Understanding Warranties

An issue came across my desk recently concerning a featured disclosure which should always appear in buyer’s order, retail installment sale contracts and lease contracts. This disclosure is a disclaimer, a disclaimer of several types of warranties.

It also became apparent, in my further discussions with various people in the industry, that there is confusion about this topic. The confusion is understandable when one considers the various related warranty terms: express warranty, limited warranty, implied warranty, implied warranty of merchantability, implied warranty for fitness for a particular purpose, extended warranty, service contract, Lemon Law, and “as is.”

Federal and state law addresses these issues. Be wary, however, to always refer to your state law because there is variance among the states concerning these terms.

In most states, every dealer who sells or leases any type of vehicle should provide to the consumer, in a clear and conspicuous manner, language which clarifies that the only warranty being provided is the one supplied by the manufacturer unless the dealer provides a separate written warranty. Additional language should be added, which is allowed in most states, and this language should disclaim express warranties and the two implied warranties. It’s best if this disclosure appears on the front of the buyer’s order.

Let’s take a closer look at seven key terms P&A executives need to understand and relate accurately:

1. Warranty

A warranty is simply a promise that a proposition of fact is true. This concept is further defined by federal and contract law. The party making the warranty is the warrantor or seller. The party who may avail himself of the warranty is the warrantee or buyer. An express warranty is one that is explicit and definite.

2. Disclaimer

A disclaimer is a disavowal or renunciation. In this case, a dealer would seek to disavow responsibility regarding the liability associated with the parts and functioning of the vehicle being sold.

3. Written Warranties

Manufacturers provide written warranties regarding the vehicles they produce. The federal law, the Magnuson-Moss Warranty Act (or “Mag-Moss”) governs written warranties. The written affirmation of the workmanship, quality or material of the vehicle meets the definition of warranty as identified in Mag-Moss.

The warranty is part of the overall exchange between the parties as would any of the tangible features of the vehicle, such as the engine or drivetrain. This point is significant as it relates to the illusory, fictional, and nonexistent “extended warranty” which should only be called by another name, such as “service contract.”

Pursuant to Mag-Moss, these warranties would have to be clearly indicated as full or limited. A full warranty completely covers the replacement or repair of any defect in the vehicle. A limited warranty is a reduced full warranty and addresses only particular parts and defects. A full warranty is relatively rare.

4. UCC and Warranties

The state law, Uniform Commercial Code (UCC), addresses various business issues, including contractual relationships between two merchants (dealers in this case) or between a merchant and a consumer. A merchant is a business which routinely entertains transactions in that type of business. For example, if a furniture store sold a vehicle to a consumer that furniture store would not be a merchant, by definition, but a Ford store selling a vehicle would be characterized as a merchant.

The UCC created the two versions of implied warranties:

• Implied Warranty of Merchantability: As a merchant, who is in the business of retailing vehicles, the dealer is representing, by implication, that the vehicle is generally equipped and suited for the purposes of a vehicle. It has an engine, brakes, transmission, and so forth, and can transport the consumer. In other words, it works as a motor vehicle in all respects. Consumers are supposed to be able to rely upon people who operate car stores as they are UCC merchants. It is presumed that the dealer-merchant understands vehicles.
• Implied Warranty of Fitness for a Particular Purpose: If a consumer tells a dealer-merchant that he is buying the vehicle for a particular purpose the dealer is on notice regarding what the consumer is going to be using the vehicle for. The dealer-merchant is then averring that the vehicle being sold is appropriate for the stated purpose. For example, if a consumer is purchasing a very small car with a small engine, and orders a trailer hitch added to it, and tells the dealer that he intends to haul a large boat, the dealer is agreeing that this vehicle will discharge this particular purpose. If the engine or transmission fails, when the boat is being hauled, the warranty will be violated and the dealer will have to compensate the consumer.

With such potential burdens being placed upon dealers regarding these two implied warranties, it is prudent to disclaim them.

5. Service Contracts

Service contracts may act as warranties but they are not by legal definition. They are certainly contracts for services relating to the maintenance of the vehicle. But they are not intrinsic to the purchase of the vehicle as they are paid for separately, an additional sum of money. In addition, they may also be purchased after the initial sale. A dealer may offer a written warranty, separate and apart from the manufacturer’s warranty, and if it is part of the initial sale of the vehicle, and is part of the sales price, it would have to subscribe to Mag-Moss.

The law addressing service contracts, for the most part, is state law, although Mag-Moss addresses it broadly. For example, is a service contract an insurance product or not? The answer would depend upon state law.

6. Lemon Law

Lemon law addresses the procedures for the failure of the manufacturer’s warranty for new vehicles. Generally, if a warranted problem can’t be corrected, after three attempts, the consumer gets his money back. Some states have lemon laws covering used vehicles.

7. As Is/No Warranty

This simple term should be thought of as the complete avoidance of any warranties or promises regarding the condition of the vehicle. The purchaser of the vehicle must trust his own examination of the vehicle which may have defects. The FTC’s Used Car Rule, with its mandated buyer’s guide, addresses this issue. There are as many as 15 states which do not allow as-is sales. And, of course, slick plaintiffs’ counsel have legal strategies which have surmounted this appellation, at times, and held the dealer liable.

Dealers should make certain that their disclaiming warranty language is clear, accurate, and conspicuous, as there is much at stake. If the language is not correct in their documents, it is perfect fodder for a class action. Finance managers should be conversant with these terms in case a consumer begins asking questions about warranties. These questions are easy to frame but are not easy to answer. Govern yourselves accordingly.