Attorneys for Appellant Attorneys for Appellee
Julia Blackwell Gelinas Scott M. Cohen
Robert B. Thornburg John D. Barker
Indianapolis, Indiana Chicago, Illinois
Indiana Supreme Court
Hyundai Motor America, Inc.,
Appellant (Defendant below),
Appellee (Plaintiff below).
Appeal from the Vanderburgh Superior Court, No. 82D03-0111-CP-3964
The Honorable Mary Margaret Lloyd, Judge
On Petition To Transfer from the Indiana Court of Appeals, No. 82A05-0303-CV-155
February 22, 2005
We hold that a consumer may sue a manufacturer for economic loss based
on breach of the implied warranty of merchantability even if the consumer purchased
the product from an intermediary in the distribution chain. There is no
requirement of vertical privity for such a claim.
Facts and Procedural Background
On November 18, 2000, Sandra Goodin test drove a Hyundai Sonata at AutoChoice
Hyundai in Evansville, Indiana. The car was represented as new and showed
nineteen miles on the odometer. Goodin testified that when she applied the
brakes in the course of the test drive she experienced a shimmy, shake,
pulsating type feel. The AutoChoice salesperson told her that this was caused
by flat spots on the tires from extended inactivity and offered to have
the tires rotated and inspected. After this explanation, Goodin purchased the Sonata
The manufacturer, Hyundai, provided three limited warranties: 1 year/12,000 miles on wear
items; 5 years/60,000 miles bumper to bumper; and 10 years/100,000 miles on the
See footnote Hyundai concedes that brake rotors, brake calipers, and brake caliper slides
were subject to the 5 year/60,000 mile warranty covering [r]epair or r
any component originally manufactured or installed by [Hyundai] that is found to be
defective in material or workmanship under normal use and maintenance. To claim
under this warranty, a vehicle must be serviced by an authorized Hyundai dealer
who is then reimbursed by Hyundai for any necessary parts or labor.
Three days after the car was purchased, Goodins husband, Steven Hicks, took it
back to AutoChoice for the promised tire work. Goodin testified that she
continued to feel the shimmy but did nothing further for a month.
On December 22, she took the car to a different Hyundai dealer, Bales
Auto Mall, in Jeffersonville, Indiana, for an unrelated problem and also made an
appointment six days later for Bales to inspect the brakes. Bales serviced
the brake rotors for warping, but on May 1, 2001, Goodin returned to
Bales complaining that the vehicle continued to vibrate when the brakes were applied.
Bales found the rotors to be out of tolerance and machined them.
Eighteen days later Goodin again returned to Bales, reporting that she still
felt vibrations and for the first time also heard a popping noise.
Goodin told the service advisor at Bales that she thought there may be
a problem with the suspension, and Bales changed and lubed the strut assembly.
Eleven days later Goodin once more brought the car to Bales reporting
continued shimmy and also a bed spring type noise originating from the brakes.
The Bales mechanic was unable to duplicate the brake problem, but balanced
and rotated the tires as Goodin had requested. One week later Goodin
returned to Bales where she and Jerry Hawes, Baless Service Manager, test drove
the Sonata. The brake problem did not occur during the test drive,
but Hawes identified a noise from the direction of the left front tire
and repaired the rubber mounting bracket.
Goodin told Hawes that the brake problem had occurred about seventy percent of
the time. The problem was worse when it was wet or cool,
was consistently occurring when she drove down a steep hill near her home,
and was less frequent when a passengers weight was added. Goodin made
arrangements to leave the car with Hawes at Bales, but, according to Hawes,
over a several day period he could not duplicate the symptoms Goodin reported.
On August 24, 2001, Goodin took her car back to her original dealer,
AutoChoice, reporting that the brakes squeak and grind when applied. Goodin left
the car with AutoChoice where the left front rotor was machined and loose
bolts on the front upper control arm were tightened. Goodin testified that
after this five-day procedure the brakes began to make the same noises and
vibrations even before she arrived home.
In October 2001 Goodin hired an attorney who faxed a letter to Hyundai
Motor America giving notice of her complaint and requesting a refund of the
purchase price. On November 13, 2001, Goodin filed a complaint against Hyundai
Motor America, Inc. alleging claims under the Magnuson-Moss Warranty Act, 15 U.S.C. §§
2301-2312, for breach of express warranty, breach of implied warranty, and revocation of
acceptance. On April 23, 2002, in anticipation of litigation, Goodin hired William
Jones to inspect her car. Jones noted that the odometer read 57,918
miles and the car was still under warranty. Jones drove the car
approximately five miles and found severe brake pulsation on normal stops which was
worse on high speed stops. Although he did not remove the tires
to inspect the brake rotors, Jones opined that the rotors were warped and
defective or there was a root cause that has not been discovered and
corrected by the repair facilities. His ultimate conclusion was that the vehicle
was defective and unmerchantable at the time of manufacture and unfit for operation
on public roadways. Three weeks later, after the 5 year/60,000 mile warranty
had expired, Goodins husband, Hicks, replaced the rotors with new rotors from a
See footnote After this repair, according to Hicks, the pu
lsation went from
very bad to mild and less frequent.
Steven Heiss, District Parts and Service Manager for Hyundai Motor America served as
the liaison between Hyundai and the dealers and provided warranty training. If
a dealer is not performing repairs correctly, Hyundai, through its liaisons, addresses the
problem. Heiss inspected Goodins Sonata on October 21, 2002. At that
point the Sonata had been driven 77,600 miles. He testified that during
his twenty-three mile test drive he neither heard the noise described by Goodin
nor felt any vibration from the brakes. However, Heiss did hear a
droning noise which he later concluded was due to a failed left rear
wheel bearing. He regarded this as a serious problem and not one
caused by abuse or misuse of the vehicle. The wheel bearing would
have been covered by the 5 year/60,000 mile warranty. Before his inspection,
Heiss had been told that the rotors had been changed by Hicks five
months earlier, and when Heiss measured the rotors he found that they were
out of standard.
See footnote Heiss testified a mi
scast from the factory was one
of a number of possible reasons for damaged rotors.
At the conclusion of a two day trial, the jury was instructed on
all claims. Over defendants objection, the instructions on implied warranties made no
reference to a privity requirement. The jury returned a verdict for Hyundai
on Goodins breach of express warranty claim, but found in favor of Goodin
on her claim for breach of implied warranty of merchantability. Damages of
$3,000.00 were assessed and Goodins counsel was later awarded attorneys fees of $19,237.50
pursuant to the fee shifting provisions of the Magnuson-Moss Warranty Act.
Hyundai orally moved to set aside the verdict as contrary to law on
the ground that Goodin purchased the car from AutoChoice and therefore did not
enjoy vertical privity with Hyundai. The court initially denied that motion, but
the following day set aside the verdict, holding lack of privity between Goodin
and Hyundai precluded a cause of action for breach of implied warranty.
Goodin then moved to reinstate the verdict, and, after briefing and oral argument,
the trial court granted that motion on the ground that Hyundai was estopped
from asserting lack of privity.
Hyundai appealed, asserting: (1) it was not estopped from asserting a defense
of lack of privity; and (2) lack of vertical privity barred Goodins recovery
for breach of implied warranty of merchantability. The Court of Appeals agreed
on both points, holding that Hyundai was not estopped from asserting that privity
was an element of Goodins prima facia case, and, because privity was lacking,
Goodin did not prove her case. Hyundai Motor Am., Inc. v. Goodin,
804 N.E.2d 775, 781 (Ind. Ct. App. 2004). The Magnuson-Moss Warranty Act
looks to state law for the contours of implied warranties. The Court
of Appeals was not unsympathetic to Goodins claims but regarded itself as bound
by a footnote in Martin Rispens & Son v. Hall Farms, Inc., 621
N.E.2d 1078, 1084 n.2 (Ind. 1993), where this Court stated: In Indiana,
privity between the seller and the buyer is required to maintain a cause
of action on the implied warranties of merchantability. Id. at 784.
We granted transfer. Hyundai Motor Am., Inc. v. Goodin, 812 N.E.2d 808
A. The Relationship Between Federal and State Law in Claims Based on
Implied Warranty of Merchantability
This case is brought under a federal statute. The Magnuson-Moss Warranty Act,
15 U.S.C. §§ 2301-2312 (2000), provides a federal right of action for consumers
to enforce written or implied warranties where they claim to be damaged by
the failure of a supplier, warrantor, or service contractor to comply with any
obligation under that statute or under a written warranty, implied warranty, or service
contract. The Act also limits the extent to which manufacturers
who give express warranties may disclaim or modify implied warranties, but looks to
state law as the source of any express or implied warranty. Schimmer
v. Jaguar Cars, Inc., 384 F.3d 402, 405 (7th Cir. 2004). As
the Seventh Circuit recently put it: Because §§ 2308 and 2304(a) do
not modify, or discuss in any way, a states ability to establish a
privity requirement, whether privity is a prerequisite to a claim for breach of
implied warranty under the Magnuson-Moss Act therefore hinges entirely on the applicable state
law. Voelker v. Porsche Cars N. Am., Inc., 353 F.3d 516, 525
(7th Cir. 2003).
Goodins claim is for breach of the implied warranty of merchantability, not for
violation of any substantive provision of the federal statute. Accordingly, her claim
lives or dies on the resolution of an issue of state law, specifically
whether Indiana requires privity between buyer and manufacturer for a claim of breach
of implied warranty.
B. Standard of Review
Hyundai does not dispute that under circumstances applicable here Indiana recognizes implied warranties
of fitness for a particular purpose and implied warranties of merchantability. Ind.
Code §§ 26-1-2-314, 315 (2003). Rather, Hyundai contends that under Indiana law,
a buyer must be in vertical privity with a seller to impose liability
on the seller for breach of an implied warranty. Whether Indiana law
requires privity to sustain an action for breach of an implied warranty is
purely a question of law and therefore is reviewed under a de novo
standard. See Griffith v. State, 788 N.E.2d 835, 839 (Ind. 2003).
An implied warranty of merchantability imposed by operation of law is to be
liberally construed in favor of the buyer. Frantz v. Cantrell, 711 N.E.2d
856, 859 (Ind. Ct. App. 1999).
C. Origins of Privity
Indiana has adopted the Uniform Commercial Code, notably its provision that: A
warranty that the goods shall be merchantable is implied in a contract for
their sale if the seller is a merchant with respect to goods of
that kind. . . . Ind. Code § 26-1-2-314(1) (2004). Hyundai
asserts, and the Court of Appeals found, Indiana law requires vertical privity between
manufacturer and consumer when economic damages
See footnote are sought.
Hyundai, 804 N.E.2d at
783. Goodin argues that traditional privity of contract between the consumer and
manufacturer is not required for a claim against a manufacturer for breach of
the implied warranty of merchantability, especially if the manufacturer provides a Magnuson-Moss express
warranty with the product.
Privity originated as a doctrine limiting tort relief for breach of warranties.
The lack of privity defense was first recognized in Winterbottom v. Wright, 10
M. & W. 109, 152 Eng Rep 402 (Ex. 1842). 2 Hawkland,
UCC Series, § 2-318:1 at 771 (2001). In that case, the court
sustained a demurrer to a suit by an injured coachman for breach of
warranty by a third party who contracted with the owner to maintain the
coach. In this century, however, MacPherson v. Buick Motor Co., 217 N.Y.
382, 111 N.E. 1050 (1916), and Henningsen v. Bloomfield Motors, Inc., 32 N.J.
358, 161 A.2d 69 (1960), established that lack of privity between an automobile
manufacturer and a consumer would not preclude the consumers action for personal injuries
and property damage caused by the negligent manufacture of an automobile. Vertical
privity typically becomes an issue when a purchaser files a breach of warranty
action against a vendor in the purchasers distribution chain who is not the
purchasers immediate seller. Hawkland, supra, at 771. Simply put, vertical privity
exists only between immediate links in a distribution chain. Rheem Mfg. Co.
v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 n.8 (Ind.
Ct. App. 1999). A buyer in the same chain who did not
purchase directly from a seller is remote as to that seller. Id.
Horizontal privity, in contrast, refers to claims by nonpurchasers, typically someone who
did not purchase the product but who was injured while using it.
1 James J. White & Robert S. Summers, Uniform Commercial Code 585 (4th
ed. 1995). Goodin purchased her car from a dealership and is thus
remote from the manufacturer and lacks vertical privity with Hyundai.
Although warranty liability originated as a tort doctrine, it was assimilated by the
law of contracts and ultimately became part of the law of sales.
Hawkland, supra, at 771. But privity is more than an accident of
history. It permitted manufacturers and distributors to control in some measure their
risks of doing business. Richard W. Duesenberg, The Manufacturers Last Stand:
The Disclaimer, 20 Bus. Law 159, 161 (1964). Because vertical privity involves
a claim by a purchaser who voluntarily acquired the goods, it enjoys a
stronger claim to justification on the basis of freedom of contract or consensual
relationship. It nevertheless has come under criticism in recent years, and this
is the first opportunity for this Court to give full consideration to this
D. Indiana Case Law
Although this Court did not address the issue, even before the Products Liability
Act, both the Court of Appeals and federal courts applying Indiana law held
that a claimant was not required to prove privity to succeed in a
personal injury action in tort based on breach of implied warranties. Lane
v. Barringer, 407 N.E.2d 1173, 1175 (Ind. Ct. App. 1980); Dagley v. Armstrong
Rubber Co., 344 F.2d 245, 252 (7th Cir. 1965) (drawing support from J.
I. Case Co. v. Sandefur, 245 Ind. 213, 221-22, 197 N.E.2d 519, 523
(1964)); Neofes v. Robertshaw Controls Co., 409 F. Supp. 1376, 1379 (S.D. Ind.
1976). Three federal court decisions drew on these decisions to conclude
that privity of contract is not required in Indiana to maintain a cause
of action for personal injury based on breach of an implied warranty.
See Filler v. Rayex Corp., 435 F.2d 336, 337-38 (7th Cir. 1970) (Indiana
law does not require privity between manufacturer and plaintiff under theories of implied
warranty, strict liability or negligence); Dagley, 344 F.2d at 254; Karczewski v. Ford
Motor Co., 382 F. Supp. 1346, 1352 (N.D. Ind. 1974).
However, several Court of Appeals decisions subsequently held that recovery of economic loss
for alleged failure of the expected benefit of the bargain based on breach
of implied warranty under the UCC required a buyer to be in privity
of contract with the seller. See Candlelight Homes, Inc. v. Zornes, 414
N.E.2d 980, 982 (Ind. Ct. App. 1981); Lane, 407 N.E.2d at 1173; Richards
v. Goerg Boat & Motors Co., 179 Ind. App. 102, 384 N.E.2d 1084
(1979). Corbin v. Coleco Industries, 748 F.2d 411, 415 (7th Cir. 1984),
took the view that [s]ubsequent Indiana cases have shed new light on Indianas
interpretation of implied warranty under the UCC, thus making it clear that privity
is indeed required.
This Court has mentioned the common law privity requirement in the context of
actions sounding in contract only once, and that in a footnote. Martin
Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993), addressed
negligence and express and implied warranty claims by a farmer against both the
direct seller and the grower of seed that allegedly damaged the farmers crops.
The footnote cited to the UCC and two Court of Appeals decisions
and other courts have taken the footnote as settled Indiana law on this
issue. As the Court of Appeals put it in its decision in
[T]he [footnote] indicates our supreme courts unequivocal acceptance that privity between a consumer
and a manufacturer is required in order to maintain a cause of action
for breach of an implied warranty of merchantability. . . . Any
change in the law removing the privity requirement in implied warranty actions should
be left to that court. . . . To the extent Goodin
argues that this result is inequitable, we are not entirely unsympathetic. Whether
the cons of the vertical privity rule outweigh the pros is something for
either our supreme court or the General Assembly to address.
Hyundai Motor America, Inc. v. Goodin, 804 N.E.2d 775, 784, 788 (Ind. Ct.
App. 2004). In Martin Rispens, the implied warranty claims were rejected based
on an effective disclaimer of implied warranty, under Indiana Code section 26-1-2-316(2) which
permits parties to agree to exclude or modify implied warranties if done in
a particular manner. The farmer did not present privity as an issue
on transfer to this Court and neither party briefed it. It was
not necessary to the decision. Accordingly, the language in Martin Rispens, though
often cited, is dicta and we accept the invitation from the Court of
Appeal to reconsider it.
Indiana law, as developed in the Court of Appeals, has already eroded the
privity requirement to some degree. In Thompson Farms, Inc. v. Corno Feed
Products, Inc., 173 Ind. App. 682, 366 N.E.2d 3 (1977), the Court of
Appeals permitted the plaintiff to recover on an implied warranty where it was
shown that the contractual arrangements between the manufacturer and the dealer who sold
to the plaintiff created an agency relationship; and the manufacturers agents participated significantly
in the sale both through advertising and personal contact with the buyer.
Under those circumstances the Court of Appeals held that the manufacturer was
a seller within the meaning of Indiana Code section 26-1-2-314. Richards, 179
Ind. App. at 112, 384 N.E.2d at 1092, involved a defective boat sold
by a dealer where the manufacturers agents also engaged in personal contact with
the buyer by giving demonstrations and attempting to adjust the loss after the
sale. The Court of Appeals then, following Thompson Farms, Inc., held that
the participation in the sale by the manufacturer was sufficient to bring it
into the transaction as a seller within the requirements of Indiana Code section
26-1-2-314. However, if the plaintiff could not show perfect vertical privity or
an exception to the rule, then the plaintiff could not prove the claim.
Candlelight Homes, 414 N.E.2d at 982.
E. Statutory Developments in Indiana
The Product Liability Act, Indiana Code § 34-20-2-1 et seq. (1999), does not
require a personal injury plaintiff to prove vertical privity in order to assert
a products liability claim against the manufacturer. See Lane, 407 N.E.2d at
1175. Even before the Product Liability Act in 1978, the requirement of
privity of contract in warranty actions in Indiana began to erode in 1963
with the passage of the Uniform Commercial Code under section 2-318:
A sellers warranty whether express or implied extends to any natural person who
is in the family or household of his buyer or who is a
guest in his home if it is reasonable to expect that such person
may use, consume or be affected by the goods and who is injured
in person by breach of the warranty. A seller may not exclude
or limit the operation of this section.
I.C. § 26-1-2-318. Section 2-318 was taken verbatim from the UCC as
originally prepared by the Uniform Code Committee Draftsmen in 1952. It eliminated
horizontal privity as a requirement for warranty actions. However, that version of
2-318 took no position on the requirement of vertical privity. White &
Summers, supra, at 586.
The purpose of the original version of section 2-318, which remains unchanged in
Indiana today, was to give standing to certain non-privity plaintiffs to sue as
third-party beneficiaries of the warranties that a buyer received under a sales contract.
Hawkland, supra, at 769. That version of section 2-318 provided only
that the benefit of a warranty automatically extended to the buyers family, household,
and houseguests. Id., supra, at 775. It was intended to, and
did, accomplish its goal of freeing any such beneficiaries from any technical rules
as to [horizontal] privity. U.C.C. § 2-318 cmt. 2. Some states
refused to enact this version of section 2-318, and others adopted nonuniform versions
of the statute. Hawkland, supra, at 777. In 1966, in response
to this proliferation of deviant versions of a purportedly uniform code, the drafters
proposed three alternative versions of section 2-318. Only California, Louisiana, and Texas
have failed to adopt one of these three versions of section 2-318.
The majority of states, including Indiana, retained or adopted the 1952 version of
ction 2-318, which now appears in the Uniform Commercial Code as Alternative A.
ative B provides that any natural person who may reasonably be expected
to use, consume or be affected by the goods and who is injured
in person by breach of warranty may institute a breach of warranty action
against the seller. U.C.C. § 2-318 cmt. 3. Alternative B expands
the class of potential plaintiffs beyond family, household, and guests, and also implicitly
abolishes the requirement of vertical privity because the sellers warranty is not limited
to his buyer and persons closely associated with that buyer.
supra, at 789. Alternative B is applicable only to claims for personal
Because Alternatives A and B of 2-318 are limited to cases where the
plaintiff is injured in person, they do not authorize recovery for such loss.
But neither do they bar a non-privity plaintiff from recovery against such
a remote manufacturer for direct economic loss. . . . Thus, Alternatives
A and B of 2-318 do not prevent a court from abolishing the
vertical privity requirement even when a non-privity buyer seeks recovery for direct economic
White & Summers, supra, at 593 (emphasis in original).
Alternative C is the most expansive in eliminating the lack-of-privity defense. White
& Summers, supra, at 593; Hawkland, supra, at 792. It provides that:
A sellers warranty whether express or implied extends to any person who
may reasonably be expected to use, consume or be affected by the goods
and who is injured by breach of the warranty. Hawkland, supra, at
769. Alternative C expands the class of plaintiffs to include other nonpurchasers
such as the buyers employees and invitees, and bystanders. Jane M. Draper,
Annotation, Third Party Beneficiaries of Warranties Under UCC § 2-318, 100 A.L.R.3d 743
at §§ 5-6 (1980). Alternative C also eliminates the vertical privity requirement,
but is not restricted to personal injury. Because Alternative C refers
simply to injury, plaintiffs sustaining only property damage or economic loss in some
states have been held to have standing to sue under this language.
See, e.g., Milbank Mut. Ins. Co. v. Proksch, 244 N.W.2d 105 (Minn. 1976)
(allowing purchasers father to recover for residential property damage caused when their Christmas
tree caught fire). This is consistent with the stated objective of the
drafters that the third alternative follow the trend of modern decisions as indicated
by Restatement of Torts 2d § 402A (Tentative Draft No. 10, 1965) in
extending the rule beyond injuries to the person. Hawkland, supra, at 770; But
see Nebraska Innkeepers, Inc. v. Pittsburgh-Des Moines Corp., 345 N.W.2d 124, 129 (Iowa
1984) (holding Alternative C did not permit non-privity plaintiffs to seek recovery solely
for economic loss).
The commentaries to the UCC were careful to explain that the these alternatives
were not to be taken as excluding the development of the common law
on the issue of vertical privity:
[Alternative A] expressly includes as beneficiaries within its provisions the family, household and
guests of the purchaser. Beyond this, the section in this form is
neutral and is not intended to enlarge or restrict the developing case law
on whether the sellers warranties, given to his buyer who resells, extend to
other persons in the distributive chain.
U.C.C § 2-318, cmt. n.3.
F. Privity as an Obsolete Requirement as Applied to Consumer Goods
There is a split of authority in other jurisdictions with similar or identical
versions of section 2-318 on the availability of implied warranty claims by remote
purchasers, particularly if only economic loss is claimed, as in the present case.
Courts of other jurisdictions that have r
etained or adopted Alternative A note
that the statute speaks only to horizontal privity, and is silent as to
vertical privity. See, e.g., Morrow v. New Moon Homes, Inc., 548 P.2d
279, 287 (Alaska 1976); Kassab v. Central Soya, 246 A.2d 848, 855 (Pa.
1968), overruled on other grounds, AM/PM Franchise Assn v. Atlantic Richfield Co., 584
A.2d 915, 926 (Pa. 1990). As the Pennsylvania Supreme Court put it:
Merely to read the language [of § 2-318] is to demonstrate that
the code simply fails to treat this problem. . . . There thus
is nothing to prevent this court from joining in the growing number of
jurisdictions which, although bound by the code, have nevertheless abolished vertical privity in
breach of warranty cases. Kassab, 246 A.2d at 856 (emphasis in original).
Indiana has not legislated on this issue since 1966 when the UCC
adopted these three alternatives. More recently, the Buyback Vehicle Disclosure statute eliminated
the lack-of-privity defense for actions under that section. See I.C. § 24-5-13.5-13(c)
(1995). In short, the General Assembly in keeping Alternative A left to
this Court the issue of to what extent vertical privity of contract will
Courts that have abolished vertical privity have cited a variety of reasons.
Principal among these is the view that, in todays economy, manufactured products typically
reach the consuming public through one or more intermediaries. As a result,
any loss from an unmerchantable product is likely to be identified only after
the product is attempted to be used or consumed. Hininger v. Case
Corp. 23 F.3d 124, 127 (5th Cir. 1994) (In Texas, the privity requirement
is not needed to assert a claim for breach of an implied warranty
against a remote manufacturer of a finished product); Reed v. City of Chicago,
263 F. Supp. 2d 1123, 1125 (N.D. Ill. 2003) (Under Alternative A of
2-318, privity is no longer an absolute requirement for breach of warranty actions.
Since benefit of paper gowns were for the protection of potentially suicidal
detainees privity between the detainee and the manufacturer was not required for the
warranty to apply); Hubbard v. General Motors Corp., 39 U.C.C.2d (Callaghan) 83 (S.D.N.Y.
1996) (buyer from dealer could sue manufacturer for direct economic loss for defective
braking system in truck). Others have cited the concern that privity encourages
thinly capitalized manufacturers by insulating them from responsibility for inferior products. See
Groppel Co., Inc. v. United States Gypsum Co., 616 S.W.2d 49, 59 (Mo.
Ct. App. 1981). Yet others have focused on the point that if
implied warranties are effective against remote sellers it produces a chain of lawsuits
or crossclaims against those up the distribution chain. See Old Albany Estates,
Ltd. v. Highland Carpet Mills, Inc., 604 P.2d 849, 851-52 (Okla. 1979) (To
require vertical privity results in perpetuating a needless chain of actions whereby each
buyer must seek redress from his immediate seller until the actual manufacturer is
eventually reached.). And some focus on the reality in todays world that manufacturers
focus on the consumer in communications promoting the product. See Spring Motors
Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 676-77 (N.J. 1985) (Eliminating
the requirement of vertical privity is particularly appropriate in the present action where
Spring Motors read advertisements published by Clark, specifically requested Clark transmissions, expected the
transmissions to be incorporated into trucks to be manufactured by Ford, contracted with
Ford only, and now seeks to recover its economic loss.).
Finally, some jurisdictions have abolished privity in warranty actions where only economic losses
were sought based on the notion that there is no reason to distinguish
between recovery for personal and property injury, on the one hand, and economic
loss on the other. Hiles Co. v. Johnston Pump Co., 560 P.2d
154, 157 (Nev. 1977); accord Salvador v. Atlantic Steel Boiler Co., 389 A.2d
1148 (Pa. Super. Ct. 1978). A variance on this theme is the
view that abolishing privity simply recognizes that economic loss is potentially devastating to
the buyer of an unmerchantable product and that it is unjust to preclude
any recovery from the manufacturer for such loss because of a lack of
privity, when the slightest physical injury can give rise to strict liability under
the same circumstances. Groppel, 616 S.W.2d at 59. One court preserving
the privity requirement expressed the view that there may be cases where the
plaintiff may be unfairly prejudiced by the operation of the economic loss rule
in combination with the privity requirement. Ramerth v. Hart, 983 P.2d 848,
852 (Idaho 1999).
In Indiana, the economic loss rule applies to bar recovery in tort where
a negligence claim is based upon the failure of a product to perform
as expected and the plaintiff suffers only economic damages. Martin Rispens, 621
N.E.2d at 1089. Possibly because of the economic loss rule, Goodin did
not raise a negligence claim here. Furthermore, at oral argument Goodins attorney
pointed to the warranty disclaimer in the Buyers Order as a bar to
Goodins ability to sue her direct seller, AutoChoice, which could then have sued
Hyundai for reimbursement. This disclaimer, Goodin contends, precluded a chain of claims
ultimately reaching the manufacturer. Therefore, Goodin claims that if this Court does
not abolish the vertical privity requirement she will be left without a remedy
for Hyundais breach of its implied warranty of merchantability, and Hyundais implied warranty
becomes nonexistent in practical terms.
The basis for the privity requirement in a contract claim is essentially the
idea that the parties to a sale of goods are free to bargain
for themselves and thus allocation of risk of failure of a product is
best left to the private sector. Otherwise stated, the law should not
impose a contract the parties do not wish to make. The Court
of Appeals summarized this view well:
Generally privity extends to the parties to the contract of sale. It
relates to the bargained for expectations of the buyer and seller. Accordingly,
when the cause of action arises out of economic loss related to the
loss of the bargain or profits and consequential damages related thereto, the bargained
for expectations of buyer and seller are relevant and privity between them is
Implied warranties of merchantability and fitness for a particular use, as they relate
to economic loss from the bargain, cannot then ordinarily be sustained between the
buyer and a remote manufacturer.
Richards, 179 Ind. App. at 112, 384 N.E.2d at 1092 (citations omitted).
We think that this rationale has eroded to the point of invisibility as
applied to many types of consumer goods in todays economy. The UCC
recognizes an implied warranty of merchantability if goods are sold to consumers by
one who ordinarily deals in this product. Warranties are often explicitly promoted
as marketing tools, as was true in this case of the Hyundai warranties.
Consumer expectations are framed by these legal developments to the point where
technically advanced consumer goods are virtually always sold under express warranties, which, as
a matter of federal law run to the consumer without regard to privity.
15 U.S.C. § 2310. Magnuson-Moss precludes a disclaimer of the implied
warranty of merchantability as to consumer goods where an express warranty is given.
15 U.S.C. § 2308. Given this framework, we think ordinary consumers
are entitled to, and do, expect that a consumer product sold under a
warranty is merchantable, at least at the modest level of merchantability set by
UCC section 2-314, where hazards common to the type of product do not
render the product unfit for normal use. Cf. Allgood v. R.J. Reynolds
Tobacco Co., 80 F.3d 168, 171 (5th Cir. 1996) (under Texas law, only
actual sellers are liable, not trade associations nor public relations agents who play
a role in distribution. Even where a party has promoted a product,
and made promises regarding that product, if the party is not the actual
seller a claim for breach of warranty will not lie.).
Even if one party to the contractthe manufacturerintends to extend an implied warranty
only to the immediate purchaser, in a consumer setting, doing away with the
privity requirement for a product subject to the Magnuson-Moss Warranty Act, rather than
rewriting the deal, simply gives the consumer the contract the consumer expected.
The manufacturer, on the other hand is encouraged to build quality into its
products. To the extent there is a cost of adding uniform or
standard quality in all products, the risk of a lemon is passed to
all buyers in the form of pricing and not randomly distributed among those
unfortunate enough to have acquired one of the lemons. Moreover, elimination of
privity requirement gives consumers such as Goodin the value of their expected bargain,
but will rarely do more than duplicate the Products Liability Act as to
other consequential damages. The remedy for breach of implied warranty of merchantability
is in most cases, including this one, the difference between the value of
the goods accepted and the value they would have had if they had
been as warranted. I.C. § 26-1-2-714(2). This gives the buyer the
benefit of the bargain. In most cases, however, if any additional damages
are available under the UCC as the result of abolishing privity, Indiana law
would award the same damages under the Products Liability Act as personal injury
or damage to other property from a defective product. Gunkel v. Renovations,
Inc., 2005 W.L. 236630 (Feb. 01, 2005).
For the reasons given above we conclude that Indiana law does not require
vertical privity between a consumer and a manufacturer as a condition to a
claim by the consumer against the manufacturer for breach of the manufacturers implied
warranty of merchantability.
The judgment of the trial court is affirmed.
Shepard, C.J., and Dickson, Sullivan, and Rucker, JJ. concur.
On the Buyers Order, AutoChoice Hyundai included the following preprinted language in
All warranties, if any, by a manufacturer or supplier other than dealer are
theirs, not dealers, and only such manufacturer or other supplier shall be liable
for performance under such warranties, unless dealer furnishes buyer with a separate written
warranty made by dealer on its own behalf. Dealer hereby disclaims all
warranties, express or implied, including any implied warranties of merchantability or fitness for
a particular purpose, on all goods and services sold by DEALER. . .
Hicks is an A.C. Certified Master Engine Machinist and Diesel Fuel Technician
who had been trained in brakes during his certification process.
Footnote: Hyundais minimum standard thickness for rotors is 22.4 millimeters and the rotors
on Goodins car (bought from NAPA and installed by Hicks) measured 21.9 and
Reed v. Central Soya Co., Inc., 621 N.E.2d 1069, 1074 (Ind.
1993), this Court defined economic damages under Indiana law as the diminution in
the value of a product and consequent loss of profits because the product
is inferior in quality and does not work for the general purposes for
which it was manufactured and sold. In this case, Goodin seeks only
direct economic damages the decreased value of the Sonata by reason of the
allegedly defective brakes. Goodin seeks the difference between the actual value of
the goods accepted and the value they would have had if they had
been as warranted. See I.C. § 26-1-2-714(2). Damages can also be
measured by the cost of replacement or the cost of repair. Rheem
Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 746 N.E.2d 941, 955-56
Texas has adopted a statute that leaves questions of horizontal and vertical
privity for the courts. Tex. Bus. & Com. Code § 2.318 (2004)
(This chapter does not provide whether anyone other than a buyer may take
advantage of an express or implied warranty of quality made to the buyer
or whether the buyer or anyone entitled to take advantage of a warranty
made to the buyer may sue a third party other than the immediate
seller for deficiencies in the quality of the goods. These matters are left
to the courts for their determination.) Louisiana has never enacted any part
of Article 2 of the Uniform Co
Alternative A has been adopted in the following states in addition to
Indiana: Alaska, Arizona, Arka
nsas, Connecticut, District of Columbia, Florida, Georgia, Idaho, Illinois,
Kentucky, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Washington, West Virginia, and Wisconsin. See
Hawkland, supra, at 778 n. 1. The Florida statute is a nonstandard
version of Alternative A, and includes the purchasers employees among those entitled to
assert implied warranty. Fla. Stat. § 672.318 (2004). In addition, case
law in Illinois and Pennsylvania has expanded the class of potential third party
beneficiaries and defendants. See, e.g., Whitaker v. Lian Feng Mach. Co., 509
N.E.2d 591, 595 (Ill. App. Ct. 1987); and Salvador v. Atlantic Steel Boiler
Co., 319 A.2d 903, 906 (Pa. 1974).
Indiana Code section 26-1-2-103(1)(a) defines buyer as a person who buys or
contracts to buy goods and section 26-1-2-103(1)(d) defines seller as a person who
sells or contracts to sell goods. Indianas ve
rsion of the U.C.C. restricts
those terms to direct buyers and direct sellers.
Several jurisdictions that have adopted Alternative A have abolished privity.
Morrow v. New Moon Homes, 548 P.2d 279, 291-92 (Alaska 1976); Manheim v.
Ford Motor Co., 201 So. 2d 440 (Fla. 1967); Groppel Co., Inc. v.
U.S. Gypsum Co., 616 S.W.2d 49, 58 (Mo. Ct. App. 1981) (abolishing vertical
privity and extending implied warranty to remote purchasers even when only economic loss
is claimed); Peterson v. N. Am. Plant Breeders, 354 N.W.2d 625, 631 (Neb.
1984); Hiles Co. v. Johnston Pump Co., 560 P.2d 154, 157 (Nev. 1977);
Spring Motors Distrib., Inc. v. Ford Motor Co., 489 A.2d 660, 676 (N.J.
1985); Old Albany Estates Ltd. v. Highland Carpet Mills, Inc., 604 P.2d 849,
852 (Okla. 1979); Spagnol Enters., Inc. v. Digital Equipment Corp., 568 A.2d 948,
952 (Pa. 1989); Dawson v. Canteen Corp., 212 S.E.2d 82, 82-83 (W. Va.
Others have retained the common law privity rule. See Flory v. Silvercrest
Indus., 633 P.2d 383, 388 (Az. 1981); Ramerth v. Hart, 983 P.2d 848,
852 (Idaho 1999) (upheld vertical privity requirement but left open the possibility of
a different conclusion if the combination of the privity requirement and the economic
loss rule proved unjust); Presnell Constr. Managers, Inc. v. EH Constr., LLC, 134
S.W.3d 575, 579 (Ky. 2004); Energy Investors Fund, L.P. v. Metric Constructors, Inc.,
525 S.E.2d 441, 446 (N.C. 2000); Hupp Corp. v. Metered Washer Serv., 472
P.2d 816 (Or. 1970); Messer Griesheim Indus. v. Cryotech of Kingsport, Inc., 131
S.W.3d 457, 463 (Tenn. Ct. App. 2003); City of La Crosse v. Schubert,
Schroder & Associates, Inc., 240 N.W.2d 124, 126 (Wis. 1976), overruled on other
grounds, Daanen & Janssen v. Cedarapids, Inc., 573 N.W.2d 842 (Wis. 1998).