC that permits a shortened limitations period. Courts have typically treated the substance of warranties, remedies for breach, and the time to sue as separate matters.[1] The Michigan Court of Appeals evidently has elected not to follow that approach.[2]

Second, the Court held that the implied warranty of merchantability – at least under the facts of the case before it – extends to future performance. This is a strange one.

The UCC provides that the limitations period for a breach of warranty action begins upon tender of delivery of the goods, unless the warranty “explicitly extends to future performance of the goods[.]” Astute readers will note (and other courts have already noted) that implied warranties, pretty much by definition, don’t do anything explicitly. Astute readers will also note that, no matter how long its duration, the implied warranty of merchantability really doesn’t have anything to say about future performance.[3] But, in Michigan it looks like a breach of implied warranty action does not accrue upon tender of delivery.

Blue Bird 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.[4] The Court elected to treat it as expressly extending the warranty of merchantability to future performance of the goods. That strikes me as missing an important part of the analysis, but you can meet me in the footnotes for my thoughts on that.[5]

Third, the Court held that the plaintiff and Blue Bird were in privity of contract, even though the plaintiff bought his RV from Holland. Much to my disappointment, the Court ducked the important question of whether privity of contract is actually an element of a breach of implied warranty action. Instead, it concluded that, by offering an express limited warranty, Blue Bird formed a contract between itself and the plaintiff, and that contract was sufficient to satisfy the privity element of the plaintiff’s implied warranty claim (if indeed privity is an element). 

This shocked me, and it should shock you too. In essence, the Court held that an express limited warranty can clear the way for a breach of implied warranty claim that wouldn’t otherwise exist. I think the Court went astray here, and its mistake was forgetting the source of the implied warranty of merchantability. That warranty is implied only into certain contracts for the sale of goods. But Blue Bird never contracted to sell any goods to the plaintiff. Instead, the Court found some other contract – the express warranty – that was not a contract to buy or sell goods, and implied a warranty into that contract.[6]

Here are my initial thoughts. This is a strange case, and I have a hard time believing its holdings will be adopted elsewhere. That said, I think most of the Court’s holdings could have been avoided had Blue Bird done three things: (1) expressly disclaimed its implied warranties;[7] (2) made its one-year limitation provision conspicuous; and (3) dropped that weird language about the duration of the implied warranties. Of those, number (2) is the only one I bet you haven’t already done with your terms and conditions. Want to be exceptionally cautious? Make that limitations provision conspicuous.[8]

Stay tuned for our next installment, in which we find out which state recently adopted a delightfully simple approach to enforcing warranty disclaimers against remote parties, though at the expense of the privity rule.

[1] See, e.g., the extensive discussion in Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 746 N.E.2d 941 (Ind. 2001).

[2] The Michigan approach is especially strange when one considers that a disclaimer of the implied warranty of merchantability must only be conspicuous if written.  But the disclaimer can also be oral (unlike the implied warranty of fitness for a particular purpose, which must be disclaimed in writing).  On its face, the Michigan opinion appears to impose more stringent requirements on shortening the limitations period than it does on disclaiming the warranty altogether.

[3] At least not directly, though surely there are instances where, for example, a rapid wear rate could lead to goods not being passable in the trade.  

[4] Ordinarily, I would think it 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.

[5] The UCC’s statute of limitations provides that a breach of warranty action accrues upon tender of delivery “except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.” (Emphasis added). The Court held that the breach was not discovered until the offending goods were recalled. But that’s only half the issue: was discovery of the breach contingent on the recall? I doubt it.

In any case, the implied warranty of merchantability doesn’t have a duration. It just is what the statute says it is, and you get four years from delivery to sue on it (unless otherwise modified), regardless of when the defect becomes obvious or even discoverable. If we start to put discoverability into the analysis, there’s no need for the “future performance” clause in the statute: everything would just run for four years (or whatever) from the date the defect is or should have been discovered.

[6] Or it just decided that any privity of contract would suffice, whether the privity arises from a contract for the sale of goods, or a lease agreement, or a non-disclosure agreement, or an advertising agreement, or anything really.

It’s possible that the Court’s judgment was swayed by the jury verdict below or by an inadvertent admission from Blue Bird. Although the jury found in Blue Bird’s favor on the plaintiff’s claim for breach of express warranty, it looks from a footnote in the opinion that the jury answered special interrogatories while rendering its verdict. Perhaps the jury found that Blue Bird gave an express warranty, but did not breach it. If so, it’s possible that (a) Blue Bird failed to challenge that finding (which I could see, considering it won on that claim), (b) the Court of Appeals recognized that an express warranty, like an implied warranty, arises between buyers and sellers of goods, and (c) therefore there was direct privity of contract between Blue Bird and the plaintiff for the sale of goods.  Some of the language in the opinion makes me think that this could have been what happened (or, alternatively, that Blue Bird agreed that it gave an express warranty, but did not intend to mean an express warranty under Article 2 and the corresponding assumptions that go with it). Either way, some clarity on the point would be nice.

[7] It may have tried to do so, but that language isn’t in the opinion.

[8] Again, I don’t think many courts will be following this case. But if you do a lot of business in Michigan, you should probably keep this in mind.