Warranties And Limitations Of Liability–Are They Still Worth It?

I have participated in a number of efforts to create the “perfect warranty.” In this context, “perfect” was defined by what was perceived as the right balance between the promises regarding performance that the manufacturer is proud to make (and, it is argued, the market requires) and what I call the “takeaways,” in the form of limitations on obligations and potential liability.

Even when we were sure that “warranty nirvana” had been achieved, the manufacturer still got sued. So, what’s up? Are warranty limitations worth it?

Stick with me as we work toward an answer because it is the approach, not the answer, that is most informative.

Warranties are creatures of contract, regulated by the Uniform Commercial Code (a universal state law governing the sale of goods), individual state court decisions and, to a lesser but important degree, the federal Magnuson-Moss Warranty Act. Assuming that a manufacturer/ seller actually gets its warranty into the hands of the purchaser before the sale, the warranty is deemed to be “part of the bargain.” The contract between buyer and seller for the sale of the goods includes the terms of the warranty, assuming they are legally enforceable.

Timely presentation of the warranty, though difficult to achieve, is an absolute must. The buyer may not read the document, but if the warranty is made known and is readily available, the buyer should be charged with notice of the warranty terms.

PROMISES AND TAKE-AWAYS

With some important limitations, the warranty allows for a statement of what the manufacturer or seller will do (promises) and will not do (takeaways) in the event of a claim of a breach of the warranty. The list of potential take-aways is substantial. Examples might include no labor costs, no liability for consequential property damage, buyer must pick up or ship any replacement product, no liability over the amount of the purchase price of the product, no warranty on repair work and on and on. The warranty also allows for a “definition” of what falls within and outside of the warranty.

To carry on with this primer, assume that you determine that you can still sell plenty of windows with all the takeaways in your warranty, and you actually do. Sure, some sales were lost, but you have got yourself one nasty defense when it comes to product claims. You get sued, hand the defense lawyer your warranty and tell him to let you know when the case is dismissed.

Knowing that “now is not the time,” your lawyer waits to write you an initial report as to the claims being brought against your company.We’re assuming that the shrinking scope of coverage, required self-insured retention and the increasing cost of insurance have caused your company to conclude (prudently) that it had to maintain active oversight of the product claims being asserted against it. Despite the warranty, the prognosis is that you are in for a fight, and your company representatives should know that depositions are likely.

Should you fire the defense lawyer, sue the lawyer who drafted the warranty, or both? The answer is “Neither.” (Okay, I heard all of you say “both” and I am somewhat offended.)

It turns out that the plaintiff has made claims for negligence and strict product liability (tort claims), breach of an unfair trade practices statute and breach of express and implied warranty (contract claims). You have been accurately advised that there is a serious risk that the long list of “take-aways” in your warranty will be inadequate to summarily defeat the claims, even perhaps the breach of implied warranty claims.

The reasons are found in both the different nature of the claims for liability that can be asserted against window and door manufacturers and in the legal restrictions on that nasty list of takeaways in your warranty. Nonetheless, the answer to today’s big question, “Is the warranty with its limitations still worth the effort?” is “You bet it is.”

IMPLIED VS. EXPRESS

Here are some of the examples of why you need a written warranty and should still make the hard choices balancing the promises with the takeaways. First, without addressing the issue in an “express” (written) warranty, the sale of windows includes the implied-by-law warranty of merchantability and perhaps an implied warranty of fitness for particular purpose. In other words, you are giving a warranty, anyway. By its express warranty, the company can effectively “manage” the impact of the implied warranties.

More importantly, the take-aways in your express warranty provide the company with an opportunity to reasonably craft its obligations with respect to product claims, including a limitation on consequential damages which in many states is enforceable. Exclusions of damages for personal injury such as a reaction to mold are unenforceable and could elicit a court reaction that the warranty as a whole is “unconscionable” and thus not enforceable. The existence of a well-crafted warranty provision disclaiming any liability for damages beyond the cost of repair or replacement of the product can dramatically reduce the potential exposure in the case and create an interesting point of leverage for the plaintiff that I will describe below.

The tort claims in our hypothetical case (negligence and strict product liability) require, in almost all states, proof that a window or door defect caused damage to property other than the product itself (known lovingly as the “economic loss rule”). In fact, the claimant should not be able to recover the costs of product repair or replacement in its tort claims. A claim for those costs is still governed by contract—the warranty—and once within the warranty, you have the ability to manage the scope of that liability.

A TOUGH CHOICE FOR PLAINTIFFS

In the right case, the very existence of a written warranty excluding consequential damage immediately presents the plaintiff with a difficult choice:

1. Take the position that he or she never got the warranty and argue that it does not apply, so as to try to avoid its terms. This leaves only implied warranty claims, which are tough to prove and have strict statutes of limitation, as a source of recovery for the cost of replacement or repair of the product.

2. Accept the more generous promises of the express warranty with regard to remedying the product defects, along with the risk that the court will enforce the limitation on consequential damages.

Tough choices for opponents are good. (As this strategy is played out, it is important to keep an eye on the scope of any available insurance coverage.)

The other basis for product claims has mostly been found in statutory claims for unfair trade practices. Though varying by state, the “unfair trade practices” statutes were designed fundamentally to punish the con artist who promises a product or service with certain characteristics and sells something dramatically deficient in comparison. Unfortunately, many of these statutes are written broadly enough to support a technical interpretation that the law applies to claims of underperforming windows or doors. (The factual defenses and legal caveats to assertion of these claims are too numerous to mention here.) The claims can be dangerous due to potential awards for attorney fees and “exemplary damages.”

My experience, however, is that these statutes require proof of “intent to deceive” and that the plaintiff will not effectively meet that requirement with respect to window or door defects that may exist. The fact that a few windows may leak because of irregular assembly simply does not suffice. (Interestingly, such a claim may make relevant at trial the fact that you have had warranty claims on less than 5 percent of product sold. Otherwise, that “good” evidence is often excluded.)

CONCLUSION

Warranties are an important piece of the “package” that surrounds your product. The terms of the written warranty should be the result of choices made to balance what is good about the commitment of the company to stand behind its product with an effort to manage what is bad about the unwarranted claims being made in product and construction defect litigation.

On another note, California has recently enacted Senate Bill 800, which completely rearranges construction defect liability and claims for original home sales (see story, p. 30). If you sell into California and want information as to SB 800, contact our office.

Paul R. Gary is principal of PR Gary & Associates, a law firm based in Portland, OR, emphasizing legal issues facing manufacturers of windows and doors. He welcomes feedback on articles published in Window & Door and can be reached at 503/227-8424 or info@prgarylaw.com.

*Previously published in the Window and Door Magazine