The law imposes an obligation that merchants sell merchantable goods. The so-called implied warranty of merchantability assures buyers that goods are, among other things, “fit for the ordinary purposes for which such goods are used.” When a purchased good falls short of this standard, a buyer who suffers an economic loss from a defect has a right of recovery through a suit for breach of implied warranty.
A manufacturer can disclaim all implied warranties at the first sale. If the manufacturer disclaims implied warranties, that disclaimer carries with the good. In other words, just like the original buyer, a second-hand buyer would be prevented by the disclaimer from pursuing a claim for breach of implied warranty.
The Texas Supreme Court has now made it clear that, absent such disclaimer language, manufacturers do not escape liability merely because a good has transferred owners. In short, the purchaser of a used good can rely upon an implied warranty created at the time of first sale. See MAN Engines & Components, Inc. v. Shows, No. 12–0490 (Tex. June 6, 2014).
The case involved the purchase of used, fifty-foot yacht. The yacht was powered by high-performance inboard engines manufactured and sold by MAN Nutzfahrzeuge Aktiengesellschaft and its United States counterpart, MAN Engines & Components (“MAN”). Prior to buying the boat, the plaintiff had the engines inspected by an authorized service dealer for MAN. The broker selling the boat had the plaintiff sign a “certification of acceptance of vessel” with stated that the vessel was being sold by the broker “as is.”
An engine on the yacht failed once and then failed again a year later, this time beyond repair. The failures resulted from the same bad valve. The plaintiff was told the damage was not covered by warranty.
The plaintiff sued and a jury found MAN liable for breach of the implied warranty of merchantability, awarding the plaintiff just under $90,000. However, the trial court granted MAN’s motion for judgment notwithstanding the verdict and issued a take-nothing judgment. The trial court concluded that the plaintiff could not prevail on an implied-warranty theory because of either (1) lack of privity (he was a subsequent purchaser of the used yacht with no contractual relationship with MAN), or (2) disclaimer (MAN disclaimed any implied warranty at the time of first sale). Agreeing with the court of appeals (that reversed the trial court), the Texas Supreme Court has now held that the plaintiff was entitled to judgment on his breach of implied warranty claim.
The Texas Supreme Court rejected the “no privity” argument. It held that MAN’s implied-warranty obligations did not terminate when the yacht engine was resold to the plaintiff.
A merchant bound by the implied warranty of merchantability is obligated to ensure that the good is merchantable when it leaves the merchant. A downstream purchaser who seeks to recover for economic loss under an implied-warranty theory, whether he buys the product new or used, seeks to hold the merchant accountable only for the state of the product when it passed to the first buyer. We see no reason why the merchant’s legally imposed duty to issue merchantable goods should automatically end when a good passes to subsequent buyers. […] The buyer’s knowledge that a good is used does not automatically erase an implied-warranty claim when a manufacturer makes a defective product. The defect doesn’t rub off with use.
MAN also argued that the plaintiff should not be able to assert the claim because he had the engines inspected prior to the purchase. The Texas Supreme Court agreed that “inspection does play a role” because, when the buyer does inspect, there is no implied warranty with regard to defects which an examination “ought in the circumstances to have revealed” to the buyer. However, in this case, the evidence showed that the plaintiff’s inspection, by an authorized service dealer for the manufacturer of the good, was reasonable and prudent under the circumstances yet failed to detect the defect. Thus, the plaintiff’s inspection did not waive the implied warranty of merchantability.
The Texas Supreme Court also rejected MAN’s “as is” and “disclaimer” arguments on the grounds that the manufacturer failed to timely raise or properly prove such matters in the trial court. MAN did not plead that the broker’s “as is” clause barred the plaintiff’s implied-warranty claim or ever reference the clause in the trial court. Similarly, MAN did not raise its disclaimer argument until its post-trial motion for judgment. The Supreme Court determined that this was too late. Disclaimer of implied warranties is an affirmative defense that must be raised before trial.
Of course, Texas law permits manufacturers to modify or even exclude implied warranties. Under Texas law, all implied warranties are nullified by “as is” and similar language, unless the circumstances indicate otherwise
Furthermore, the Texas Supreme Court emphasized that a second-hand purchaser cannot obtain a greater warranty than that given to the original purchaser. Thus, if the manufacturer at the point of original sale makes a valid disclaimer of implied warranties, that disclaimer extends to subsequent purchasers. In other words, a second-hand purchaser will apparently not be able to claim he was not personally aware of a disclaimer.
Defective products: protect your rights
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