In last week’s blog, I discussed the differences between Service Contracts and Warranties under the Magnusun-Moss Warranty Act.  You can review that blog by clicking here. I pointed out that under the Magnuson-Moss Warranty Act, providers are limited in their ability to disclaim the implied warranties of merchantability and fitness for a particular purpose.  So, exactly what does that mean?

The implied warranties are taught in most all law schools as part of the 1L class offering in a course called “Commercial Transactions,” based in the Uniform Commercial Code (“UCC”). This is the important law addressing—among other things—sales, personal property leases, bank-customer relations, investment securities and secured transactions. This body of law is particularly relevant to the practice of debtor/creditor and consumer credit protection law.

Under the UCC, warranties can be expressed or implied.  Expressed warranties are outright promises of the warrantor about the product being sold.  

Implied warranties are those that the UCC implies as a matter of law.  

  • The implied warranty of merchantability means that the goods sold will pass in the trade without objection and are fit for the ordinary purpose for which they are to be used.
  • The implied warranty of fitness for a particular purpose means that at the time of sale, the seller has reason to know of the purpose for which the goods will be used and that the buyer is relaying on the seller’s skill or judgment to furnish suitable goods for the purpose.

Unless the implied warranties are disclaimed by the seller, these implied warranties are made as a matter of law and are contained in the sales transaction.  The UCC is very specific as to how to go about disclaiming these implied warranties.

However, as mentioned last week, the Magnusun-Moss Warranty Act places limitations on sellers’ right to disclaim the implied warranties if a Full Warranty is offered in connection with the consumer products sold or if a Service Policy is sold to a consumer.  Clearly, this is important to the seller of consumer goods.  But, why is this important to a consumer finance company?

The answer to this question lies in the FTC Holder-in-Due-Course Rule discussed here. Since the finance company that buys or takes assignment of a consumer credit contract is subject to all claims and defenses that a buyer can assert against the seller or dealer, the assignee finance company may have to deal with the aftermath of breached warranties.  And, while there is a limit on the assignee’s exposure, it is a potential liability that should be considered.

Practice Pointer:  Take care when purchasing or taking assignment of consumer credit contracts to be certain that the expressed or implied warranty liability associated with such contracts is understood and baked into the pricing consideration.

Please note: This is the fiftieth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.