Used Car Warranties: What You Don’t Know CAN Hurt You

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.