I recently visited 2 different dealerships where I
noticed that all of their used vehicles, other than cars that were covered by
manufacturer’s warranties, were being sold “As-Is”. One of the dealers, a
high-line establishment, had a number of very expensive pre-owned vehicles
being sold without any warranty, including a low-mileage Bentley selling for almost
$120,000. Maybe it’s just me, but I figured that a potential buyer might wonder
why they would be expected to spend that kind of money with a dealer that
didn’t feel it necessary to stand behind their vehicles.
Being nosy, I had to ask the dealers’ staff “what
are you thinking?” After weaving through the employees that responded “I don’t know,
that’s just the way we do things here”, I was able to find the decision-makers.
In both instances, they expressed to me that they opted for the “As Is” policy
to protect themselves from potential warranty claims from customers. Now I’m
all for dealers protecting themselves, but unfortunately, automotive law is not
that simple and “protecting yourself" can be far more challenging than just
slapping an As-Is guide on the window.
Rarely a day goes by without a dealer somewhere
receiving a letter or lawsuit regarding an alleged breach of warranty. The federal
Magnuson-Moss Warranty Act, the Uniform Commercial Code (UCC) and various state
laws (including used car Lemon Laws) all govern warranties on motor vehicles. Breach
of warranty claims are extremely common and can lead to serious legal
consequences for a dealer.
Following is a basic review of used car warranty
issues for dealers. The information is based on federal laws and is just an elementary
overview. You should consult with your legal counsel for an extensive review of
the laws pertinent to your state.
Warranties
An EXPRESS WARRANTY is often given in the form of a
specific, written "Warranty" document. However, a warranty may also arise by
operation of law based upon the seller's description of the goods, and perhaps
their source and quality, and any material deviation from that specification
would violate the guarantee. For
example, an advertisement describing a product is often full of express
warranties; the product must substantially conform to what is advertised. An express warranty can be made orally, in
writing and without the intent of the seller to actually create the warranty. Any oral promise made to a customer regarding
the condition of a vehicle may constitute an express warranty. Consider
this scenario: While negotiating
with a customer, the sales consultant states, “This vehicle is in great shape. Our
service department completely reconditioned it before we put it on the lot. If
you have any problems, believe me, we’ll take care of it.” The customer
subsequently purchased the vehicle without a written warranty. If the vehicle
breaks down shortly after the sale, the dealership will likely be responsible
for repairs since an express warranty was created by the sales consultant’s
oral promises.
An IMPLIED WARRANTY is one that arises from the
nature of the transaction, and the inherent understanding by the buyer, rather
than from the express representations of the seller. What many dealers don’t
understand is that even though they may give a “power-train only” warranty or
service contract, they may still be responsible for other problems that
develop. A dealership could find itself in a position of having to make
extensive repairs that aren’t covered by the warranty or service contract as a
result of these implied warranties.
There are two types of implied warranties: the Implied Warranty of Merchantability and the Implied Warranty of Fitness for
a Particular Purpose. As a general rule, an Implied Warranty of Merchantability is included with the sale of a
used vehicle, unless it is expressly disclaimed by name, or the sale is
identified with the phrase “As Is" or “With All Faults." To be considered
"merchantable", the vehicle must reasonably conform to an ordinary
buyer's expectations, i.e., that it is fit for the ordinary purposes for which
a vehicle is used. What is meant by
“merchantable” may vary by the age of the vehicle. For example, a new vehicle
would be expected to be free of significant defects for at least the length of
its factory warranty or longer while a high-mileage older vehicle would be held
to a lesser standard. To be merchantable, a vehicle may be required to meet safety
standards, be fully operational with all accessories in working order, and have
no known mechanical problems at the time of sale other than those inherent in a
vehicle based upon its age and mileage.
The Warranty of Fitness for a Particular Purpose is implied
when a buyer relies upon the seller to select the goods to fit a specific
request. For instance, when a buyer asks a dealer to provide a vehicle that is
suitable for towing a boat or trailer and relies on the expertise of the dealer
to supply a vehicle suitable for that purpose.
Generally,
a dealer who wants to disclaim implied warranties must do so specifically. Some
states limit or prohibit the elimination of implied warranties, but in many cases, implied warranties may be
disclaimed on a used vehicle by checking the “AS IS – No Warranty “box on the
Buyer’s Guide. However, a conspicuous disclaimer may also need to be included
in the sale contract as some states may require using special language
and/or a document other than the Guide.
Other regulations state that when a written warranty of any duration is given
with a vehicle purchase, or a service contract is entered into within 90 days
of the sale, a dealer may not be allowed to waive the implied warranty. Again, it is important to have any disclaimers
reviewed by experienced legal counsel.
The duration of implied warranties may vary based
upon federal and state laws, the sales price, age, and mileage of the vehicle. For
instance, according to Magnuson-Moss, if a dealer gives its own written
warranty, the duration of the implied warranty may be limited in duration to
the duration of the written warranty provided the limitation is set forth clearly
and prominently on the face of the warranty. However, if no written warranty is
given, but a service contract is entered into, then the duration of the implied
warranty of merchantability may not be limited. State laws may impose
additional conditions on the duration of implied warranties, but as a general
rule of thumb, the newer and more expensive the model, the longer the implied
warranty will remain in force.
Used Car Rule and Buyers
Guides
Most
dealers who sell used vehicles must comply with the Federal Trade Commission's
(FTC) Used Car Rule. The Rule regulates
the use of Buyers Guides and declares that it is a deceptive act or practice
for a dealer to:
- Misrepresent the mechanical condition of a used vehicle.
- Misrepresent the terms of any warranty offered in connection with the sale of a used vehicle.
- Represent that a used vehicle is sold with a warranty when it is not.
- Fail to disclose, prior to sale, that a used vehicle is sold without any warranty.
- Fail to make available, prior to sale, the terms of any written warranty offered in connection with the sale of a used vehicle.
A Buyers Guide
must be posted before a used vehicle is “offered” for sale. A vehicle is
offered for sale when it is displayed for sale or a customer is allowed to inspect
it for the purpose of buying it, even if the car is not fully prepared for
delivery. The exact wording and form of the Buyers Guide has been prescribed by
the FTC, and should not be altered.
The
Buyers Guide must be posted prominently and conspicuously on or in the vehicle.
This means it must be in plain view and both sides must be visible. The Guide may
be hung from the rear-view mirror inside the car or on a side-view mirror
outside the car. It can also be placed under a windshield wiper or attached to
a side window. A Buyers Guide in a glove compartment, trunk or under the seat
is not conspicuous because it is not in plain sight. The Guide may be removed for
a test drive, but must be replaced as soon as the test drive is over.
The
Buyers Guide must specify whether the vehicle is being sold "as is"
or with a warranty. In states that limit or prohibit the elimination of implied
warranties, the "Implied Warranties Only" version must be used. If a
warranty is offered, each system that's covered must be specified. The Rule
prohibits the use of shorthand phrases such as "drive train" or
"power train" because it's not always clear what specific components
are included in the "power train" or "drive train."
If
a dealer’s warranty requires buyers to pay a deductible, the warranty document
should disclose the deductible amount and the details as to when and under what
circumstances the deductible must be paid.
If
the manufacturer's warranty hasn't expired, this fact may be disclosed by checking
the "Warranty" box and including this disclosure in the "systems
covered/duration" section: "MANUFACTURER'S WARRANTY STILL APPLIES.
The manufacturer's original warranty has not expired on the vehicle. Consult
the manufacturer's warranty booklet for details as to warranty coverage,
service location, etc." The disclosure must be stated in the exact
language quoted above. Using phrases such as "balance of factory
warranty" are not sufficient. Although it may not be required by law,
disclosing that the vehicle is covered by an unexpired factory warranty may
help prevent later claims by the customer that he or she needlessly paid for
repairs that were covered under warranty.
The
buyer must be given the original or a copy of the vehicle's Buyers Guide at the
sale. If the dealer and consumer negotiate changes in the warranty, the Buyers
Guide must reflect the changes. If a signature line is included on the Buyers
Guide, the buyer should sign the Guide that reflects all final changes.
The
sales contract itself must incorporate the information included on the Buyers
Guide.
If a
used car transaction is conducted in Spanish, a Spanish language Buyers Guide must be posted on the vehicle before it
is displayed or offered for sale.
Warranty
information provided on the Buyers Guide is not sufficient to meet the
requirements of the Warranty Disclosure Rule. Therefore, the written warranty
and the Buyers Guide must be two separate documents. The FTC's Rule on Pre-Sale
Availability of Written Warranty Terms requires that written warranties are
displayed in close proximity to the vehicle or made available to consumers,
upon request, before they buy.
Dealers
who violate the Used Car Rule may be subject to penalties of up to $16,000 per
violation in FTC enforcement actions. Many states have laws or regulations that
are similar to the Used Car Rule. Some states incorporate the Used Car Rule by
reference in their state laws. As a result, state and local law enforcement
officials may have the authority to ensure that dealers post Buyers Guides and
to fine them or sue them if they do not comply. So get on out there and walk
the lot.
One
final note - warranty claims frequently snowball into much larger legal issues.
Savvy plaintiff’s attorneys often review purchase documents and look for other
violations. Many class action lawsuits have begun as a result of perceived
warranty or Lemon Law issues. As always, I suggest that you take all customer
complaints seriously. If a buyer claims that there’s a warranty issue with a
vehicle they purchased from you, it’s probably a good idea to get legal advice
before ignoring the claim. That’s my 2 cents. Good luck and good selling.
