Typically service contracts are for a fixed number of years. Some contracts have the added feature of automatically renewing for additional years after the term has expired unless the consumer cancels before the renewal date.
When a consumer purchases a service contract and transfers the covered product to another consumer, can the subsequent owner enforce the service contract? The first place to look is the service contract agreement to see what it states as to its assignability. Silence should be interpreted as allowing assignment, because ambiguous contracts are to be construed against the drafter.
While the consumer may purchase goods from a retailer, it is the manufacturer that may provide the written warranty or make advertising claims concerning the product. In addition, sometimes the final product from the manufacturer may include components from other manufacturers. In general, each business in the distribution chain is a separate entity with separate rules of warranty liability. For example, an express warranty from the retail seller will not bind the manufacturer, without special facts.
There are many reasons why the buyer will want to pursue a warranty claim against the manufacturer or other indirect seller.6 Often it is the manufacturer who provides the written, express warranty, and the retailer will disclaim its warranty obligations. Moreover, when the manufacturer has provided a written warranty, the Magnuson-Moss Warranty Act prohibits the manufacturer from disclaiming implied warranties. The manufacturer may also be the one advertising the product and making other product representations through its promotional program.
The federal Magnuson-Moss Warranty Act eliminates vertical privity requirements when a consumer wishes to sue a manufacturer or other supplier based on a “written warranty” on consumer goods. In such cases, the Act gives the consumer the right to sue the entity that issued the written warranty, whether or not the consumer dealt directly with that supplier.9 The Act does not allow suit for personal injury, however.10
Consumer Warranty Law: 188.8.131.52 Effect on Express Warranties When State Abolishes Vertical Privity Requirement for Implied Warranties
When an express warranty does not meet the requirements of a Magnuson-Moss Warranty Act “written warranty,” a consumer’s right to enforce the express warranty against the manufacturer is a matter of state law.
Consumer Warranty Law: 184.108.40.206 Even States That Have Not Unequivocally Abolished Privity Requirements for Implied Warranties Usually Do So for Express Warranties
Even when a state has not abolished the privity requirement for implied warranties, or when the law in that state is still unclear, courts generally will not require privity for express warranties. The policies supporting implied warranty liability for an indirect seller apply even more forcefully to claims based on express warranties made by the manufacturer to buyers or made to the general public through representations in advertisements or sales brochures.
There is a split of opinion in the courts as to whether the Magnuson-Moss Warranty Act eliminates vertical privity requirements with respect to implied warranties. The conflicting case law and arguments from both sides on this question are analyzed in § 220.127.116.11, supra.
In analyzing a state’s privity requirements, several points need to be kept in mind. First, courts and statutes may take different positions about whether a consumer can sue a manufacturer depending on whether the suit is for personal injury or property damage or whether it is for economic damage to the product itself—that the product purchased is worth less because it is defective.
Consumer Warranty Law: 18.104.22.168.2 Arguments in favor of judicial abolition of privity requirements for implied warranties
Case law eliminating the vertical privity requirement focuses on the fact that manufacturers place their wares in the stream of commerce with the intent that these goods will find their way into the hands of the consumer.59 Manufacturers focus on these ultimate buyers when they promote their products.60 In Morrow v.
Whether a state has abolished vertical privity for implied warranty claims seeking economic damages requires a review of both statutory and case law in that state. There is more variation on this issue among the states than on almost any other UCC Article 2 warranty issue.
Even states that have not abolished vertical privity for implied warranties of merchantability may do so for implied warranties of fitness for a particular purpose.209 Implied warranties of fitness are closely akin to express warranties.
Lack of privity is not a defense when the retail buyer is a third-party beneficiary of the warranty in the sales contract between the manufacturer and the retail seller.211 This theory is one of the many grounds on which courts hold manufacturers responsible for breaching express warranties that are intended to protect the retail buyer, but are delivered through intermediaries,212 or created by samples provided to the retailer to use in the sales presentation.213 However, the theory applies to i
The manufacturer may also be liable to the retail buyer on an agency theory. Privity of contract will exist between the ultimate purchaser and the manufacturer when the dealer is found to be the agent of the manufacturer.222 Vertical privity may also exist if the intermediate buyer is the agent of the ultimate consumer.223
Another exception to the vertical privity requirement is when the manufacturer can be viewed as the direct seller even though the dealer was the actual signatory to the contract.
Consumer Warranty Law: 22.214.171.124 Manufacturer’s Issuance of Express Warranty As Creating Privity for Implied Warranties; Manufacturer Rebate Programs
Some courts hold that merely issuing an express warranty is sufficient to create privity between a buyer and a remote manufacturer, thus allowing the buyer to sue for implied as well as express warranties.233 The manufacturer may also have a direct enough relationship with the buyer to obviate privity concerns when the dealer has a warranty from the manufacturer and assigns that warranty to the buyer.234 It is also possible that a manufacturer’s relationship with the buyer through a manufacturer’s rebate program or some other
The manufacturer may be liable under principles of equitable estoppel. Under this theory, the manufacturer is estopped from asserting lack of privity as a defense to a claim for breach of the manufacturer’s express warranty.235 For example, equitable estoppel has been applied when the manufacturer had given the dealer a warranty for delivery to the buyer, had initially made repairs under the warranty, and had voluntarily extended it.
Claims such as fraud, fraudulent suppression, violation of state unfair and deceptive acts and practices (UDAP) statutes, negligence, and products liability can often be asserted without regard to privity.238 In states that retain vertical privity requirements for warranty actions, these alternative liability theories should be explored. States differ, however, on the extent to which economic losses can be recovered in tort.239
If privity requirements prevent consumers from obtaining relief from the manufacturer on its warranty, another possibility is to hold the dealer liable for the manufacturer’s warranty. Generally, the retail seller is not bound by the manufacturer’s warranty, just as the manufacturer is not obligated under the retail seller’s express or implied warranties.240 Two contract theories are available, however, for holding the retail seller liable on the manufacturer’s warranty.
Although exceptions to vertical privity avoid the legal obstacle to manufacturer liability for breach of warranty, an important practical problem remains. The manufacturer’s express warranty often promises “no defects in factory materials and workmanship.” Theoretically then, the buyer is required to prove that the problems arose in the factory rather than during the course of the retail seller’s handling.
This section examines the warranty rights of someone other than the actual retail buyer, including a relative or friend for whom the goods were purchased, a recipient of a gift, a subsequent buyer of the product, or a person who received the product from the buyer-spouse through divorce or abandonment. This chapter does not focus on the rights of accident victims, neighbors, passersby, or employees who suffer personal injury or property damage because of the defects in the product.
Consumer Warranty Law: 6.3.2 No Horizontal Privity Requirement When There Is a “Written Warranty” or Implied Warranty
The Magnuson-Moss Warranty Act eliminates horizontal privity problems for written and implied warranties provided to consumers. If the transaction involves a consumer product251 and there is either a “written warranty” as defined by the Act252 or an implied warranty, then any “consumer” can sue for failure to comply with it. “Consumer,” as defined by the Act, includes not only the buyer but also subsequent owners.253
While federal law greatly reduces the effect of horizontal privity requirements, state law may still be important in a number of situations:
Section 2-318 is the only Uniform Commercial Code (UCC) section addressing the rights of nonbuyers. It offers three alternative provisions: Alternatives A, B, and C.255 Alternative C goes the farthest in eliminating horizontal privity, allowing any person who “may reasonably be expected to use, consume or be affected by the goods” and who is “injured” by breach of the seller’s warranty, whether express or implied, to sue the seller.
Somewhat less than half the states abolish the requirement of horizontal privity, even for economic injury.278 That is, donees and subsequent buyers can enforce warranty rights even when the suit is based on the diminished value of the goods not conforming to their warranty.