Damages and Disclaimers cont’d.

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Here’s part two of my discussion of damages and disclaimers in cases involving claims that a warranty on a consumer product has been breached. (Part 1 is here.)

The Role of State Sales Law

Most consumer product manufacturers offer a “limited warranty,” as the term is defined under § 103(a)(2) of the MMWA. The MMWA does not contain substantive remedy provisions applicable to a “limited warranty,” so state sales law—generally the U.C.C.—has been held to control. Section 2-714(2) of the Code provides the standard measure of damages for breach of warranty. But as Comment 3 to § 2-714 makes clear, “it is not intended as an exclusive measure.” Because a repair or replacement warranty is not a U.C.C. “express warranty,” § 2-714(2) should not be mechanically applied in breach of limited warranty actions.

“Limited Warranty” vs. “Express Warranty”

A limited or repair-or-replacement warranty is fundamentally different than a U.C.C. “express” warranty. Under an express warranty the seller is required to tender and deliver goods that conform to the terms of the agreement. For example, if a seller warrants that a truck-trailer has a 10-ton carrying capacity, but the buyer discovers that it is only capable of hauling eight tons, the trailer does not conform to the warranty and the agreement has been breached at the time of tender. On the other hand, a warranty to repair requires only that the warrantor take action that conforms to the terms of the agreement; it does not establish standards to which the goods must, or may be made to, conform. Accordingly, a warranty to repair is not an express warranty, as defined by the Code, and goods accepted with such a warranty cannot be non-conforming.

Moreover, a warranty to repair or replace is not—and cannot be—breached at tender or delivery, even if there are defects in the product’s material or workmanship. Breach occurs only when warrantor refuses or fails to make repairs after being given a reasonable opportunity to do so. Strictly speaking, then, a warranty to repair or replace is not covered by the U.C.C. And it follows that the U.C.C.’s measure of damages provisions should not be mechanically applied in cases involving a limited warranty. But, because such a warranty is analogous to an express warranty, the Code’s policies and provisions should guide the court in setting a measure of damages. So the court should endeavor to fashion a measure that is consistent with (1) the Code’s policy of putting the aggrieved party in as good a position as if the breach had not occurred and (2) the warranty promise.

To illustrate the point we return to our truck-trailer example. Let us assume: (1) that the buyer agreed to pay $100,000 for a trailer expressly warranted to have 10-ton carrying capacity; (2) that shortly after acceptance the buyer discovered that the trailer as accepted, although free of defects in materials or workmanship, has a maximum capacity of 8-tons; and (3) that an 8-ton capacity trailer has a market value of $80,000. The seller breached its express warranty by tendering non-conforming, although defect-free, goods. If the buyer elects to retain the non-conforming trailer and sue for damages, he would be put in as good a position as if the breach had not occurred by being awarded damages of $20,000, which equals the difference between the value of the goods as warranted (10-ton capacity/$100,000) and as accepted (8-ton capacity/$80,000) as provided under U.C.C. § 2-714(2).

Now let us assume: (1) that the trailer was sold with only a one-year warranty to repair or replace defects in materials or workmanship; (2) that the buyer did not experience any difficulties with the trailer during the first 6 months after delivery and acceptance; (3) that the trailer’s condition had changed substantially during the 6 months after delivery due to ordinary wear and tear prohibiting revocation of acceptance; (4) that at 6 months the rear axel breaks as a result of a defect in workmanship; (5) that the seller is unable to repair, and unwilling to replace, the axel in breach of the warranty; and (6) that the buyer then incurs costs of $5,000 to replace the axel. It would be unfair to the buyer, and inconsistent with the terms of the warranty provided, to calculate damages as the difference between the value of the trailer as warranted and as accepted. At the time of acceptance, the seller had not failed to perform in any way; the warranty had not been breached—there were no unrepaired defects that would bring about a reduction in the trailer’s value. Measured at the time of acceptance, the buyer’s damages would be $0.00. The warranty is breached, and the buyer sustains damages, only when the seller failed to repair or replace the axel, after being given a reasonable opportunity to do so, and the buyer incurred the $5,000 in repair costs. Measuring the buyer’s damages at the time of the breach will result in a recovery of the $5,000 in repair costs. This in turn achieves the U.C.C.’s aim of putting the buyer in as good position as if the seller had fully performed and is consistent with the warranty obligations undertaken by the seller.

The Wisconsin Supreme Court’s decision in Mayberry v. Volkswagen of America, Inc., is an excellent example of the unfairness resulting from mechanical application of § 2-714(2)’s standard measure of damages in a breach of limited warranty case.  There, the plaintiff purchased a new VW automobile, experienced numerous problems that were addressed under the warranty, made substantial use of the car, resold it for an amount concededly in excess of the car’s fair market value, and then brought suit for damages. The trial court entered summary judgment for the defendant, finding that plaintiff failed to prove damages. The appellate court reversed, concluding that the trial erred by not applying § 2-714(2)’s standard measure of damages. In the supreme court the plaintiff claimed that as a result of defects discovered post-purchase, the car was not worth what she paid for it at the time of acceptance, thus entitling her to “difference in value,” or benefit-of-the-bargain damages. The defendant countered that because the plaintiff’s received greater than fair market value when she traded in the car, there existed “special circumstances” requiring a non-standard measure to be applied. It contended that the standard measure would result in a windfall to the plaintiff.

It appears that the court and the parties took it as a given that the VW limited warranty was a U.C.C. express warranty; accordingly the court found it necessary to apply § 2-714(2) as written. Although the court acknowledged Comment 3’s admonition that the standard measure is not intended to be the exclusive measure, it rejected VW’s contention that damages should be measured at the time of the alleged breach because the case VW relied upon did not apply the “pertinent language of § 2-714(2).” The court further held that plaintiff’s opinion testimony that, at the time of acceptance, the car was not worth the amount she agreed to for it was sufficient to require submission of the damages issue to the jury.

The problem with the court’s analysis is that plaintiff did not actually suffer economic injury or loss. Because VW offered a limited warranty, it had no obligation to provide a defect-free car. Accordingly, the presence of defects, manifest or latent, at the time of acceptance did not constitute a breach. VW merely promised to repair defects that arose during the warranty period, and it appears to have complied with this promise. So the court’s application of the standard damages measure had the effect, no doubt unintended, of effectively rewriting VW’s limited warranty. It was transformed from a promise to repair-or-replace into a promise to deliver a defect-free car. Defects existing at the time of acceptance merely presented the potential for breach and resulting damages in the event VW was provided with an opportunity to repair and failed to do so. Moreover, plaintiff did not resell the car and sustain a loss attributable to defects. Rather, she had the car repaired under warranty and made full use of the car for a substantial period of time. She then resold it for more than its fair market value. She made a profit at resale, and will reap a windfall if allowed to recover damages for what amounts to a theoretical injury (and one not attributable to defendant’s breach of its promise to repair).

The correct damages analysis was applied in the case Mayberry refused to follow, Valenti v. Mitsubishi Motor Sales of America, Inc., which was decided by the First District of the Illinois Appellate Court. There, the court found that because the plaintiff received fair market value for the car in trade, she sustained no economic loss and affirmed summary judgment for the defendant.

In the case of a repair or replacement warranty the U.C.C. standard measure of damages provisions do not fit. Instead, “repair cost” is the appropriate measure of damages because it equals the economic harm proximately resulting from the breach and thus places the aggrieved buyer in the position he would have been in had the defendant fully performed. Where a buyer resells or trades goods for fair market value, no economic harm is sustained, and there is no basis for a damages award.

Our next post will examine how incidental and consequential damage disclaimers are treated.

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