Risk of Loss
We covered two topics in class on March 5, 2004: privity issues and the Magnuson-Moss Warranty Act. I called the former the "privity puzzle" because of its many dimensions as it relates to warranty law. This summary deals with introductory material, the levels of privity, common law and UCC handling of the issue and the recently-adopted 2-313A and 2-313B. The next page deals with Magnuson-Moss. Much more could be said. I know you believe me.
Introduction. The doctrine of privity in contract or warranty law functions like the doctrine of foreseeability in tort law: it serves to limit liability according to easily-defined categories of people or relationships. To be in "privity of contract" according to the common law meant that you had a cause of action only against the person with whom you entered a contractual relationship. That cause of action did not apply to those who did not enter into the contract, no matter how close they were to the original contracting party. Liability ran from seller to buyer. Period.
But in the more complex modern world in which we live, privity issues also become more complex. For every transaction there might be as many as five levels of vertical privity, as it is called, stretching from the buyer, to the seller, to the distributor, to the manufacturer to the component manufacturer. Likewise there are several levels of horizontal privity, stretching from the buyer to User 1 (family members/guests) to User 2 (any who might reasonably use) to User 3 (subsequent purchasers) to User 4 (someone affected by the use of the good but not actually a user). Questions began to emerge about the liability of various entities on the vertical privity ladder to the various individuals on the horizontal privity ladder.
Making the issue more complex is that the damages suffered by Buyer or various Users could be either physical or economic. As the "citadel" of privity was "assaulted" and relaxed, courts and legislatures had to deal with the issue of to what extent physical or economic injury experienced by a User not the Buyer would trigger liability. In addition, courts debated whether express warranties gave Buyers and Users greater protection than implied warranties. As you see, you can "mix and match" scenarios to present the problem in many forms.
Gradual Erosion of Doctrine. It would be a mistake to say that the doctrine of privity has "collapsed" in our day. In Randy Knitwear the NY Court of Appeals showed how in the case of express warranties the Washington Supreme Court held as early as 1932 that a car maker was liable to purchasers who relied on those express warranties. In Henningsen (1960) the New Jersey Supreme Court held that it was unconscionable for an auto manufacturer to limit its liability to repair and replacement of faulty parts when the faulty part led to an accident in which the owner's wife was seriously injured. Finally in Randy Knitwear the NY Court held that lack of privity of contract did not prevent a seller from successfully suing a manufacturer for economic losses.
The UCC drafting committee was already hard at work on the privity subarticle when Henningsen and Randy Knitwear came out, and in 1962 Alternative A of 2-318 was released, followed in 1966 by Alternatives B and C. In adopting its own Article 2 a state was free, of course, to accept, refine or refuse to accept any of the proffered alternatives, but most ended up adopting Alt. A. The three alternatives represented an effort to relax horizontal privity either by allowing people within the household or guests who were physically injured (Alt A), or any reasonably-expected user who was physically injured (Alt B) or any reasonably-affected user who was injured either in body or economically (Alt C) to sue the seller. The Code drafters, in Comment 3, specifically stated that the statute was not intended to affect the issue of vertical privity. In its words, "[it] is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his buyer who resells, extend to other persons in the distributive chain." The courts were expected to be the bodies to police that issue.
Current Issues. Of greatest importance for those working on privity issues and warranty law today is to check to see which Alternative has been adopted in your state, and how your state has defined or redefined the issue of vertical privity liability when there is both physical and economic injury. For example, the Garden Gate case (p. 340), applied Iowa law to hold that consequential damages would not be available to remote buyers for economic loss. Another case, not mentioned in class, held that a customer injured when sitting on a display patio chair in a Wal-Mart could not proceed with a breach of warranty claim against the manufacturer because, under Alabama's Alt. A, the customer was not to be considered a "guest" or member of the Wal-Mart "family" or "household (660 So2d 951)." Thus, the issue retains its complexity today.
The proposed revision of 2-313A and 2-313B, adopted by NCCUSL and the ALI in 2003 but not yet adopted in any state, would allow a remote purchaser of a new good to sue a "seller" (which includes manufacturers) for breach of a "remedial promise" made by that "seller" either through a "record packed with the goods" or an "advertisement or similar communication to the public." Though it is uncertain whether this will pass in any legislature, it reflects an attempt to relax rules of vertical privity by statute.