Dealer Warranty Issues in a Special Finance
Transaction
By
Keith E. Whann
While there are many legal aspects to a
traditional motor vehicle sale, one area which continues to pose
significant legal compliance problems for dealerships is warranties.
While the concepts in this area are relatively straightforward, the
issue becomes complicated because of the various federal and state
regulations which often have an overlapping effect on the subject matter.
Furthermore, given the fact that dealers are required to warrant their
compliance with all applicable laws in subprime lender dealer agreements,
and often are requested to warrant that the vehicle which is the subject
of the transaction is in good condition, this area of the law merits some
attention in order to ensure compliance.
A
warranty is a promise by a manufacturer or seller to stand behind its
product. There are two types of warranties that businesses give consumers
with the sale of a product, implied warranties and express warranties. Implied warranties are a creation of state law and are based upon
the common law principle of "fair value for money spent." There are two types of implied warranties for consumer goods such
as motor vehicles, the implied warranty of merchantability and the implied
warranty of fitness for a particular purpose. An implied warranty of merchantability is a dealership's standard
obligation when it sells a product and it is made automatically with every
product sold. In essence, an implied warranty is a promise that the
product is in proper condition for sale, that it will function as intended
and that there is nothing significantly wrong with the product. An implied warranty of fitness for a particular purpose arises when
a consumer relies on the dealership's advice that a product can be used
for a particular purpose. Implied
warranties do not cover problems caused by abuse, misuse, wear or other
factors not relating to the product's condition at the time of sale.
Many
states, but not all, allow motor vehicle dealerships to limit or disclaim
implied warranties. Since
state laws vary with respect to which implied warranties may be disclaimed
and the manner in which they may be disclaimed, dealers should be familiar
with their state laws. Generally,
disclaiming implied warranties is accomplished by including a statement on the motor vehicle sales contract which
states the dealer's intention to disclaim the implied warranties and
sell the vehicle "as is," "with all faults," or by using other
language which in common understanding calls the buyer's attention to
the exclusion of warranties and makes plain that there is no implied
warranty. Note also that some
state statutes provide that there is no implied warranty for defects that
ought to have been discovered by a consumer if, before entering into the
contract, the consumer has examined the vehicle as fully as desired or has
refused to examine the vehicle and an examination would have revealed the
defects.
In
states that do not allow dealerships to disclaim all implied warranties,
dealerships may still be able to disclaim one or the other. To exclude or modify the implied warranty of merchantability, the
disclaimer language must mention the word "merchantability" and, if in
writing, must be clear and conspicuous. To exclude or modify an implied warranty of fitness for a
particular purpose, the disclaimer must be in writing and conspicuous. In any event, the disclaimer should be contained on the front side
of the sales contract. If it
must appear on the reverse side of the sales contract, language on the
front side of the contract should be included informing the consumer that
the warranty disclaimer does appear on the reverse side.
Unlike
the implied warranty which is automatically provided to the consumer
unless disclaimed, an express warranty is an affirmative fact or promise
made by the dealer orally or in writing which relates to the goods and
becomes part of the basis of the bargain. Express warranties are governed by both state and federal law. Again, dealerships should refer to their state statutes to
determine how express warranties are created and disclaimed in their
state. If, however, a
dealership offers a written warranty, it must comply with the Magnuson
Moss Warranty Act.
The
general goal of the Magnuson Moss Warranty Act is to ensure that consumers
get complete information about warranty terms for products they purchase. The Act covers any "consumer product" that costs the consumer
more than Fifteen Dollars and only applies to written warranties including
written express and written implied warranties. The term "written warranty" means any undertaking in writing in
connection with the sale by a supplier of a consumer product to refund,
repair, replace or take other remedial action with respect to such product
in the event that such product fails to meet the specifications set forth
in the undertaking, which written affirmation, promise or undertaking
becomes part of the basis of the bargain between a supplier and a buyer
for purposes other than resale of such product. Only the supplier actually making a written warranty is liable
under the Act. A supplier who does no more than distribute or sell a
consumer product covered by a written warranty offered by another person
is not liable for failure of the written warranty to comply with the Act
unless the supplier is deemed to have adopted the warranty.
The
Act provides that, if a written warranty is offered, only necessary
information should be included in a warranty document. Any extraneous material in a warranty may confuse consumers about
the purpose of the document and about what it really covers. The Act further requires some very detailed information to be
included in any written warranty, which must be disclosed clearly and
conspicuously in a single document, in simple and readily understood
language.
The
Magnuson Moss Warranty Act also defines two types of written warranties,
full warranties and limited warranties. These titles have been given special meaning by Federal Warranty
Law. All warranties have to
be prominently labeled as one type or the other. The title "full" on a warranty means a defective product will
be repaired or replaced for free, including removal and reinstallation
when necessary, and that the warranty extends to anyone who owns the
product during the warranty period. If
a full written warranty is provided, implied warranties cannot be
disclaimed or limited to the duration of the warranty. The title "limited" on a warranty means the warranty gives the
consumer less than full warranty protection. By giving a limited warranty, the dealership is representing to
consumers that there are some costs or responsibilities that are not
undertaken by the dealership. Implied
warranties can be limited in duration to the term of an express limited
warranty.
Confusion
often arises concerning the difference between a written warranty and a
service contract. The term
"service contract" means a contract in writing to perform over a fixed
period of time, or for a specified duration, services relating to the
maintenance or repair or both of a consumer product. A written warranty, as previously stated, must be part of the
"basis-of-the-bargain." This
means that it must be conveyed at the time of the sale of the consumer
product and the consumer must not give any consideration beyond the
purchase price of the consumer product in order to benefit from the
agreement. It should be noted
that an agreement which would meet the definitions of a written warranty
as set forth under Federal Warranty Law, but for its failure to satisfy
the basis-of-the-bargain test, is a service contract.
When
selling a used motor vehicle, dealerships must also comply with the
Federal Trade Commission's Used Car Rule. The FTC Used Car Rule requires dealerships to post a buyer's
guide on every used vehicle before it is offered for sale. A vehicle is considered used under the Rule if it has been driven
more miles than are necessary to deliver it to an ultimate purchaser. The buyer's guide must be prominently and conspicuously displayed
on or in the used vehicle so that both sides are readable. The layout for the buyer's guide is set forth in the Rule. The dealership must use the wording, type style, type sizes and the
format as specified in the Rule. Furthermore,
the guides must be printed in one hundred percent black ink on white paper
cut to at least eleven inches by seven and one-quarter inches. Colored ink may be used to fill in the blanks on the guide.
Dealerships must give the buyer of the used
vehicle a copy of the vehicle's buyer's guide at the time of sale. A signature line may be included on the guide and the buyer may be
asked to sign to acknowledge that he or she has received the guide. If a signature line is included on the buyer's guide, a
disclosure must also be included near the signature line that says, "I
hereby acknowledge receipt of the buyer's guide at the closing of this
sale." For additional
guidance on issues concerning the completion of the buyer's guide,
dealers can obtain a copy of the Federal Trade Commission publication, A
Dealer's Guide To The Used Car Rule, which covers many of these
issues in greater detail. |
