August 2007
New Car Buyers Lose Their Right to Revoke Acceptance or
Pursue Remedies for Breach of Warranty
By Gary M. Victor
Introduction
Over the better part of the last decade, Michigan consumers have seen their legal protections erode.1 Although the legislature has played its part, much of this erosion has been the result of appellate court decisions. If this trend continues, consumers can do little more than stand back and watch their rights circle the drain. Several of these cases have decreased the potential liability of automobile dealers at the expense of car buyers.2 The court of appeals in Davis v LaFontaine Motors, Inc3 is an example of such a case and may have added the final nail to that coffin. Davis is replete with problems. This article will examine Davis in terms of its impact on the ability of new car buyers to pursue remedies for breaches of implied warranties,4 to revoke acceptance to defective vehicles,5 and to obtain redress for breaches of express warranties.6
The Case
The plaintiffs in Davis purchased a new 2001 Daewoo from defendant dealer, an authorized Daewoo dealer, executing a retail installment purchase agreement. After plaintiffs took possession, they had some minor warranty repairs performed by defendant. Subsequently, in September of 2001, defendant cancelled its sales and service agreement with Daewoo. When plaintiffs next took the car to defendant for warranty repair, they
were informed that defendant was no longer doing Daewoo warranty work and were referred to another Daewoo dealer. In March 2002, when plaintiffs sought warranty repairs from the second Daewoo dealer, they were told that Daewoo had declared bankruptcy and they would have to pay for any further repairs on their vehicle.7
Plaintiffs brought suit against defendant and the assignee of their purchase agreement under the Uniform Commercial Code (UCC)8 seeking to revoke acceptance of the vehicle as well as remedies for breaches of express and implied warranties. They also made claims for violations of the Magnuson-Moss Warranty Act,9 the Michigan Consumer Protection Act (MCPA),10 and the Motor Vehicle Service and Repair Act.11 Relying on disclaimers in its purchase agreement, the dealer moved for summary disposition. Plaintiffs countered, claiming the disclaimer was defective, defendants could not disclaim express warranties, and the disclaimer had no effect on a buyer’s right to revoke acceptance.12 Without a written opinion, the trial court denied defendant’s motion except with regard to plaintiffs’ claims under the MCPA and held that defendant was liable under the manufacturer’s warranty.13 The appeal followed.
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The Purchase Order Disclaimer
Automobile dealers, as is the case with most merchants, have done their best to limit their liability. With each decision favoring their business, dealers have modified their contracts to incorporate any new advantageous language. The language in Davis, if not universal with Michigan dealers at the moment, is likely to become a model for future dealer contracts.
The first page of the vehicle purchase order contained the following language under the heading “IMPORTANT BUYER INFORMATION”:
1. Any warranties from a Manufacturer or supplier, including warranties on any Dealer-installed Non-Manufacturer accessories, are theirs, not Dealer’s, and only such Manufacturer or other supplier will be liable for performance under those warranties. All goods, services and Vehicles sold by Dealer are sold “AS IS” unless Dealer furnished Buyer with a separate written warranty or service contract or the used car sticker on the window on the vehicle indicates otherwise. (SEE PARAGRAPH 10 ON REVERSE SIDE). This disclaimer in no way affects the Manufacturer’s Vehicle warranty.14
Paragraph 10 on the back of the page was entitled “WARRANTY DISCLAIMER,” printed in all capital letters, and provided:
A. IN THE EVENT THE VEHICLE IS EITHER A NEW VEHICLE OR A USED VEHICLE STILL SUBJECT TO A MANUFACTURER’S WARRANTY, DEALER EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED (INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE) ON THE VEHICLE. FURTHER, DEALER NEITHER MAKES NOR AUTHORIZES ANY OTHER PERSON TO MAKE ON DEALER’S BEHALF, ANY WARRANTY IN CONJUNCTION WITH THE SALE OF THE VEHICLE. AS TO ANY MANUFACTURER’S WARRANTY EXTENDED TO BUYER BY MANUFACTURER, DEALER SPECIFICALLY DISCLAIMS ANY LIABILITY THEREUNDER, SUCH MANUFACTURER’S WARRANTY BEING BETWEEN BUYER AND MANUFACTURER ONLY.15
The Court’s Analysis Implied Warranties
Given the judicial atmosphere in Michigan, it is hard to pick too big a bone with the court’s analysis on the implied
warranty issue. The UCC allows both the implied warranty of merchantability16 and the implied warranty of fitness for a particular purpose17 to be disclaimed, provided that the disclaimer is conspicuous.18 Additionally, the UCC provides that all implied warranties are disclaimed in an “AS IS” sale.19 It could be argued that the Paragraph 10 disclaimer language is not conspicuous because it is on the reverse side of the purchase agreement. It could also be argued that any such disclaimer in a vehicle purchase agreement is either inconspicuous20 or unconscionable.21 However, it is inconceivable that such positions will be adopted in Michigan anytime soon. Even if Paragraph 10 could be struck down, there is still the problem with the “AS IS” language on the front of the purchase agreement.
hT e use of “AS IS” language in a new vehicle sale is even more insidious than the usual warranty disclaimer. These two little words dispose of both the warranty of merchantability and warranty of fitness for a particular purpose. Moreover, the UCC contains no requirement that the “AS IS” language be conspicuous22 or even in writing.23 Therefore, a merchant can accomplish with two two-letter words that which would otherwise take a full, conspicuous paragraph. What is perhaps the most significant holding in Davis rests on the use of the “AS IS” language to eliminate a Michigan car buyer’s right to revoke acceptance.
Revocation of Acceptance
The UCC allows buyers to revoke their acceptance of goods that have non-conformities24 that substantially impair the value of the goods to the buyer.25 The Michigan Supreme Court has recognized a new car buyer’s right to revoke acceptance provided the buyer can show the defect “has a special devaluing effect on him and that the buyer’s assessment of it is factually correct.”26 Under the Michigan law, revocation of acceptance is available against the dealer but not the manufacturer.27 Hence, if a new car buyer loses his right to revoke against the dealer, he loses the right altogether. This elimination of the buyer’s right to revoke is exactly what Davis has accomplished.
Under the view of the Davis court, whenever a new car is purchased under a contract containing the magic “AS IS” words
and the dealer does not furnish a separate written warranty or service contract, the right to revoke against the dealer is lost. As stated by the court:
. . . [W]e hold that, for the purposes of revocation under MCL 440.2608, nonconformity is a failure of the goods sold to conform to legitimate expectations arising from the contract. In this contract, it was plainly agreed that “All goods, services and Vehicles sold by Dealer are sold ‘AS IS’ unless Dealer furnished Buyer
August 2007
with a separate written warranty or service contract or the used car sticker on the window on the vehicle indicates otherwise.” Because plaintiffs purchased the vehicle “as is,” the vehicle, even with the alleged defects, conforms to the contract and therefore necessarily conforms to the parties’ legitimate contractual expectations. Plaintiffs got the vehicle for which they bargained; there was no nonconformity.28
If not currently the case, it is reasonable to expect most, if not all, new car dealers will put “AS IS” language in their purchase agreements. New car buyers will then lose any contractual right to revoke acceptance no matter what defects the vehicle may have. Future car buyers may still have some rights against vehicle manufacturers under Michigan’s Lemon Law,29 which under circumstances considerably more restrictive than revocation under the UCC may allow the buyer a refund or replacement vehicle.30 Consumers like the plaintiffs in Davis, however, are left with no remedy whatsoever when a manufacturer goes bankrupt. In essence, Davis permits dealers to sell defective cars with relative contractual immunity. Whatever merit the Davis court’s analysis may contain on the revocation of acceptance issue, its analysis on express warranties is at best perfunctory and at worst dangerous.
Express Warranties
Express warranties are endemic in sales contracts. They are easy to create and hard to eliminate. Any statement of fact or promise,31 any description,32 and any sample or model33 that becomes part of the basis of the bargain creates an express warranty. Also, it is not necessary for a seller to use words such as “warranty” or even have the intention to make a warranty.34 It is hard to see how one could sell anything without making statements of fact or promises or without describing the goods in any way. “Buy my goods, please—I can’t tell you what they are or what they will do.” The possibility that the dealer in Davis, or any other car dealer for that matter, could sell a new vehicle without making a significant number of express warranties is infinitesimal.
Express warranties are also difficult to eliminate. There is no method of disclaiming them, as is the case with the implied warranties of merchantability and fitness for a particular purpose,35 and “AS IS” sales do not apply to them.36 Even though express warranties cannot be readily disclaimed, it has not stopped sellers from using language that purports to disclaim both express and implied warranties such as the language in the Davis contract quoted above. In an attempt to remove potential confusion where a seller, through words or conduct, makes express warranties while at the same time using language that would disclaim those warranties, the UCC has established a rule of construction.
MCL §440.2316(1) provides:
Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other, but subject to the provisions of this article on parol or extrinsic evidence. . . negation or limitation is inoperative to the extent that such construction is unreasonable.37
Clearly, since the dealer must have made some express warranties during the sale in Davis, an analysis relying alone on the contractual language disclaiming express warranties is erroneous. This appears to be what happened in Davis.
Plaintiffs in Davis alleged that the dealer created an express warranty by representing that the sale included a manufacturer’s warranty.38 Relying on the purchase agreement disclaimer language, the court disposed of this issue as follows:
Nowhere in the vehicle purchase order does LaFontaine make any express warranty. Rather, the vehicle purchase order recognizes the manufacturer’s warranty and then clearly disclaims any such warranty. Because LaFontaine did not make an express warranty of its own, the trial court erred in denying summary disposition on plaintiffs’ claim that defendants breached an express warranty.39
Without knowing what statements of fact, promises, or descriptions the dealer may have made regarding warranty work on the buyer’s new vehicle, there was no way of knowing what express warranties, if any, were made by the dealer. Therefore, the court’s reliance on the disclaimer language alone was improper. The Davis analysis dangerously leaves the incorrect impression that express warranties can be disclaimed merely by using disclaimer language. This misstep by the Davis court is magnified by the fact that there were several other more reasonable legal paths leading to the same result.
Under one approach, the court could have acknowledged that the purchase order language negating express warranties might be inoperative under MCL §440.2316(1) quoted above. It could then simply have stated that even if the dealer made an “affirmation of fact” indicating the car came with a manufacturer’s warranty thereby creating an express warranty, the representation was in fact true. Since the car did come with a manufacturer’s warranty, the dealer’s express warranty to that effect, if made, could not be the basis for a breach of express warranty claim. A single case from another jurisdiction notwithstanding,40 an express warranty that a new vehicle comes with a manufacturer’s warranty would not ordinarily obligate the dealer to perform warranty repairs in the event of the manufacturer’s subsequent bankruptcy.
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A second approach would involve reliance on the purchase agreement’s merger clause in conjunction with the express warranty disclaimer. Virtually all new car dealer contracts contain an integration or merger clause. A typical merger clause states that the written contract is the final understanding of the parties and that all prior agreements are superseded by the written contact. MCL §440.2316(1) makes the negation of express warranty disclaimer language subject to the UCC parol evidence rule.41 Under the parol evidence rule, prior or contemporaneous agreements are not admissible for the purpose of varying or contradicting a final written contract.42
The Davis court could have reasoned that even if the dealer’s statement that the car came with a manufacturer’s warranty could constitute an express warranty, the statement was inadmissible under the parol evidence rule. The Michigan Supreme Court had taken the relatively extreme position that “[r]eliance on pre-contractual representations is unreasonable as a matter of law when the contract contains an integration clause.43 Thus, an analysis relying on the merger clause in conjunction with the express warranty disclaimer would prevail as a matter of law even if the dealer had stated that the car came with a manufacturer’s warranty.44
Summary
As stated by the New Jersey Court in Zabriskie Chevrolet, Inc v Smith:45
For a majority of people, the purchase of a new car is a major investment, rationalized by the peace of mind that flows from its dependability and safety. Once their faith is shaken, the vehicle loses not only its real value in their eyes, but becomes an instrument whose integrity is substantially impaired and whose operation is fraught with apprehension.46