Attorneys for Appellant Attorneys for Appellee
Julia Blackwell Gelinas Scott M. Cohen
Robert B. Thornburg John D. Barker
Indianapolis, Indiana Chicago, Illinois
____________________________________________________________________________
__
In the
Indiana Supreme Court
_________________________________
No. 82S05-0406-CV-279
Hyundai Motor America, Inc.,
Appellant (Defendant below),
v.
Sandra Goodin,
Appellee (Plaintiff below).
_________________________________
Appeal from the Vanderburgh Superior Court, No. 82D03-0111-CP-3964
The Honorable Mary Margaret Lloyd, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 82A05-0303-
CV-155
_________________________________
February 22, 2005
Boehm, Justice.
We hold that a consumer may sue a manufacturer for economic loss based
on breach of the implied warranty of merchantability even if the consumer
purchased the product from an intermediary in the distribution chain.
There is no requirement of “vertical” privity for such a claim.
Facts and Procedural Background
On November 18, 2000, Sandra Goodin test drove a Hyundai Sonata at
AutoChoice Hyundai in Evansville, Indiana. The car was represented as new
and showed nineteen miles on the odometer. Goodin testified that when she
applied the brakes in the course of the test drive she experienced a
“shimmy, shake, pulsating type feel.” The AutoChoice salesperson told her
that this was caused by flat spots on the tires from extended inactivity
and offered to have the tires rotated and inspected. After this
explanation, Goodin purchased the Sonata for $22,710.00.
The manufacturer, Hyundai, provided three limited warranties: 1
year/12,000 miles on “wear items;” 5 years/60,000 miles “bumper to bumper;”
and 10 years/100,000 miles on the powertrain.[1] Hyundai concedes that
brake rotors, brake calipers, and brake caliper slides were subject to the
5 year/60,000 mile warranty covering “[r]epair or replacement of any
component originally manufactured or installed by [Hyundai] that is found
to be defective in material or workmanship under normal use and
maintenance.” To claim under this warranty, a vehicle must be serviced by
an authorized Hyundai dealer who is then reimbursed by Hyundai for any
necessary parts or labor.
Three days after the car was purchased, Goodin’s husband, Steven
Hicks, took it back to AutoChoice for the promised tire work. Goodin
testified that she continued to feel the shimmy but did nothing further for
a month. On December 22, she took the car to a different Hyundai dealer,
Bales Auto Mall, in Jeffersonville, Indiana, for an unrelated problem and
also made an appointment six days later for Bales to inspect the brakes.
Bales serviced the brake rotors for warping, but on May 1, 2001, Goodin
returned to Bales complaining that the vehicle continued to vibrate when
the brakes were applied. Bales found the rotors to be out of tolerance and
machined them. Eighteen days later Goodin again returned to Bales,
reporting that she still felt vibrations and for the first time also heard
a “popping” noise. Goodin told the service advisor at Bales that she
thought there may be a problem with the suspension, and Bales changed and
lubed the strut assembly. Eleven days later Goodin once more brought the
car to Bales reporting continued shimmy and also a “bed spring type” noise
originating from the brakes. The Bales mechanic was unable to duplicate
the brake problem, but balanced and rotated the tires as Goodin had
requested. One week later Goodin returned to Bales where she and Jerry
Hawes, Bales’s Service Manager, test drove the Sonata. The brake problem
did not occur during the test drive, but Hawes identified a noise from the
direction of the left front tire and repaired the rubber mounting bracket.
Goodin told Hawes that the brake problem had occurred about seventy
percent of the time. The problem was worse when it was wet or cool, was
consistently occurring when she drove down a steep hill near her home, and
was less frequent when a passenger’s weight was added. Goodin made
arrangements to leave the car with Hawes at Bales, but, according to Hawes,
over a several day period he could not duplicate the symptoms Goodin
reported.
On August 24, 2001, Goodin took her car back to her original dealer,
AutoChoice, reporting that the brakes “squeak and grind when applied.”
Goodin left the car with AutoChoice where the left front rotor was machined
and loose bolts on the front upper control arm were tightened. Goodin
testified that after this five-day procedure the brakes began to make the
same noises and vibrations even before she arrived home.
In October 2001 Goodin hired an attorney who faxed a letter to Hyundai
Motor America giving notice of her complaint and requesting a refund of the
purchase price. On November 13, 2001, Goodin filed a complaint against
Hyundai Motor America, Inc. alleging claims under the Magnuson-Moss
Warranty Act, 15 U.S.C. §§ 2301-2312, for breach of express warranty,
breach of implied warranty, and revocation of acceptance. On April 23,
2002, in anticipation of litigation, Goodin hired William Jones to inspect
her car. Jones noted that the odometer read 57,918 miles and the car was
still under warranty. Jones drove the car approximately five miles and
found “severe brake pulsation on normal stops” which “was worse on high
speed stops.” Although he did not remove the tires to inspect the brake
rotors, Jones opined that the rotors were warped and defective or there was
“a root cause that has not been discovered and corrected by the repair
facilities.” His ultimate conclusion was that the “vehicle was defective
and unmerchantable at the time of manufacture and unfit for operation on
public roadways.” Three weeks later, after the 5 year/60,000 mile warranty
had expired, Goodin’s husband, Hicks, replaced the rotors with new rotors
from a NAPA distributor.[2] After this repair, according to Hicks, the
pulsation went from “very bad” to “mild” and “less frequent.”
Steven Heiss, District Parts and Service Manager for Hyundai Motor
America served as the liaison between Hyundai and the dealers and provided
warranty training. If a dealer is not performing repairs correctly,
Hyundai, through its liaisons, addresses the problem. Heiss inspected
Goodin’s Sonata on October 21, 2002. At that point the Sonata had been
driven 77,600 miles. He testified that during his twenty-three mile test
drive he neither heard the noise described by Goodin nor felt any vibration
from the brakes. However, Heiss did hear a “droning noise” which he later
concluded was due to a failed left rear wheel bearing. He regarded this as
a serious problem and not one caused by abuse or misuse of the vehicle.
The wheel bearing would have been covered by the 5 year/60,000 mile
warranty. Before his inspection, Heiss had been told that the rotors had
been changed by Hicks five months earlier, and when Heiss measured the
rotors he found that they were out of standard.[3] Heiss testified a
miscast from the factory was one of a number of possible reasons for
damaged rotors.
At the conclusion of a two day trial, the jury was instructed on all
claims. Over defendants’ objection, the instructions on implied warranties
made no reference to a privity requirement. The jury returned a verdict
for Hyundai on Goodin’s breach of express warranty claim, but found in
favor of Goodin on her claim for breach of implied warranty of
merchantability. Damages of $3,000.00 were assessed and Goodin’s counsel
was later awarded attorneys’ fees of $19,237.50 pursuant to the fee
shifting provisions of the Magnuson-Moss Warranty Act.
Hyundai orally moved to set aside the verdict as contrary to law on
the ground that Goodin purchased the car from AutoChoice and therefore did
not enjoy vertical privity with Hyundai. The court initially denied that
motion, but the following day set aside the verdict, holding lack of
privity between Goodin and Hyundai precluded a cause of action for breach
of implied warranty. Goodin then moved to reinstate the verdict, and,
after briefing and oral argument, the trial court granted that motion on
the ground that Hyundai was estopped from asserting lack of privity.
Hyundai appealed, asserting: (1) it was not estopped from asserting a
defense of lack of privity; and (2) lack of vertical privity barred
Goodin’s recovery for breach of implied warranty of merchantability. The
Court of Appeals agreed on both points, holding that Hyundai was not
estopped from asserting that privity was an element of Goodin’s prima facia
case, and, because privity was lacking, Goodin did not prove her case.
Hyundai Motor Am., Inc. v. Goodin, 804 N.E.2d 775, 781 (Ind. Ct. App.
2004). The Magnuson-Moss Warranty Act looks to state law for the contours
of implied warranties. The Court of Appeals was “not unsympathetic” to
Goodin’s claims but regarded itself as bound by a footnote in Martin
Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1084 n.2 (Ind. 1993),
where this Court stated: “In Indiana, privity between the seller and the
buyer is required to maintain a cause of action on the implied warranties
of merchantability.” Id. at 784. We granted transfer. Hyundai Motor Am.,
Inc. v. Goodin, 812 N.E.2d 808 (Ind. 2004).
Vertical Privity
A. The Relationship Between Federal and State Law in Claims Based on
Implied Warranty of Merchantability
This case is brought under a federal statute. The Magnuson-Moss
Warranty Act, 15 U.S.C. §§ 2301-2312 (2000), provides a federal right of
action for consumers to enforce written or implied warranties where they
claim to be damaged by the failure of a supplier, warrantor, or service
contractor to comply with any obligation under that statute or under a
written warranty, implied warranty, or service contract. The Act also
limits the extent to which manufacturers who give express warranties may
disclaim or modify implied warranties, but looks to state law as the source
of any express or implied warranty. Schimmer v. Jaguar Cars, Inc., 384
F.3d 402, 405 (7th Cir. 2004). As the Seventh Circuit recently put it:
“Because §§ 2308 and 2304(a) do not modify, or discuss in any way, a
state’s ability to establish a privity requirement, whether privity is a
prerequisite to a claim for breach of implied warranty under the Magnuson-
Moss Act therefore hinges entirely on the applicable state law.” Voelker
v. Porsche Cars N. Am., Inc., 353 F.3d 516, 525 (7th Cir. 2003).
Goodin’s claim is for breach of the implied warranty of
merchantability, not for violation of any substantive provision of the
federal statute. Accordingly, her claim lives or dies on the resolution of
an issue of state law, specifically whether Indiana requires privity
between buyer and manufacturer for a claim of breach of implied warranty.
B. Standard of Review
Hyundai does not dispute that under circumstances applicable here
Indiana recognizes implied warranties of fitness for a particular purpose
and implied warranties of merchantability. Ind. Code §§ 26-1-2-314, 315
(2003). Rather, Hyundai contends that under Indiana law, a buyer must be
in vertical privity with a seller to impose liability on the seller for
breach of an implied warranty. Whether Indiana law requires privity to
sustain an action for breach of an implied warranty is purely a question of
law and therefore is reviewed under a de novo standard. See Griffith v.
State, 788 N.E.2d 835, 839 (Ind. 2003). An implied warranty of
merchantability imposed by operation of law is to be liberally construed in
favor of the buyer. Frantz v. Cantrell, 711 N.E.2d 856, 859 (Ind. Ct. App.
1999).
C. Origins of Privity
Indiana has adopted the Uniform Commercial Code, notably its provision
that: “A warranty that the goods shall be merchantable is implied in a
contract for their sale if the seller is a merchant with respect to goods
of that kind. . . .” Ind. Code § 26-1-2-314(1) (2004). Hyundai asserts,
and the Court of Appeals found, Indiana law requires vertical privity
between manufacturer and consumer when economic damages[4] are sought.
Hyundai, 804 N.E.2d at 783. Goodin argues that traditional privity of
contract between the consumer and manufacturer is not required for a claim
against a manufacturer for breach of the implied warranty of
merchantability, especially if the manufacturer provides a Magnuson-Moss
express warranty with the product.
Privity originated as a doctrine limiting tort relief for breach of
warranties. The lack of privity defense was first recognized in
Winterbottom v. Wright, 10 M. & W. 109, 152 Eng Rep 402 (Ex. 1842). 2
Hawkland, UCC Series, § 2-318:1 at 771 (2001). In that case, the court
sustained a demurrer to a suit by an injured coachman for breach of
warranty by a third party who contracted with the owner to maintain the
coach. In this century, however, MacPherson v. Buick Motor Co., 217 N.Y.
382, 111 N.E. 1050 (1916), and Henningsen v. Bloomfield Motors, Inc., 32
N.J. 358, 161 A.2d 69 (1960), established that lack of privity between an
automobile manufacturer and a consumer would not preclude the consumer’s
action for personal injuries and property damage caused by the negligent
manufacture of an automobile. “Vertical” privity typically becomes an
issue when a purchaser files a breach of warranty action against a vendor
in the purchaser’s distribution chain who is not the purchaser’s immediate
seller. Hawkland, supra, at 771. Simply put, vertical privity exists only
between immediate links in a distribution chain. Rheem Mfg. Co. v. Phelps
Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 n.8 (Ind. Ct. App.
1999). A buyer in the same chain who did not purchase directly from a
seller is “remote” as to that seller. Id. “Horizontal” privity, in
contrast, refers to claims by nonpurchasers, typically someone who did not
purchase the product but who was injured while using it. 1 James J. White
& Robert S. Summers, Uniform Commercial Code 585 (4th ed. 1995). Goodin
purchased her car from a dealership and is thus remote from the
manufacturer and lacks “vertical” privity with Hyundai.
“Although warranty liability originated as a tort doctrine, it was
assimilated by the law of contracts and ultimately became part of the law
of sales.” Hawkland, supra, at 771. But “privity is more than an accident
of history. It permitted manufacturers and distributors to control in some
measure their risks of doing business.” Richard W. Duesenberg, The
Manufacturer’s Last Stand: The Disclaimer, 20 Bus. Law 159, 161 (1964).
Because vertical privity involves a claim by a purchaser who voluntarily
acquired the goods, it enjoys a stronger claim to justification on the
basis of freedom of contract or consensual relationship. It nevertheless
has come under criticism in recent years, and this is the first opportunity
for this Court to give full consideration to this issue.
D. Indiana Case Law
Although this Court did not address the issue, even before the
Products Liability Act, both the Court of Appeals and federal courts
applying Indiana law held that a claimant was not required to prove privity
to succeed in a personal injury action in tort based on breach of implied
warranties. Lane v. Barringer, 407 N.E.2d 1173, 1175 (Ind. Ct. App. 1980);
Dagley v. Armstrong Rubber Co., 344 F.2d 245, 252 (7th Cir. 1965) (drawing
support from J. I. Case Co. v. Sandefur, 245 Ind. 213, 221-22, 197 N.E.2d
519, 523 (1964)); Neofes v. Robertshaw Controls Co., 409 F. Supp. 1376,
1379 (S.D. Ind. 1976). Three federal court decisions drew on these
decisions to conclude that privity of contract is not required in Indiana
to maintain a cause of action for personal injury based on breach of an
implied warranty. See Filler v. Rayex Corp., 435 F.2d 336, 337-38 (7th
Cir. 1970) (Indiana law does not require privity between manufacturer and
plaintiff under theories of implied warranty, strict liability or
negligence); Dagley, 344 F.2d at 254; Karczewski v. Ford Motor Co., 382 F.
Supp. 1346, 1352 (N.D. Ind. 1974).
However, several Court of Appeals decisions subsequently held that
recovery of economic loss for alleged failure of the expected benefit of
the bargain based on breach of implied warranty under the UCC required a
buyer to be in privity of contract with the seller. See Candlelight Homes,
Inc. v. Zornes, 414 N.E.2d 980, 982 (Ind. Ct. App. 1981); Lane, 407 N.E.2d
at 1173; Richards v. Goerg Boat & Motors Co., 179 Ind. App. 102, 384 N.E.2d
1084 (1979). Corbin v. Coleco Industries, 748 F.2d 411, 415 (7th Cir.
1984), took the view that “[s]ubsequent Indiana cases have shed new light
on Indiana’s interpretation of implied warranty under the UCC, thus making
it clear that privity is indeed required.”
This Court has mentioned the common law privity requirement in the
context of actions sounding in contract only once, and that in a footnote.
Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993),
addressed negligence and express and implied warranty claims by a farmer
against both the direct seller and the grower of seed that allegedly
damaged the farmer’s crops. The footnote cited to the UCC and two Court of
Appeals decisions and other courts have taken the footnote as settled
Indiana law on this issue. As the Court of Appeals put it in its decision
in this case:
[T]he [footnote] indicates our supreme court’s unequivocal acceptance
that privity between a consumer and a manufacturer is required in
order to maintain a cause of action for breach of an implied warranty
of merchantability. . . . Any change in the law removing the privity
requirement in implied warranty actions should be left to that court.
. . . To the extent Goodin argues that this result is inequitable, we
are not entirely unsympathetic. Whether the cons of the vertical
privity rule outweigh the pros is something for either our supreme
court or the General Assembly to address.
Hyundai Motor America, Inc. v. Goodin, 804 N.E.2d 775, 784, 788 (Ind. Ct.
App. 2004). In Martin Rispens, the implied warranty claims were rejected
based on an effective disclaimer of implied warranty, under Indiana Code
section 26-1-2-316(2) which permits parties to agree to exclude or modify
implied warranties if done in a particular manner. The farmer did not
present privity as an issue on transfer to this Court and neither party
briefed it. It was not necessary to the decision. Accordingly, the
language in Martin Rispens, though often cited, is dicta and we accept the
invitation from the Court of Appeal to reconsider it.
Indiana law, as developed in the Court of Appeals, has already eroded
the privity requirement to some degree. In Thompson Farms, Inc. v. Corno
Feed Products, Inc., 173 Ind. App. 682, 366 N.E.2d 3 (1977), the Court of
Appeals permitted the plaintiff to recover on an implied warranty where it
was shown that the contractual arrangements between the manufacturer and
the dealer who sold to the plaintiff created an agency relationship; and
the manufacturer’s agents participated significantly in the sale both
through advertising and personal contact with the buyer. Under those
circumstances the Court of Appeals held that the manufacturer was a
“seller” within the meaning of Indiana Code section 26-1-2-314. Richards,
179 Ind. App. at 112, 384 N.E.2d at 1092, involved a defective boat sold by
a dealer where the manufacturer’s agents also engaged in personal contact
with the buyer by giving demonstrations and attempting to adjust the loss
after the sale. The Court of Appeals then, following Thompson Farms, Inc.,
held that the participation in the sale by the manufacturer was sufficient
to bring it into the transaction as a seller within the requirements of
Indiana Code section 26-1-2-314. However, if the plaintiff could not show
perfect vertical privity or an exception to the rule, then the plaintiff
could not prove the claim. Candlelight Homes, 414 N.E.2d at 982.
E. Statutory Developments in Indiana
The Product Liability Act, Indiana Code § 34-20-2-1 et seq. (1999),
does not require a personal injury plaintiff to prove vertical privity in
order to assert a products liability claim against the manufacturer. See
Lane, 407 N.E.2d at 1175. Even before the Product Liability Act in 1978,
the requirement of privity of contract in warranty actions in Indiana began
to erode in 1963 with the passage of the Uniform Commercial Code under
section 2-318:
A seller’s warranty whether express or implied extends to any natural
person who is in the family or household of his buyer or who is a
guest in his home if it is reasonable to expect that such person may
use, consume or be affected by the goods and who is injured in person
by breach of the warranty. A seller may not exclude or limit the
operation of this section.
I.C. § 26-1-2-318. Section 2-318 was taken verbatim from the UCC as
originally prepared by the Uniform Code Committee Draftsmen in 1952. It
eliminated “horizontal” privity as a requirement for warranty actions.
However, that version of 2-318 took no position on the requirement of
vertical privity. White & Summers, supra, at 586.
The purpose of the original version of section 2-318, which remains
unchanged in Indiana today, was to give standing to certain non-privity
plaintiffs to sue as third-party beneficiaries of the warranties that a
buyer received under a sales contract. Hawkland, supra, at 769. That
version of section 2-318 provided only that the benefit of a warranty
automatically extended to the buyer’s family, household, and houseguests.
Id., supra, at 775. It was intended to, and did, accomplish its goal of
“freeing any such beneficiaries from any technical rules as to [horizontal]
privity.” U.C.C. § 2-318 cmt. 2. Some states refused to enact this
version of section 2-318, and others adopted nonuniform versions of the
statute. Hawkland, supra, at 777. In 1966, in response to this
proliferation of deviant versions of a purportedly uniform code, the
drafters proposed three alternative versions of section 2-318. Only
California, Louisiana, and Texas have failed to adopt one of these three
versions of section 2-318.[5]
The majority of states, including Indiana, retained or adopted the
1952 version of section 2-318, which now appears in the Uniform Commercial
Code as “Alternative A.”[6] Alternative B provides that “any natural
person who may reasonably be expected to use, consume or be affected by the
goods and who is injured in person by breach of warranty” may institute a
breach of warranty action against the seller. U.C.C. § 2-318 cmt. 3.
Alternative B expands the class of potential plaintiffs beyond family,
household, and guests, and also implicitly abolishes the requirement of
vertical privity because the seller’s warranty is not limited to “his
buyer” and persons closely associated with that buyer.[7] See Hawkland,
supra, at 789. Alternative B is applicable only to claims for personal
injury.
Because Alternatives A and B of 2-318 are limited to cases where the
plaintiff is “injured in person,” they do not authorize recovery for
such loss. But neither do they bar a non-privity plaintiff from
recovery against such a remote manufacturer for direct economic loss.
. . . Thus, Alternatives A and B of 2-318 do not prevent a court from
abolishing the vertical privity requirement even when a non-privity
buyer seeks recovery for direct economic loss.
White & Summers, supra, at 593 (emphasis in original).
Alternative C is the most expansive in eliminating the lack-of-privity
defense. White & Summers, supra, at 593; Hawkland, supra, at 792. It
provides that: “A seller’s warranty whether express or implied extends to
any person who may reasonably be expected to use, consume or be affected by
the goods and who is injured by breach of the warranty.” Hawkland, supra,
at 769. Alternative C expands the class of plaintiffs to include other
nonpurchasers such as the buyer’s employees and invitees, and bystanders.
Jane M. Draper, Annotation, Third Party Beneficiaries of Warranties Under
UCC § 2-318, 100 A.L.R.3d 743 at §§ 5-6 (1980). Alternative C also
eliminates the vertical privity requirement, but is not restricted to
“personal” injury. Because Alternative C refers simply to “injury,”
plaintiffs sustaining only property damage or economic loss in some states
have been held to have standing to sue under this language. See, e.g.,
Milbank Mut. Ins. Co. v. Proksch, 244 N.W.2d 105 (Minn. 1976) (allowing
purchaser’s father to recover for residential property damage caused when
their Christmas tree caught fire). This is consistent with the stated
objective of the drafters that the third alternative follow “the trend of
modern decisions as indicated by Restatement of Torts 2d § 402A (Tentative
Draft No. 10, 1965) in extending the rule beyond injuries to the person.”
Hawkland, supra, at 770; But see Nebraska Innkeepers, Inc. v. Pittsburgh-
Des Moines Corp., 345 N.W.2d 124, 129 (Iowa 1984) (holding Alternative C
did not permit non-privity plaintiffs to seek recovery solely for economic
loss).
The commentaries to the UCC were careful to explain that the these
alternatives were not to be taken as excluding the development of the
common law on the issue of vertical privity:
[Alternative A] expressly includes as beneficiaries within its
provisions the family, household and guests of the purchaser. Beyond
this, the section in this form is neutral and is not intended to
enlarge or restrict the developing case law on whether the seller’s
warranties, given to his buyer who resells, extend to other persons in
the distributive chain.
U.C.C § 2-318, cmt. n.3.
F. Privity as an Obsolete Requirement as Applied to Consumer Goods
There is a split of authority in other jurisdictions with similar or
identical versions of section 2-318 on the availability of implied warranty
claims by remote purchasers, particularly if only economic loss is claimed,
as in the present case.[8] Courts of other jurisdictions that have
retained or adopted Alternative A note that the statute speaks only to
horizontal privity, and is silent as to vertical privity. See, e.g.,
Morrow v. New Moon Homes, Inc., 548 P.2d 279, 287 (Alaska 1976); Kassab v.
Central Soya, 246 A.2d 848, 855 (Pa. 1968), overruled on other grounds,
AM/PM Franchise Ass’n v. Atlantic Richfield Co., 584 A.2d 915, 926 (Pa.
1990). As the Pennsylvania Supreme Court put it: “Merely to read the
language [of § 2-318] is to demonstrate that the code simply fails to treat
this problem. . . . There thus is nothing to prevent this court from
joining in the growing number of jurisdictions which, although bound by the
code, have nevertheless abolished vertical privity in breach of warranty
cases.” Kassab, 246 A.2d at 856 (emphasis in original). Indiana has not
legislated on this issue since 1966 when the UCC adopted these three
alternatives. More recently, the “Buyback Vehicle Disclosure” statute
eliminated the lack-of-privity defense for actions under that section. See
I.C. § 24-5-13.5-13(c) (1995). In short, the General Assembly in keeping
Alternative A left to this Court the issue of to what extent vertical
privity of contract will be required.
Courts that have abolished vertical privity have cited a variety of
reasons. Principal among these is the view that, in today’s economy,
manufactured products typically reach the consuming public through one or
more intermediaries. As a result, any loss from an unmerchantable product
is likely to be identified only after the product is attempted to be used
or consumed. Hininger v. Case Corp. 23 F.3d 124, 127 (5th Cir. 1994) (In
Texas, the privity requirement is not needed to assert a claim for breach
of an implied warranty against a remote manufacturer of a finished
product); Reed v. City of Chicago, 263 F. Supp. 2d 1123, 1125 (N.D. Ill.
2003) (Under Alternative A of 2-318, privity is no longer an absolute
requirement for breach of warranty actions. Since benefit of paper gowns
were for the protection of potentially suicidal detainees privity between
the detainee and the manufacturer was not required for the warranty to
apply); Hubbard v. General Motors Corp., 39 U.C.C.2d (Callaghan) 83
(S.D.N.Y. 1996) (buyer from dealer could sue manufacturer for direct
economic loss for defective braking system in truck). Others have cited
the concern that privity encourages thinly capitalized manufacturers by
insulating them from responsibility for inferior products. See Groppel
Co., Inc. v. United States Gypsum Co., 616 S.W.2d 49, 59 (Mo. Ct. App.
1981). Yet others have focused on the point that if implied warranties are
effective against remote sellers it produces a chain of lawsuits or
crossclaims against those up the distribution chain. See Old Albany
Estates, Ltd. v. Highland Carpet Mills, Inc., 604 P.2d 849, 851-52 (Okla.
1979) (“To require vertical privity results in perpetuating a needless
chain of actions whereby each buyer must seek redress from his immediate
seller until the actual manufacturer is eventually reached.”). And some
focus on the reality in today’s world that manufacturers focus on the
consumer in communications promoting the product. See Spring Motors
Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 676-77 (N.J. 1985)
(“Eliminating the requirement of vertical privity is particularly
appropriate in the present action where Spring Motors read advertisements
published by Clark, specifically requested Clark transmissions, expected
the transmissions to be incorporated into trucks to be manufactured by
Ford, contracted with Ford only, and now seeks to recover its economic
loss.”).
Finally, some jurisdictions have abolished privity in warranty actions
where only economic losses were sought based on the notion that there is
“no reason to distinguish between recovery for personal and property
injury, on the one hand, and economic loss on the other.” Hiles Co. v.
Johnston Pump Co., 560 P.2d 154, 157 (Nev. 1977); accord Salvador v.
Atlantic Steel Boiler Co., 389 A.2d 1148 (Pa. Super. Ct. 1978). A variance
on this theme is the view that abolishing privity “simply recognizes that
economic loss is potentially devastating to the buyer of an unmerchantable
product and that it is unjust to preclude any recovery from the
manufacturer for such loss because of a lack of privity, when the slightest
physical injury can give rise to strict liability under the same
circumstances.” Groppel, 616 S.W.2d at 59. One court preserving the
privity requirement expressed the view that “there may be cases where the
plaintiff may be unfairly prejudiced by the operation of the economic loss
rule in combination with the privity requirement.” Ramerth v. Hart, 983
P.2d 848, 852 (Idaho 1999).
In Indiana, the economic loss rule applies to bar recovery in tort
“where a negligence claim is based upon the failure of a product to perform
as expected and the plaintiff suffers only economic damages.” Martin
Rispens, 621 N.E.2d at 1089. Possibly because of the economic loss rule,
Goodin did not raise a negligence claim here. Furthermore, at oral
argument Goodin’s attorney pointed to the warranty disclaimer in the
Buyer’s Order as a bar to Goodin’s ability to sue her direct seller,
AutoChoice, which could then have sued Hyundai for reimbursement. This
disclaimer, Goodin contends, precluded a chain of claims ultimately
reaching the manufacturer. Therefore, Goodin claims that if this Court
does not abolish the vertical privity requirement she will be left without
a remedy for Hyundai’s breach of its implied warranty of merchantability,
and Hyundai’s implied warranty becomes nonexistent in practical terms.
The basis for the privity requirement in a contract claim is
essentially the idea that the parties to a sale of goods are free to
bargain for themselves and thus allocation of risk of failure of a product
is best left to the private sector. Otherwise stated, the law should not
impose a contract the parties do not wish to make. The Court of Appeals
summarized this view well:
Generally privity extends to the parties to the contract of
sale. It relates to the bargained for expectations of the buyer and
seller. Accordingly, when the cause of action arises out of economic
loss related to the loss of the bargain or profits and consequential
damages related thereto, the bargained for expectations of buyer and
seller are relevant and privity between them is still required.
Implied warranties of merchantability and fitness for a
particular use, as they relate to economic loss from the bargain,
cannot then ordinarily be sustained between the buyer and a remote
manufacturer.
Richards, 179 Ind. App. at 112, 384 N.E.2d at 1092 (citations omitted). We
think that this rationale has eroded to the point of invisibility as
applied to many types of consumer goods in today’s economy. The UCC
recognizes an implied warranty of merchantability if “goods” are sold to
“consumers” by one who ordinarily deals in this product. Warranties are
often explicitly promoted as marketing tools, as was true in this case of
the Hyundai warranties. Consumer expectations are framed by these legal
developments to the point where technically advanced consumer goods are
virtually always sold under express warranties, which, as a matter of
federal law run to the consumer without regard to privity. 15 U.S.C. §
2310. Magnuson-Moss precludes a disclaimer of the implied warranty of
merchantability as to consumer goods where an express warranty is given.
15 U.S.C. § 2308. Given this framework, we think ordinary consumers are
entitled to, and do, expect that a consumer product sold under a warranty
is merchantable, at least at the modest level of merchantability set by UCC
section 2-314, where hazards common to the type of product do not render
the product unfit for normal use. Cf. Allgood v. R.J. Reynolds Tobacco
Co., 80 F.3d 168, 171 (5th Cir. 1996) (under Texas law, only actual sellers
are liable, not trade associations nor public relations agents who play a
role in distribution. “Even where a party has promoted a product, and made
promises regarding that product, if the party is not the actual seller a
claim for breach of warranty will not lie.”).
Even if one party to the contract—the manufacturer—intends to extend
an implied warranty only to the immediate purchaser, in a consumer setting,
doing away with the privity requirement for a product subject to the
Magnuson-Moss Warranty Act, rather than rewriting the deal, simply gives
the consumer the contract the consumer expected. The manufacturer, on the
other hand is encouraged to build quality into its products. To the extent
there is a cost of adding uniform or standard quality in all products, the
risk of a lemon is passed to all buyers in the form of pricing and not
randomly distributed among those unfortunate enough to have acquired one of
the lemons. Moreover, elimination of privity requirement gives consumers
such as Goodin the value of their expected bargain, but will rarely do more
than duplicate the Products Liability Act as to other consequential
damages. The remedy for breach of implied warranty of merchantability is
in most cases, including this one, the difference between “the value of the
goods accepted and the value they would have had if they had been as
warranted.” I.C. § 26-1-2-714(2). This gives the buyer the benefit of the
bargain. In most cases, however, if any additional damages are available
under the UCC as the result of abolishing privity, Indiana law would award
the same damages under the Products Liability Act as personal injury or
damage to “other property” from a “defective” product. Gunkel v.
Renovations, Inc., 2005 W.L. 236630 (Feb. 01, 2005).
For the reasons given above we conclude that Indiana law does not
require vertical privity between a consumer and a manufacturer as a
condition to a claim by the consumer against the manufacturer for breach of
the manufacturer’s implied warranty of merchantability.
Conclusion
The judgment of the trial court is affirmed.
Shepard, C.J., and Dickson, Sullivan, and Rucker, JJ. concur.
-----------------------
[1] On the “Buyers Order,” AutoChoice Hyundai included the following
preprinted language in capital letters:
All warranties, if any, by a manufacturer or supplier other than
dealer are theirs, not dealer’s, and only such manufacturer or other
supplier shall be liable for performance under such warranties, unless
dealer furnishes buyer with a separate written warranty made by dealer
on its own behalf. Dealer hereby disclaims all warranties, express or
implied, including any implied warranties of merchantability or
fitness for a particular purpose, on all goods and services sold by
DEALER. . . .
[2] Hicks is an A.C. Certified Master Engine Machinist and Diesel Fuel
Technician who had been trained in brakes during his certification process.
[3] Hyundai’s minimum standard thickness for rotors is 22.4 millimeters and
the rotors on Goodin’s car (bought from NAPA and installed by Hicks)
measured 21.9 and 22 millimeters.
[4] In Reed v. Central Soya Co., Inc., 621 N.E.2d 1069, 1074 (Ind. 1993),
this Court defined economic damages under Indiana law as “the diminution in
the value of a product and consequent loss of profits because the product
is inferior in quality and does not work for the general purposes for which
it was manufactured and sold.” In this case, Goodin seeks only direct
economic damages the decreased value of the Sonata by reason of the
allegedly defective brakes. Goodin seeks the difference between the actual
value of the goods accepted and the value they would have had if they had
been as warranted. See I.C. § 26-1-2-714(2). Damages can also be measured
by the cost of replacement or the cost of repair. Rheem Mfg. Co. v. Phelps
Heating & Air Conditioning, Inc., 746 N.E.2d 941, 955-56 (Ind. 2001).
[5] Texas has adopted a statute that leaves questions of horizontal and
vertical privity for the courts. Tex. Bus. & Com. Code § 2.318 (2004)
(“This chapter does not provide whether anyone other than a buyer may take
advantage of an express or implied warranty of quality made to the buyer or
whether the buyer or anyone entitled to take advantage of a warranty made
to the buyer may sue a third party other than the immediate seller for
deficiencies in the quality of the goods. These matters are left to the
courts for their determination.”) Louisiana has never enacted any part of
Article 2 of the Uniform Commercial Code.
[6] Alternative A has been adopted in the following states in addition to
Indiana: Alaska, Arizona, Arkansas, Connecticut, District of Columbia,
Florida, Georgia, Idaho, Illinois, Kentucky, Maryland, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee,
Washington, West Virginia, and Wisconsin. See Hawkland, supra, at 778 n.
1. The Florida statute is a nonstandard version of Alternative A, and
includes the purchaser’s employees among those entitled to assert implied
warranty. Fla. Stat. § 672.318 (2004). In addition, case law in Illinois
and Pennsylvania has expanded the class of potential third party
beneficiaries and defendants. See, e.g., Whitaker v. Lian Feng Mach. Co.,
509 N.E.2d 591, 595 (Ill. App. Ct. 1987); and Salvador v. Atlantic Steel
Boiler Co., 319 A.2d 903, 906 (Pa. 1974).
[7] Indiana Code section 26-1-2-103(1)(a) defines “buyer” as “a person who
buys or contracts to buy goods” and section 26-1-2-103(1)(d) defines
“seller” as “a person who sells or contracts to sell goods.” Indiana’s
version of the U.C.C. restricts those terms to direct buyers and direct
sellers.
[8] Several jurisdictions that have adopted Alternative A have abolished
privity. See Morrow v. New Moon Homes, 548 P.2d 279, 291-92 (Alaska 1976);
Manheim v. Ford Motor Co., 201 So. 2d 440 (Fla. 1967); Groppel Co., Inc. v.
U.S. Gypsum Co., 616 S.W.2d 49, 58 (Mo. Ct. App. 1981) (abolishing vertical
privity and extending implied warranty to remote purchasers even when only
economic loss is claimed); Peterson v. N. Am. Plant Breeders, 354 N.W.2d
625, 631 (Neb. 1984); Hiles Co. v. Johnston Pump Co., 560 P.2d 154, 157
(Nev. 1977); Spring Motors Distrib., Inc. v. Ford Motor Co., 489 A.2d 660,
676 (N.J. 1985); Old Albany Estates Ltd. v. Highland Carpet Mills, Inc.,
604 P.2d 849, 852 (Okla. 1979); Spagnol Enters., Inc. v. Digital Equipment
Corp., 568 A.2d 948, 952 (Pa. 1989); Dawson v. Canteen Corp., 212 S.E.2d
82, 82-83 (W. Va. 1975).
Others have retained the common law privity rule. See Flory v.
Silvercrest Indus., 633 P.2d 383, 388 (Az. 1981); Ramerth v. Hart, 983 P.2d
848, 852 (Idaho 1999) (upheld vertical privity requirement but left open
the possibility of a different conclusion if the combination of the privity
requirement and the economic loss rule proved unjust); Presnell Constr.
Managers, Inc. v. EH Constr., LLC, 134 S.W.3d 575, 579 (Ky. 2004); Energy
Investors Fund, L.P. v. Metric Constructors, Inc., 525 S.E.2d 441, 446
(N.C. 2000); Hupp Corp. v. Metered Washer Serv., 472 P.2d 816 (Or. 1970);
Messer Griesheim Indus. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457, 463
(Tenn. Ct. App. 2003); City of La Crosse v. Schubert, Schroder &
Associates, Inc., 240 N.W.2d 124, 126 (Wis. 1976), overruled on other
grounds, Daanen & Janssen v. Cedarapids, Inc., 573 N.W.2d 842 (Wis. 1998).