Tag Archives: express warranty

BE STRATEGIC WHEN SUING A MANUFACTURER UNDER A WARRANTY WITH AN ARBITRATION PROVISION

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I’ve said this before, and I’ll say it again: arbitration is a creature of contract. If you don’t want to arbitrate, don’t agree to an arbitration provision as the means to resolve your dispute. Now, with that said, there are times you may not have a choice. An arbitration provision in a warranty from a manufacturer of a product is an example. If you are procuring the product, you are agreeing to the terms of the express warranty. Manufacturers are not negotiating their product warranty on a case-by-case basis considering they are not typically the ones selling the product directly to the end user. This does not mean that is a bad thing. It just means if you elect to sue the manufacturer directly for an alleged product defect or under the terms of the warranty, you should read the warranty and consider the strategic aspect that suing the manufacturer will have on your case.

In SICIS North America, Inc. v Sadie’s Hideaway, LLC, 48 Fla.L.Weekly D1581c (Fla. 1st DCA 2023), an owner elected to sue a tile manufacturer, a general contractor, the architect, and a window and door company. One of the arguments the owner raised was that exterior tiles installed were defective. The tiles were procured by the general contractor. The owner sued the general contractor under various theories and sued the tile manufacturer for breaches of warranty and negligence. The general contractor asserted a crossclaim for indemnification against the tile manufacturer. The tile manufacturer moved to compel the owner’s claim and the general contractor’s crossclaim to arbitration since there was an arbitration provision in the warranty documents and the general contractor’s indemnification claim arose from that transaction. The trial court denied the motion to compel arbitration. On appeal, the appellate court reversed:

First, because [the owner] was suing [the tile manufacturer] based upon the written warranty, it was bound by the arbitration provision contained in [the general contractor’s] agreement with [the tile manufacturer]. As the Florida Supreme Court has explained, “[W]hen a plaintiff sues under a contract to which the plaintiff is not a party . . . we will ordinarily enforce an arbitration clause contained in that contract, absent some other valid defense. . . .” . [The owner] had no valid defense against arbitration, a fact which it apparently realized when it voluntarily dismissed its express warranty claim after the notice of appeal and initial brief were filed.

Second, the trial court erred in not compelling arbitration based upon the agency relationship that existed between [the owner] and [the general contractor]. The essential elements of an actual agency relationship are: (1) acknowledgement by the principal that the agent will act for him; (2) the agent’s acceptance of the undertaking; and (3) control by the principal over the actions of the agent. 

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[T]he record evidence establishes that [the owner] authorized [the general contractor] as its general contractor to act as its agent when purchasing the tiles from [the tile manufacturer]. Article 3 of the parties’ agreement provides that [the general contractor] “accept[ed] the relationship of trust and confidence established by the [a]greement,” it would “exercise [its] skill and judgment in furthering the interests of the Owner,” it would “furnish efficient business administration and supervision,” and it would “furnish at all times an adequate supply of workers and materials.” Section 10.1 authorizes [the general contractor] to obtain bids from “suppliers of materials,” and Section 12.1.9 provides that “the Contractor will not be required to make payments to subcontractors or suppliers unless and until the Owner pays Contractor for their work and materials.” In line with its duties pursuant to the agreement, [the general contractor] alleged below in its indemnification claim that a special relationship existed between it and [the tile manufacturer] because [the tile manufacturer] provided “certain materials” to it to install on the project. In addition, [the tile manufacturer] filed with the trial court a signed copy of its purchase agreement with [the general contractor]. Because [the general contractor’s purchase of the tiles was within the scope of work that [the owner] hired it to do, it was unnecessary for [the owner] to expressly authorize [the general contractor] to enter into the arbitration agreement with [the tile manufacturer]. [The owner] is bound by that agreement by virtue of its agency relationship with [the general contractor].

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

SICIS North America, supra (internal citations omitted).

The owner did not need to sue the tile manufacturer. It could have just sued the general contractor for the tiles. Also, in numerous cases, it is not the product that is the problem; it is the installation. Did the warranty cover installation or only defects in the product itself?  It may likely be the latter and the warranty probably limited the scope of the manufacturer’s liability. It is uncertain in this instance, but even if there was an inherent product defect in the tiles, there are also economic loss rule considerations. The point is – suing the manufacturer was likely overkill in this case by the owner as it could have sued the general contractor that procured the tiles and was responsible for installing the tiles. Now, the owner and general contractor are tasked with arbitrating claims against a manufacturer under a warranty that probably has favorable terms to the manufacturer if indeed the tiles are proven to be defective and the root of the owner’s construction defect claim.

SUBSEQUENT PURCHASER CAN ASSERT CLAIMS FOR CONSTRUCTION DEFECTS

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Can a subsequent purchaser pursue construction defect claims relating to the original construction of the property?  This was the threshold issue on a motion for summary judgment by a drywall manufacturer against a subsequent purchaser of a home in Karpel v. Knauf Gips KG, 2022 WL 4366946 (S.D. Fla. 2022).  This matter deals with the defective Chinese drywall that was installed in homes years ago.  The plaintiffs, which were subsequent purchasers of a home, sued the manufacturer of the defective drywall for various theories including negligence, negligence per se, strict liability, breach of express and/or implied warranty, private nuisance, unjust enrichment, and Florida’s Deceptive and Unfair Trade Practices Act.

The trial court noted, from the onset, that Florida does NOT have a subsequent purchaser rule that prohibits subsequent purchasers from asserting construction defect claims. With this consideration in mind, the trial court went through the claims the plaintiff, as a subsequent purchaser, asserted against the manufacturer to determine whether they were viable claims as a matter of law.

Negligence Claim

The trial court found that a subsequent purchaser could sue in negligence.  “Florida courts have long allowed subsequent purchasers to sue for negligence including in construction defect litigation.”  Karpel, supra, at *2.

Negligence Per Se and Strict Liability Claims

The trial court held that the plaintiff’s negligence per se and strict liability claims were duplicative. Both could not stand; for this reason, the court entered summary judgment as to the duplicative negligence per se claim. “Strict liability means negligence as a matter of law or negligence per se, the effect of which is to remove the burden from the user of proving specific acts of negligence.” Karpel, supra, at *3 (quotation and citation omitted).

A subsequent purchaser could pursue a strict liability claim against a manufacturer.  “[A] manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being.”  Karpel, supra, at *4 (quotation and citation omitted).

Even Section 402A of the Second Restatement of Torts, adopted by Florida’s Supreme Court, provides: “(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.” Karpel, supra, at *4.

There are, however, limits on strict liability.

“First, Florida disallows recovery in tort where plaintiffs only claim economic losses such as ‘damages for inadequate value, costs of repair, and replacement of the defective product, or consequent loss of profits—without any claim of personal injury or damage to other property.” Karpel, supra, at *4 (citation omitted).

“Second, Florida courts will disallow recovery for strict liability where the purchaser was subject to the common law doctrine of caveat emptor.”  Karpel, supra, at *4.

Thus, a subsequent purchaser’s strict liability claim could be pursued against a manufacturer provided such damages are not barred by the economic loss rule or the doctrine of caveat emptor (which applies to commercial property and property purchased at judicial auction sales).  Karpel, supra, at *4.

Breach of Implied Warranty

The trial court found that a subsequent purchaser could NOT sue a manufacturer for breach of implied warranty.  “[I]t is abundantly clear that in cases like these, where no contractual relationship between a subsequent purchaser and a manufacturer exists, the former’s recourse is a claim for strict liability.” Karpel, supra, at *4.

Breach of Express Warranty

While a contractual relationship is typically required for breach of express warranty, this requirement is relaxed if the express warranty is intended to benefit subsequent purchasers.  “A manufacturer’s liability for breach of an express warranty derives from, and is measured by, the terms of that warranty.”  Karpel, supra, at *4 (quotations and citation omitted).  However, in this case, plaintiff’s breach of express warranty claim failed because the plaintiff never introduced any express warranty into the record.

Private Nuisance

The trial court held that the subsequent purchaser could NOT pursue a private nuisance claim against the manufacturer.   To sustain a private nuisance claim, the plaintiff must prove that the defendant’s maintenance of the nuisance was the proximate cause of the plaintiff’s damages.  Karpel, supra, at *8.  “The Plaintiffs’ ownership and current control over the drywall conclusively forecloses them from arguing that the Defendants actively “maintain” the ‘nuisance’ they complain of.”  Id.

Unjust Enrichment

The trial court held that the subsequent purchaser could NOT pursue an unjust enrichment claim against the manufacturer.  An unjust enrichment claim requires the plaintiff to prove that the plaintiff conferred a direct benefit on the defendant. “The Plaintiffs conferred no direct benefit on the Defendant.” Karpel, supra, at *8 (finding that plaintiffs, as subsequent purchasers, obtained their homes from previous owners so the plaintiffs conferred no direct financial benefit on the manufacturer).

Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA)

The trial court found that a subsequent purchaser could theortetically pursue a FDUTPA claim. “Because the law is clear that a plaintiff need not have actually relied on the purported deceptive or unfair practice, the Court’s analysis need not go further….The Plaintiffs’ status as subsequent purchasers does not foreclose them from arguing that the Defendants’ practices violated FDUTPA.”  Karpel, supra, at *9.

However, the trial court noted that actual damages under FDUTPA may implicate the economic loss rule because actual damages under the statute “are the difference in the market value of the product or service in the condition in which it was delivered and its market value in the condition in which it should have been delivered according to the contract of the parties.”  Karpel, supra, at *9 (quotation and citation omitted). For this reason, the court ordered the plaintiff and defendant to submit supplemental briefing because if the economic loss rule is implicated, the FDUTPA claim will fail (due to the same limitations relating to the strict liability claim).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

EXPRESS WARRANTY TRUMPING SPEARIN’S IMPLIED WARRANTY

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Be mindful of that express warranty provision in your contract.  It could result in an outcome that you did not consider or factor when submitting your proposal or agreeing to your contract amount.

An express warranty could have the effect of eviscerating the argument that you performed your scope of work pursuant to the plans and specifications.   In other words, the applicability of the Spearin doctrine could be rendered moot based on express warranty language in your contract that is fully within your control because you do not have to agree to that language.

Under the Spearin doctrine:

 [W]hen a ‘contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specification.’ Spearin and its progeny set forth a default rule of fundamental fairness that when a general contractor requires a subcontractor to follow certain plans and specifications, the general contractor impliedly warrants that those plans and specifications are ‘free from design defects.’  Put simply, Spearin protects subcontractors from liability for simply following the general contractor’s direction and requirements.

However, the implied warranty set forth in Spearin and its progeny may be overcome by express agreement.   Where a general contractor and subcontractor expressly agree to allocate the risk of a defective product to the subcontractor, that express agreement must prevail over Spearin’s implied warranty. 

Lighting Retrofit International, LLC v. Consellation NewEnergy, Inc., 2022 WL 541156 (D. Md. 2022) (internal citations omitted).

Does this underlined language above mean that an express warranty provision in a contract can trump the Spearin doctrine’s implied warranty of building according to the plans and specifications?  According to this decision in Lighting Retrofit International, the answer is a resounding yes!

This case involved energy savings construction improvements to a federal prison in Florida, although the dispute was decided under Maryland law (likely due to a choice of law and venue provision in a subcontract).  A subcontract between the prime contractor and a subcontractor was predicated on LED retrofit kits from a specific manufacturer for certain exterior lights.  There was no other manufacturer that offered such retro kits on the market.

The subcontract contained a very detailed express warranty provision:

 6.8 Warranties. Subcontractor warrants that (a) all services will be provided by qualified, competent and professional persons in a timely, good and workmanlike manner and with a degree of skill and care in conformity with industry standards, (b) all equipment will be free from defects and installed in accordance with manufacturer’s specifications, and (c) all services and equipment shall be in compliance with all applicable laws, licenses, and permits. Subcontractor will obtain vendor/ manufacturer/supplier warranties and pass through all such warranties to both Constellation [prime contractor] and Constellation’s Customers. Subcontractor shall, if available, with the prior written approval of Constellation, obtain extended warranties, and pass through all such extended warranties to both Constellation and Constellation’s Customers. The Subcontractor shall, at its sole expense interface, and act as liaison with Subcontractor-purchased materials manufacturers, vendors, and suppliers to resolve problems and pursue warranty claims on behalf of Constellation and Constellation’s Customers. In the event a manufacturer, vendor, or supplier of such materials ceases operations or is otherwise unable to meet its warranty obligations to Constellation or Constellation’s Customers, Subcontractor agrees to provide or secure, at its sole expense, for Constellation and Constellation’s Customers, all such warranties including but not limited to any required spare parts.

The warranties set forth herein shall continue for a period of one (1) year after the date of Constellation’s final acceptance of the work or Customer’s beneficial use, whichever is later, unless a longer period is set forth in the Contract Documents. Unless otherwise provided on the Scope of Work, if the services and materials provided by Subcontractor hereunder do not conform to the warranties included herein, then Subcontractor will (at its sole cost and expense) do any of the following upon Constellation’s request: (a) re-perform the services, or repair or replace the equipment, in a satisfactory manner that conforms to the terms of this Subcontract, (b) pay Constellation any money damages that Constellation owes as a result of nonconformance and refund the portion of the cost hereunder which is attributable to such nonconformance, (c) if Constellation chooses to correct the breach by re-performing the services or repairing or replacing the equipment, (by itself or through another subcontractor), pay Constellation any expenses Constellation incurs itself or pays a third party. This warranty shall not in any way limit any standard warranties provided by Subcontractor to its customers generally.

The LED retrofit kits failed miserably resulting in a dispute between the prime contractor and subcontractor.  The subcontractor was not paid and filed a lawsuit.  The prime contractor had to hire another subcontractor to ultimately remediate the failure and countersued.

The subcontractor argued under the Spearin doctrine, i.e., that the prime contractor impliedly warranted the LED retrofit kits which the subcontractor furnished for the project.

The issue was whether the express warranty provision above should supersede Spearin’s implied warranty.  In reviewing this issue, the Court noted cases in jurisdictions other than Maryland where an express warranty trumped Spearin’s implied warranty; however, there was a case from Missouri where Spearin’s implied warranty trumped an express warranty  due to a circumstance outside the party’s control.  See Lighting Retrofit International, supra, at *6.

Yet, even giving the subcontractor the benefit of the doubt, the Court noted this was NOT an issue beyond the subcontractor’s control.

While the fact the retrofit kids failed was beyond the subcontractor’s control, the subcontractor was free to negotiate the express warranty provision in its subcontract – the express warranty provision was within its control: “[E]ven assuming [the prime contractor] forced [the subcontractor] to use that particular product, [the subcontractor] freely and willingly agreed to the unequivocal warranty provisions in the Subcontract – a conscious choice that was, undoubtedly, within [the subcontractor’s] control.”  Lighting Retrofit International, supra, at *6.   “Therefore, an implied warranty that exists to prevent a general contractor from unfairly taking advantage of a subcontractor for merely following the general contractor’s directions must yield where a sophisticated subcontractor expressly agrees to shoulder the risk.” Id.

Is this a harsh outcome?   You betcha!   And it’s a harsh outcome form an express warranty provision that contains language that exists in some fashion in many contracts.  This outcome goes to the point that it all starts with your contract and what you are agreeing to on the frontend.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.