MAN Engines & Components, Inc. v. Shows NO. 12-0490

JUSTICE WILLETT delivered the opinion of the Court. JUSTICE BROWN did not participate in the decision.

This is a breach of warranty case in which it is argued that an implied warranty of merchantability should extend to purchasers of used goods. In 2002, Doug Shows purchased a used, fifty-foot yacht through a broker, Texas Sportfishing, for $525,000. The boat was powered by high-performance inboard engines manufactured and sold by a foreign company’s United States counterpart, MAN Engines & Components (MAN). Prior to purchase, Shows had the engines inspected by an authorized service dealer for MAN. At the time of purchase, Texas Sportfishing gave Shows a letter from the service dealer’s president originally addressed to a broker. The letter, dated September 17, 2001, stated that a two-year express warranty applied to the engines “on everything” and an additional three-year warranty applied “on major components.” Shows also signed a “certification of acceptance of vessel” on Texas Sportfishing letterhead stating that the boat was being sold “as is.”

In June 2004, while Shows was fishing with friends, the boat’s starboard engine failed because of a bad valve. Although the full two-year warranty had expired by that time, the three-year warranty was still available. Shows filed a warranty claim only to discover that the parts involved were not considered “major components” covered by the warranty. Still, MAN gave Shows a check for about $5,800 for goodwill to help with repair costs, which were nearly $40,000. A year later, in 2005, the same engine failed, this time beyond repair. The failure resulted from the same bad valve. Again, Shows was told the damage was not covered by warranty. Shows replaced the engine and in June 2006 sued MAN for negligence, fraud, negligent misrepresentation, breaches of express and implied warranties, and deceptive trade practices.

Although a jury trial found MAN liable for only the breach of the implied warranty of merchantability claim and awarded Shows almost $ 90,000, the trial judge issued summary judgment n.o.v. because it concluded that Shows could not prevail on an implied-warranty theory because there was a disclaimer from the first sale of the boat and alternatively, a lack of contractual privity between MAN and Shows. The disclaimer was based on a document Shows found online of a 2003 generic warranty issued by MAN. Relevant excerpts of the document included an express disclaimer which stated that “[t]he limited warranty herein set forth is the sole and exclusive warranty with respect to Series D 28 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 [are] hereby displaced.”

The court of appeals reversed the trial court’s summary judgment. The court of appeals refused to consider MAN’s express-disclaimer defense, because MAN did not raise it as an affirmative defense in its pleadings and the issue was not tried by consent. This express disclaimer defense became the first issue that the Texas Supreme Court would tackle, along with the question of implied warranties for used goods.

Issues: (1) Whether “express disclaimer” is an affirmative defense under Texas Rule of Civil Procedure 94.

(2) Whether implied warranties apply to used-good purchasers.

MAN raised its express-disclaimer argument for the first time in its Motion for JNOV. From the Court’s perspective, this violated the clear requirement that affirmative defenses must be raised in pretrial pleadings. “Disclaimer is an affirmative defense subject to Rule 94 requirements. Rule 94 provides a list of affirmative defenses and then adds a catch-all that sweeps in ‘any other matter constituting an avoidance or affirmative defense.’ Disclaimer falls into this ‘any other matter’ catch-all.” Additionally, the Court explained that the purpose of Rule 94 is one of fairness: it allows the plaintiff to reasonably prepare to rebut or explain facts distinct from their primary claim. “Accordingly, MAN cannot rely on itspurported express disclaimer of implied warranties issued at the first sale unless it properly raised that defense in the trial court.”

Next, the Court addressed the main issue of whether implied warranties apply to used-good purchasers. Relying on the previous case of NobilityHomes of Texas, Inc. v. Shivers, where it held that privity does not need to exist between an upstream defendant and a downstream plaintiff in order for the plaintiff to recover on an implied-warranty claim, the Court held that “[a] merchant’s legally imposed duty to issue merchantable goods [does not] automatically end when a good passes to subsequent buyers.” The Court reasoned that a downstream purchaser who seeks to recover for economic loss under an implied-warranty theory, whether he buys the product new or used, seeks to hold the merchant accountable only for the state of the product when it passed to the first buyer.

MAN argued that a buyer who knowingly purchases a used good and inspects it has effectively waived the implied warranty of merchantability. The Court acknowledged that 2.316(c)(2) provides that examination of goods or refusal to examine goods before entering into a contract serves to waive an implied warranty “with regard to defects which an examination ought in the circumstances to have revealed to [the buyer].” The Court, however, distinguished between an impliedwarranty action between a second-hand buyer and an immediate seller, and an implied-warranty action between a second-hand buyer and the original manufacturer. The inspection Shows employed on his boat did not waive the implied warranty of merchantability against the original manufacturer, because as the Court stated: “The buyer’s knowledge that a good is used does not automatically erase an implied-warranty claim when a manufacturer makes a defective product. The defect doesn’t rub off with use.”

Finally, the question of whether an “as is” clause negates an implied warranty claim by a second-hand buyer against the manufacturer could not be reached in this case. In Texas, all implied warranties are nullified by “as is” language unless the circumstances indicate otherwise. Unfortunately, MAN did not plead the “as is” clause in the trial court or the court of appeals. Therefore, procedurally, the Court declined to address the argument.

In sum, if a manufacturer validly disclaims implied warranties from the beginning, then that disclaimer will transfer with the good itself. Without a disclaimer, however, manufacturers remain liable to the subsequent purchasers of a good who rely on an implied warranty that was created from the first sale. “The law imposes an obligation that merchants sell merchantable goods, and when [goods] fall short of this standard, a second-hand buyer who suffers an economic loss from a defect has a right of recovery through an implied-warranty action.”