In a significant decision issued earlier this month, the Supreme Court of Texas held that the implied warranty of merchantability, unless properly disclaimed, passes to purchasers of used goods. The decision in Man Engines & Components, Inc. v. Shows, No. 12-0490, on appeal from the Court of Appeals for the Fourteenth District in Houston, also highlights the risk of failure to plead affirmative defenses, such as express disclaimer.

The court held that the resale of a used good does not automatically terminate any remaining implied warranty obligations. The court reiterated that if a manufacturer disclaims implied warranties, which Texas law permits, such express language necessarily would apply to subsequent purchasers beyond the original purchaser, but the engine manufacturer in the case was precluded from introducing evidence of its express disclaimer language because of a failure to raise it as an affirmative defense in its pre-trial pleadings.

The case involved a buyer’s purchase of a used 50-foot yacht from a broker. Several years following that purchase, the in-board engine failed because of an allegedly bad valve, and the buyer of the yacht sued the engine manufacturer for negligence, fraud, negligent misrepresentation, breaches of express and implied warranties, and deceptive trade practices. The jury found the engine manufacturer liable only for breach of the implied warranty of merchantability and awarded the buyer $89,967 in damages. The trial judge, however, granted the manufacturer’s motion for judgment notwithstanding the verdict on the grounds that the buyer could not recover under the implied warranty theory because there was no privity between the manufacturer and the subsequent buyer, or that the engine manufacturer had sufficiently disclaimed any implied warranty at the time of the initial sale to the broker. The manufacturer’s express warranty provided: “The limited warranty herein set forth is the sole and exclusive warranty with respect to the [] engines. There are no other warranties, expressed or implied, including any warranties of merchantability or fitness for any particular purpose and all such other warranties hare [sic] hereby displaced.”

The Court of Appeals reversed the trial judge after concluding that someone who buys goods knowing they are used still may rely on an implied warranty from the manufacturer to the original buyer because that warranty passes with the goods.

“Express Disclaimer” Is an Affirmative Defense That Must Be Pleaded Under Rule 94

The Court of Appeals also refused to consider the engine manufacturer’s language expressly disclaiming the implied warranty because the engine manufacturer failed to raise it as an affirmative defense in its pleadings. On appeal, the Supreme Court of Texas agreed with the Court of Appeals after concluding that the express disclaimer defense was an affirmative defense governed by Texas Rule of Civil Procedure 94. The engine manufacturer first raised the defense in its argument to the trial judge for a judgment notwithstanding the verdict. Because that defense was not raised before trial, it could not be raised on appeal.

Rule 94 provides: “In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense.” The Supreme Court concluded that the express disclaimer defense is a defense of avoidance and not of denial, and thus falls into the “any other matter” catch-all provision at the end of the rule.

The Implied Warranty of Merchantability, Unless Properly Disclaimed, Passes to Subsequent Purchasers

The Supreme Court also agreed with the Court of Appeals that where not disclaimed, the implied warranty passes with the product to subsequent purchasers: “We see no reason why the merchant’s legally imposed duty to issue merchantable goods should automatically end when a good passes to subsequent buyers.” That implied warranty, if not disclaimed, is “born at the point of sale,” and no subsequent use or abuse of a product removes the manufacturer’s duty to place merchantable goods into the stream of commerce.

The sale from the broker to the buyer also contained an “as is” clause, which can nullify any implied warranties under Texas law, but the engine manufacturer failed to raise the existence of the “as is” clause as a cross-point that could support the judgment notwithstanding the verdict before the Court of Appeals, which was required under Texas Rule of Civil Procedure 38.2(b) (“Failure to bring forward by cross-point an issue or point that would vitiate the verdict or prevent an affirmance of the judgment waives the complaint.”).

Under Texas law, manufacturers can validly disclaim implied warranties at the first sale, which is commonly done, and such a disclaimer follows the good in the same manner as the express warranty. If no disclaimer is made, then the implied warranties follow the product even after subsequent sales of the product. Second-hand buyers, therefore, have rights of recovery for breaches of these implied warranties.