The Pennsylvania Superior Court’s decision in Allen-Myland, Inc. will likely increase liability exposure for manufacturers.

In a case of first impression, the Pennsylvania Superior Court recently rejected the enforceability of a warranty disclaimer where the seller failed to provide the buyer with the disclaimer until after the parties had already entered into their agreement. Following the lead of case law from other jurisdictions, the court in Allen-Myland, Inc. v. Garmin International, Inc. found that warranty disclaimers in Pennsylvania are unenforceable unless the buyer has the opportunity to assent to the disclaimer in some fashion.

Background

The case arises from a contract to update the aviation features of a 30-year-old twin-engine aircraft. In April 2010, the plaintiff and defendant Winner Aviation Corporation entered into a contract under which the plaintiff agreed to pay Winner $150,000 in exchange for the purchase and installation of new avionics systems that had been manufactured by defendant Garmin International, Inc. Avionics systems are the electronic systems of aircraft that help with communication, navigation and other functions. In August 2010, the plaintiff flew the aircraft to Winner’s Ohio-based facility for Winner to perform the upgrade. At that time, Winner provided the plaintiff with Garmin’s “Pilot Guide,” which contained a disclaimer of any implied warranty for the avionics systems.

In October 2010 — after Winner had completed the installation — the plaintiff returned to inspect the new avionics systems. During a test flight, the plaintiff discovered that the aircraft’s autopilot system no longer enabled the plaintiff to maintain a preselected altitude without manual intervention by the pilot. Winner and Garmin informed the plaintiff that the newly installed avionics systems were not compatible with the aircraft’s autopilot system, and, therefore, the plaintiff’s aircraft would no longer have certain functionality that was previously supplied by the autopilot system.

Trial Court’s Decision

In June 2013, the plaintiff filed a lawsuit against both Winner and Garmin, claiming, among other things, that the defendants had breached the implied warranty of fitness for a particular purpose. The plaintiff alleged that, at the time it entered into the contact, the defendants knew that the plaintiff wanted the new avionics systems to integrate with the aircraft’s existing systems and that the defendants warranted that the avionics systems would do so. The plaintiff claimed that the defendants breached the warranty because the avionics systems failed to preserve the existing functionality of the aircraft’s autopilot system.

At the end of discovery, the trial court entered summary judgment against the plaintiff on its claim for breach of the implied warranty of fitness for a particular purpose. The court found that the Pilot Guide had disclaimed any implied warranty. The trial court held that the plaintiff could not sustain its warranty claim without the existence of a valid warranty.

Superior Court’s Reversal

On appeal, the plaintiff argued that the October 2010 Pilot Guide disclaimer was ineffective because it was not provided to the plaintiff until after the parties had already entered into the April 2010 agreement for the avionics systems. The Superior Court reversed the trial court’s entry of summary judgment, holding that a seller cannot disclaim an implied warranty after the parties have completed the bargaining process and arrived at a final binding agreement. The court remanded the case for a determination as to whether the bargaining process had ended by the time Winner delivered the Pilot Guide to the plaintiff.

In reaching its decision, the court began by examining the section of Pennsylvania’s Commercial Code that governs the warranty of fitness for a particular purpose. The statute provides that, where the seller “at the time of contracting” has reason to know of a particular purpose for the goods and of the buyer’s reliance on the seller’s judgment to select the goods, an implied warranty is created unless the seller excludes or modifies it. Emphasizing that the plain language provides for the creation of an implied warranty “at the time of contracting,” the court held that the statute forecloses any possibility that a seller can disclaim a warranty after the bargaining process has ended.

The court then surveyed cases from other jurisdictions that had applied similar versions of the statute. Citing decisions involving machinery and other equipment, the court explained that a seller’s disclaimer is generally ineffective when the disclaimer post-dates the parties’ agreement and accompanies the delivered product. These cases reasoned that the disclaimers were invalid because the bargaining process had already concluded when the sellers issued the disclaimers.

The court distinguished cases involving software shrink-wrap licenses and other transactions in which disclaimers were encoded on CDs or located inside of boxes. Even though the buyers in those cases had no opportunity to review the disclaimers before they had purchased the products, those courts upheld the disclaimers because the buyers had the right to return the products upon seeing the disclaimers when they loaded the software or opened the boxes. Because the buyers still had the chance to agree to the disclaimers after their purchases, the courts reasoned that the disclaimers were part of the bargaining process.

In applying the law to the facts of this case, the Superior Court determined that it was necessary to remand the case. The court noted that, although the plaintiff had accepted Winner’s written proposal and paid Winner an $80,000 down payment in April 2010, Winner did not finally give the plaintiff the Pilot Guide containing the warranty disclaimer until August 2010. The court explained, however, that the record was unclear as to whether the plaintiff had the option to return the avionics systems upon its receipt of the disclaimer. The court instructed the trial court to determine whether the disclaimer was provided as part of the parties’ bargain.

Conclusion

The Superior Court’s decision in Allen-Myland, Inc. will likely increase liability exposure for manufacturers. In today’s economic environment, products frequently travel through several layers of distribution before reaching the end-user customer. Manufacturers at the top of the chain often lack control over the manner in which the retailers at the bottom of the chain communicate with the customer. Focused on selling their products, retailers often fail to provide customers with instruction manuals and other important paperwork containing warranty-related information until after a sale has been made. By that point, however, the bargaining process may already be complete, and the retailer’s delay may cause the manufacturer to forfeit the protections it expected to realize through its now-unenforceable warranty disclaimer.

Manufacturers can reduce their liability risk by requiring retailers to provide warranty documents at the time of sale. In contracts between manufacturers and distributors, manufacturers should consider insisting on a provision that obligates distributors and subsequent resellers to issue warranties to customers before the bargaining process is complete. Manufacturers should also include language that penalizes distributors for noncompliance and requires distributors to defend and indemnify manufacturers against claims that would have been avoided if the disclaimers had been properly provided to the customer in a timely manner.

In circumstances where manufacturers are unable to contractually ensure that distributors issue warranties when customers pay for their products, manufacturers should consider adopting the practice that has become common in the software industry by granting customers the option of returning the product upon their review of post-sale warranty terms. The decision of whether to implement such a practice will require manufacturers to balance the potential advantages to be gained from reducing their liability exposure to warranty litigation against the potential disadvantages to be suffered from providing refunds for what would have otherwise been final sales. In the end, the projected benefits may outweigh the projected burdens.