We have written before about the need for clarity as to whether vertical contractual privity is an element of a breach of implied warranty claim under Section 2-314 of the Uniform Commercial Code. Idaho may not have reached that lofty goal quite yet, but it recently clarified that the answer is generally “yes.”
In American West Enters., Inc. v. CNH, LLC, 316 P.3d 662 (Idaho 2013), the plaintiff sued to recover economic damages on a breach of implied warranty theory. The problem: there was no contract between the plaintiff and the defendant.
The plaintiff urged that it was a third-party beneficiary of the contract between defendant and defendant’s buyer (who was also plaintiff’s seller) and that, even if it was not, vertical privity of contract is not a necessary element of a breach of implied warranty claim. The first issue – third-party beneficiary – is not of interest to us here. As to the second, the Court held that vertical privity is generally required.
In reaching its decision, the Court relied on a string of cases observing what should be obvious: allowing remote purchasers to sue for breach of implied warranty would undermine critical provisions of the UCC that allow sellers to disclaim their implied warranties. Because such disclaimers must be made in writing and meet certain other criteria such as conspicuousness, it is exceedingly difficult as a practical matter to make such disclaimers to remote parties. Thus, the UCC’s disclaimer provisions would be left without teeth.
Unfortunately, the Court left intact some old holdings that, in exceptional circumstances where the purchaser would be prejudiced were it not allowed to sue remote sellers, lack of vertical privity would not bar a breach of implied warranty action. The case does nothing to illuminate what those circumstances might be, except to note that the “mere inability to be fully compensated” does not constitute prejudice that justifies deviating from the general rule.
So score a point for reason for the time being, but we’ll have to wait and see what constitutes sufficient prejudice to ignore the vertical privity requirement.