A New Look at Implied Warranties for Used Goods

Recently, the Supreme Court of Texas examined whether a buyer of used goods may assert claims based on the implied warranty of merchantability.  See MAN Engine & Components, Inc. v. Shows, 434 S.W.3d 132 (Tex. 2014).  The implied warranty of merchantability assures buyers that goods are "fit for the ordinary purposes for which such goods are used."  Tex. Bus. & Com. Code § 2.314(b)(3).  Texas law had previously held that a buyer who purchased goods knowing that they were used could not assert claims under this theory.  See, e.g., Chaq Oil Co. v. Gardner Mach. Corp., 500 S.W.2d 877, 878 (Tex. App.—Houston [14th Dist.] 1973, no writ).  Man Engine & Components moved away from this rule and addressed when implied warranty claims may be available to second-hand purchasers of used goods—the Court's answer: "it depends."  The Court ultimately held that a buyer of used goods may assert implied warranty claims against a product manufacturer.

A.        Factual and Procedural Background

The product at issue in Man Engine & Components was a used yacht called the Caliente.  The Plaintiff, Doug Shows ("Shows") purchased the yacht from a broker for $525,000.00.  MAN Nutzfahrzeuge Aktiengesellschaft and its United States counterpart, MAN Engines & Components, Inc. (collectively "MAN") manufactured the engines on the Caliente.  At the time of purchase, Shows had the engines inspected by an authorized service dealer.

Two years later, Shows was fishing off of the coast of Louisiana when one of the MAN engines failed.  The failure was caused by a bad valve.  Repairs totaled approximately $40,000.00.  A year after these repairs, the same engine failed a second time due to the same bad valve.  This time, the engine was beyond repair.

Shows sued MAN on a number of theories including breach of the implied warranty of merchantability.  After the jury found MAN liable for breach of implied warranty, the trial court disregarded the verdict and issued a take-nothing judgment.  The court of appeals reversed, and MAN appealed to the Supreme Court of Texas asserting that Shows's claims were not viable.

B.        Second-Hand Purchasers May Assert Implied Warranty Claims

In analyzing whether Shows could sue MAN for breach of implied warranty, the Court emphasized that implied warranty claims only hold a merchant accountable for the state of the goods when they pass to the first buyer.  There is "no reason why the merchant's legally imposed duty to issue merchantable goods should automatically end when a good passes to subsequent buyers."  As such, Shows could properly assert his implied warranty causes of action against MAN even though there was no contractual privity between the parties.

To support this conclusion, the Court referred to its prior holding in Nobility Homes of Texas, Inc. v. Shivers—where a purchaser who bought a mobile home from a retailer was permitted to assert implied warranty claims against the manufacturer.  See Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977).  This holding "did not depend on the fate of the product between the time that it left the manufacturer's hands and the time that it was purchased by the plaintiff."  As such, the Court extended Nobility Homes to the purchasers of used goods as well.

This holding applies regardless of whether the buyer purchased goods knowing they were used.  Breach of implied warranty claims focus only on the state of the goods when they pass to the first buyer.  It makes no difference whether the buyer suing the manufacturer bought the goods as new or used from the manufacturer, a retailer or through some other channel.  "The defect doesn't rub off with use."  The Court held that Chaq Oil's bar against implied warranty claims for used goods was inapplicable in cases between a second-hand buyer and a manufacturer.  One who purchases used goods may still assert claims for implied warranty of merchantability against manufacturers.  As such, the lack of privity did not bar Shows's claims against MAN.[1]

C.        Potential Caveats to a Purchaser's Implied Warranty Claims

In making this holding, the Court recognized a number of limitations to a second-hand purchaser's implied warranty claims. For instance, a buyer who inspects goods, or refuses to do so when given the opportunity, may waive all implied warranties relating to defects which said inspections would have revealed.  See Tex. Bus. & Com. Code § 2.316(c)(2).  However, the Court found that this did not eliminate Shows's claims.  While Shows did have the yacht inspected, no defects were brought to light.  Shows acted reasonably and prudently, did not discover any defects and therefore did not waive his implied warranty claims.

The subsequent misuse of the product after it leaves the manufacturer's hands can also defeat an implied warranty claim brought by a purchaser of used goods.  MAN expressed concerns that the Court's holding would eliminate a manufacturer's defenses that the product was improperly used, maintained or repaired.  The Court addressed this fear by pointing out that the purchaser, as the plaintiff, bore the burden of showing that the goods were defective when they left the manufacturer's hands.  As such, "the wear and tear that plagues a good after it leaves the merchant is an obstacle for the plaintiff, not the defendant."

The Court also explained that a manufacturer's valid disclaimer of the implied warranty of merchantability would still be effective against a downstream purchaser of used goods.  MAN claimed that it would be impossible for a manufacturer to provide the requisite notice to properly disclaim any warranty to a remote, second-hand purchaser.  However, a purchaser cannot obtain a greater warranty than that which was held by the immediate seller.  When a manufacturer properly disclaims implied warranties at the original sale of the product, said disclaimer extends to the initial buyer as well as any subsequent purchasers down the chain.  Implied warranties and valid disclaimers both "move with the used good, by operation of law, from purchaser to purchaser."[2]

Finally, the Court hinted at another issue affecting a second-hand purchaser's ability to assert an implied warranty claim—"until barred by an applicable statute of limitations, the implied warranty remains with the good."  The statute of limitations period for implied warranty claims lasts four years after the cause of action accrues.  Tex. Bus. & Com. Code § 2.725(a).  Although the Texas Business and Commerce Code clearly states that a breach of warranty claim accrues when the product is delivered, Texas case law is inconsistent on this point.  See id. at § 2.725(b); compare Murray v. Ford Motor Co., 97 S.W.3d 888, 891 (Tex. App.—Dallas 2003, no pet.) ("limitations on implied warranties begin when goods are sold"), with Pako Corp. v. Thomas, 855 S.W.2d 215, 219 (Tex. App.—Tyler 1993, no writ)("breach of implied warranty occurs upon tender of delivery") (emphasis in original).  Regardless of the starting point, the limitations period is not extended by the subsequent resale of the product or discovery of the defect.  Am. Alloy Steel, Inc. v. Armco, Inc., 777 S.W.2d 173, 177 (Tex. App.—Houston [14th Dist.] 1989, no writ).  A second-hand purchaser may assert implied warranty claims until four years after the delivery/sale of the product to the original buyer.

D.        Conclusion

A purchaser of used goods is no longer completely barred from asserting claims for breaches of implied warranty of merchantability.  In making this holding, the Court was careful to explain that it was only focusing on claims between purchasers of used goods and manufacturers.  It remains uncertain whether implied warranty claims regarding used goods are viable against others in the stream of commerce (i.e. an immediate seller).  What is clear is that claims for breach of the implied warranty of merchantability are now an available option of recourse for the purchasers of used goods against manufacturers.  However, this is subject to many of the same limitations typical to all implied warranty claims.

[1] The Court later relied on this departure from the privity requirement in addressing MAN's concerns that the Court's holding would open the door for multiple claims from multiple purchasers for the same goods.  The Court's holding in Nobility Homes, settled this issue.  The limitations associated with implied warranty claims (i.e. the warranty's limited scope or a valid disclaimer) serve to prevent a manufacturer from unlimited or unforeseeable liability.  Nobility Homes, 557 S.W.2d at 81–82.

[2] MAN attempted to raise the defense that it expressly disclaimed the implied warranty of merchantability.  The Court held that MAN failed to properly plead this defense, and therefore it could not be heard.

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