Legal “Double Talk”: When is a warranty not a warranty?

Image result for double talkIn Grosse Pointe Law Firm, PC v. Jaguar Land Rover North America, LLC, 2016 WL 5266724 (Mich. App.2016), the Michigan Court of Appeals joined courts from several other jurisdictions in holding that a written “repair or replace warranty” (“RRW”) is not a “warranty” as defined under of § 2-313(1) of the Uniform Commercial Code (“UCC or “the Code”). See, e.g., Mydlach v. DaimlerChrysler Corp., 226 Ill.2d 307 (2007). Warrantors should take heed.

UCC § 2-313(1) states:

(1)  Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

The Michigan court reasoned that under the Code, an “affirmation of fact or promise ‘creates an express warranty that the goods shall conform to the affirmation of fact or promise.’ Goods cannot ‘conform’ to a promise to repair or replace because such a promise says nothing about the character or quality of the goods, but rather identifies a remedy if the buyer determines that goods are defective.” Courts that have adopted this view have further found that several of the Code’s other provisions, such as those governing limitation and exclusion of remedies (UCC § 2-719), limitation of actions (§ 2-725), and the appropriate measure of damages (UCC § 2-714), may not be applied strictly as written, but instead serve as guideposts. In light of this emerging trend in the judicial treatment of RRWs, the question product makers face is whether benefit is to be had by restructuring their warranty offering to bring it within UCC § 2-313(1)’s definition of “express warranty” providing repair and replacement as the exclusive remedy so that they may avail themselves of the UCC’s provisions that directly impact warranty cost exposure.

Take first the Code’s limitation on actions provisions, UCC § 2-725(1) and (2):

(1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.

(2) A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, 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.

Courts hold that a RRW cannot be breached “when tender of delivery is made,” but must await a warrantor’s refusal or failure to make repairs. This means that the 4-year limitations period can begin to run at any point during the term of the warranty, a manufacturer remains exposed to suit for breach of warranty for at least 1-year and up to 4-years after the warranty expires, and a precise date of breach is uncertain and more difficult to establish.

By offering a UCC “express warranty,” a manufacturer may limit its exposure to a breach of warranty claim to 4-years post-delivery or to a lesser period. For example, if the warranty promises a defect-free product and limits the buyer’s remedy to repair or replacement of defective parts or workmanship, it can then set the remedy period at 15 months or 15,000 miles and limit the time for bringing an action (and its exposure to a breach of warranty claim) to 18-months post-delivery.

Taking such an approach also addresses the problem created by erroneous court decisions holding that a RRW “extends to future performance.” A RRW does not “extend[ ] to future performance of the goods” for the same reason it does not fall within the Code’s definition of “express warranty”; it does not promise performance of the goods, but rather performance of the warrantor. Thus UCC § 2-725(2) applies to fix the date of delivery, date of breach, and the date on which the limitations period for bringing an action begins to run.

Additionally, by offering an express warranty providing repair or replacement of defective parts or workmanship as the buyer’s exclusive remedy, a warrantor limits its warranty exposure in the same fashion it does under a RRW, but puts itself in a stronger position to seek enforcement of UCC § 2-719’s limitation of remedy and exclusion of incidental and consequential damages provisions. UCC § 2-719 states:

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

An analysis of an “express warranty’s” provisions should be done consistent with the plain meaning of § 2-719’s express language. With a RRW, courts tend to depart from strict application of § 2-719. This is particularly important in jurisdictions that follow to the majority approach, holding that § 2-719(2) and (3) operate independent of one another. See, e.g., Rheem Mfg. v. Phelps Heating & Air Conditioning, 746 N.E.2d 941 (2001); Razor v. Hyundai Motor America, 222 Ill.2d 75 (2006). Under this approach, unless unconscionable, an exclusion of incidental and consequential damages survives where a limited remedy fails of its essential purpose. An incidental and consequential damages disclaimer is far more likely to be enforced in an “independent approach” jurisdiction.

Finally, there is the question of the appropriate measure of damages in a case alleging breach of a RRW. Courts struggle in trying to adapt the UCC to consumer claims under a RRW; no place is this more evident than in the measure of damages context. Pointing to UCC § 2-714(2), consumer-plaintiffs argue for “diminution of value damages,” while defendants counter that damages should be based on cost-of-repair based on the nature of the promise made under a RRW.  Most judges, it seems, tend to agree with plaintiffs and instruct on diminished- or difference-in- value damages. For example, the Illinois pattern jury instruction on damages in an action brought under the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301, et seq., provides:

If you decide for the Plaintiff on [his] [her] claim for breach of warranty, you must fix the amount of money which will reasonably compensate the Plaintiff for damages naturally arising from the breach. In calculating Plaintiff’s damages, you should determine that sum of money that will put the Plaintiff in as good a position as [he] [she] would have been in if both Plaintiff and Defendant had performed all of their promises under the contract.

The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of goods accepted and the value they would have had if they had been as warranted.

IL. IPI. Civil 185.09. UCC § 2-714’s measure of damages does not fit where a RRW is at issue. This is so because, unlike a UCC express warranty, the promise made under a RRW does not relate to the quality or characteristics of the goods, but is limited to repairs to be provided by the warrantor at no cost to the buyer. Repairs are the “benefit of the bargain” under a RRW. Damages for breach of a RRW should correspond to the harm caused by the breach:  the refusal or failure to furnish the no-cost repairs promised. Stated another way, the “sum of money that will put the Plaintiff in as good a position as [he] [she] would have been in if both Plaintiff and Defendant had performed all of their promises under the [RRW]” equals the amount of money necessary to effectuate repairs that should have been, but were not provided under the warranty and no cost. This argument is made more clearly – and in more compelling fashion – where a warranty expressly identifies repair-or-replacement of defects in parts or workmanship as the buyer’s sole and exclusive remedy. The exclusive remedy defines and makes clear that repairs are the “benefit of the bargain.”

Faced with a RRW warranty, courts frequently try to force the proverbial square peg (RRW) in to a round hole (UCC). The inevitable results:  uncertainty and inconsistency. By providing an express warranty that the product is defect-free, and limiting the buyer’s remedy to repair or replacement of defects in parts or workmanship, a manufacturer who becomes embroiled in a warranty dispute better positions itself to benefit from a straight forward application of UCC provisions.

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