The Privity Defense in Commercial Warranty Actions: Still Lingering Forty-Five Years After Legislative AbolitionPosted: February 2, 2018
by David R. Geiger and Richard G. Baldwin
On July 21, 2017, in Organic Mulch & Landscape Supply of New England LLC v. Probec, Inc. [i] the United States District Court for the District of Massachusetts dismissed a groundskeeping supply business’s breach of warranty claims against a manufacturer to recover the purchase price, repair costs and lost profits from allegedly defective ice bagging equipment because plaintiff bought the equipment from a distributor rather than directly from the manufacturer. The court further denied plaintiff’s motion to certify to the Massachusetts Supreme Judicial Court (“SJC”) the question of whether privity was required for a commercial plaintiff’s warranty claim for economic loss, reasoning that the “answer is clear in the case law.” In support, the court asserted that since the late 1990s courts have “uniformly” required privity under these circumstances, citing opinions from four different Massachusetts federal judges.
This authority, however, appears to be at odds with the plain language of Mass. Gen. L. ch. 106, § 2-318, which provides:
Lack of privity between plaintiff and defendant shall be no defense in any action brought against the manufacturer . . . to recover damages for breach of warranty, express or implied, or for negligence . . . if the plaintiff was a person whom the manufacturer . . . might reasonably have expected to use, consume or be affected by the goods.
As discussed below, the Massachusetts federal court’s departure from the statutory language rests on a tenuous basis, particularly in light of the statute’s history and interpretation by the SJC, and raises significant practical and policy concerns.
The Path To The Federal Court Rule
The original version of § 2-318 abolished the privity requirement only for breach of warranty claims by a “natural person who is in the family or household of [the] buyer or who is a guest in his home . . . and who is injured in person” by a warranty breach.[ii] In 1971, the section was re-written to extend the abolition to “any action . . . to recover damages for breach of warranty, express or implied, or for negligence” by “a person whom the manufacturer . . . might reasonably have expected to use, consume or be affected by the goods.” In 1973, the legislature added a two-year statute of limitations for “all actions under this section,” and in 1974 extended it to three years.[iii]
For nearly twenty-five years, the 1971 amendment to § 2-318 was consistently interpreted to have eliminated the privity defense in all warranty cases.[iv] Even the Massachusetts federal court opinions noted above agree on this,[v] but they cite the SJC’s 1989 decision in Bay State-Spray & Provincetown S.S., Inc. v. Caterpillar Tractor Co.[vi] as a turning point in the statute’s interpretation.
The issue in Bay State-Spray was not privity, however, but which of two “literally appli[cable]” statutes of limitations governed a warranty claim for repair costs and lost profits against the manufacturer of an allegedly defective engine in a ferry sold to plaintiff by a shipyard. Section 2-318 establishes a three-year statute of limitations from the date of injury for actions “under this section,” which includes warranty claims, but Mass. Gen. L. ch. 106, § 2-725 imposes a four-year limitations period generally running from the date of sale for actions “for breach of any contract,” including “breach of warranty.” The SJC viewed the legislature as having two purposes in expanding § 2-318: “to eliminate requirements of privity and to express new principles of strict liability for personal injuries and property damage caused by a seller’s breach of warranty.” Based on the latter, the court reasoned that the limitations period of § 2-318 governed “tort-based warranty claims,” in which the product causes personal injury or damage to property other than the product itself, while that of § 2-725 governed “contract-based warranty claims,” in which the product causes only economic loss or damage to the product itself. As plaintiff’s claim was contract-based and brought more than four years after the sale, § 2-725 applied and barred the claim. In a footnote, the SJC mentioned that defendant had not argued that plaintiff’s lack of privity barred the claim.
Six years later, the United States District Court for the Southern District of New York in Hadar v. Concordia Yacht Builders[vii] relied on Bay State-Spray to conclude that Massachusetts law required privity for contract-based warranty claims. In Hadar, a yacht owner sued his shipbuilder and the distributors and manufacturers of epoxy resin and fabric used to construct the ship for a cosmetic defect allegedly caused by incompatibility between the resin and fabric. The distributor and manufacturer defendants asserted that lack of privity barred plaintiff’s warranty claims. The court interpreted Bay State-Spray to hold that § 2-725—which is entitled “Statute of Limitations in Contracts for Sale”—governed all aspects of contract-based warranty claims and that § 2-318 is inapplicable to such claims. The court reasoned that although Bay State-Spray “involved” statute of limitations issues, the SJC “did not limit its discussion of the scope of section 2-318 to [such] issues.” Because § 2-725 does not address privity, the court held Massachusetts still required it for contract-based warranty claims.
Less than a month later, however, the SJC held in Jacobs v. Yamaha Motor Corp., U.S.A.,[viii] that privity was not required for the purchaser of a consumer product to recover from its manufacturer for contract-based warranty claims. The court noted that Mass. Gen. L. ch. 106, § 2-316A expressly prohibits a “manufacturer of consumer goods”[ix] from disclaiming or limiting implied warranties or remedies for their breach, thus creating the “implication” that such a manufacturer indeed “makes an implied warranty . . . to the consumer,” i.e., that privity is not required. Moreover, § 2-318 is even “[m]ore explicit” and “on its face invalidate[d]” the manufacturer’s privity argument, since the statute’s abolition of the privity requirement “is not limited to recovery for personal injury but rather refers [more broadly] to ‘damages’ for breach of warranty,”—unlike two of the three official UCC alternatives for the section. The SJC also noted that Massachusetts’ § 2-318 is “at least as broad as,” and in some respects “goes beyond,” the UCC’s broadest Alternative C, which had been interpreted by courts across the country as permitting consumers to recover for non-personal injury warranty claims absent privity.[x]
While the Jacobs Court noted Bay State-Spray’s conclusion that § 2-318 had been enacted with a tort “focus,” it reasoned that focus should not “inhibit the independent development of the law concerning warranties.” Acknowledging in dicta the possibility that “[c]ontract-based warranty claims involving commercial transactions may generally call for different treatment than tort-based warranty claims,” the SJC asserted that buyers of consumer goods “deserve separate consideration because of the special legislation affecting them.” The court explained it was responding to this treatment by interpreting sections 2-316A and 2-318 to abolish the privity requirement for a buyer of consumer products to bring a contract-based warranty claim against the manufacturer.
Following Jacobs, developments in the Hadar litigation caused the New York court to revisit its prior ruling.[xi] Acknowledging the decision in Jacobs, but noting that its holding was limited to buyers of consumer products, the court retained its original conclusion for contract-based warranty claims “arising in the context of commercial transactions.” The court did not address the fact that its original decision was premised on § 2-725, while Jacobs did not even cite that section, much less say that it governed all aspects of contract-based warranty claims. Nor did the court acknowledge Jacobs’ affirmative reliance on § 2-318’s plain language that was “explicit” in its abolition of the privity requirement, including for economic loss claims, and was at least as broad as—and in some respects went beyond—UCC Alternative C.
Seven months later, the Massachusetts federal court in Sebago, Inc. v. Beazer East, Inc.[xii] adopted Hadar’s interpretation of Bay State-Spray and Jacobs to conclude that, under Massachusetts law, “commercial plaintiffs must allege privity to maintain a breach of warranty action against a manufacturer.” Later opinions of the Massachusetts federal courts follow Sebago and its analysis, generally without citing Hadar.[xiii]
The SJC’s Subsequent Decision in Theos & Sons
The SJC has not subsequently revisited the possibility raised in Jacobs that commercial contract-based warranty claims may warrant different treatment than tort-based warranty claims or, more pertinently, whether such claims should be treated differently from consumer contract-based warranty claims, which Jacobs explicitly held did not require privity.[xiv] But at least one post-Jacobs case strongly suggests the court does not view privity as a requirement even for commercial contract-based warranty claims.
In Theos & Sons, Inc. v. Mack Trucks, Inc.,[xv] a business that bought a commercial truck second-hand from another business sued the manufacturer for breach of the implied warranty of merchantability to recover for economic losses from failure of the truck’s engine. The SJC affirmed dismissal of plaintiff’s claim because the manufacturer had effectively disclaimed any implied warranty in its sale to the first buyer, holding that the disclaimer was effective against any subsequent buyer, even one unaware of the disclaimer. In reaching its conclusion, the SJC specifically noted that “§ 2-318 extends all warranties . . . to third parties who may reasonably be expected to use the warranted product,” without making any distinction between consumer or commercial transactions, and observed that while § 2-318 itself did not explicitly address the effects of warranty disclaimers on remote plaintiffs, the section’s comments did. Theos & Sons thus strongly implies that the court may view § 2-318’s abolition of the privity requirement for contract-based warranty claims as equally applicable to both commercial and consumer products.
Practical and Policy Concerns
Although the Massachusetts federal court decisions requiring privity apply only to commercial buyers and contract-based warranty claims, the decisions nonetheless have considerable practical and policy consequences. For example, commercial buyers that purchase through intermediaries such as distributors may lack a remedy if their immediate seller becomes insolvent. Indeed, that may be the outcome in Organic Mulch, where the court dismissed plaintiff’s claims against the manufacturer for lack of privity but claims against the distributor have been stayed by its bankruptcy filing.
While insolvency may be a comparatively rare occurrence, the federal court rule will almost always have litigation consequences. For example, since the manufacturer inevitably possesses the most critical information and documents concerning any alleged product defect, a plaintiff limited to suing its immediate seller must incur the additional burden of pursuing third-party discovery from the manufacturer to obtain information necessary to prosecute its claim. In addition, the rule is likely to foster multiple litigations: each party in the sales chain would have to bring a suit against the entity with which it was in privity until liability ultimately reaches the manufacturer.
The federal court rule also has significant policy consequences. For one, preventing suits against manufacturers that sell indirectly fails to situate liability, and the corresponding economic incentive, on the truly responsible entity. The SJC has noted in the tort context that the law seeks to impose liability on the party in the best position to prevent or remedy a product defect.[xvi] This principle should be not be rendered inapplicable by the happenstance that the product caused only economic loss, creating a contract-based claim, rather than personal injury or property damage that would create a tort-based claim. Moreover, to the extent the federal court’s position diverges from that of the state court’s, a manufacturer’s liability will turn not on its culpability but rather whether plaintiff’s claims can be removed to federal court.
In addition, interpreting § 2-318 contrary to its seemingly unambiguous meaning may run afoul of the SJC’s requirement that courts must “carry out the legislature’s intent, determined by the words of a statute interpreted according to the ordinary and approved usage of the language.”[xvii]
In light of this fundamental principle, Jacobs’ statement (albeit in the context of a consumer claim) that § 2-318 is “explicit” in abolishing the privity requirement for contract-based warranty claims and Theos & Sons’ strong implication that this abolition is as applicable to commercial as to consumer plaintiffs, courts and litigants would benefit by the SJC’s finally resolving the issue. Accordingly, a future federal court may want to consider requesting such a resolution. Alternatively, a direct state court appeal may provide the SJC that same opportunity.
[i] Civil Action No. 16-10658-RGS, 2017 U.S. Dist. LEXIS 113716 (D. Mass. July 21, 2017).
[ii] See Bay State-Spray & Provincetown S.S., Inc. v. Caterpillar Tractor Co., 404 Mass. 103, 108 n.6 (1989) (quoting 1957 version of statute).
[iii] See id. at 109.
[iv] See, e.g., id. at 104 (“Our discussion will require an analysis of the unique Massachusetts treatment of G.L. c. 106 § 2-318, . . . which the Legislature has used to eliminate requirements of privity”); Cameo Curtains, Inc. v. Philip Carey Corp., 11 Mass. App. Ct. 423, (1981) (“The fundamental purpose of § 2-318, as amended, is to eliminate lack of privity as a defense in a breach of warranty action.”).
[v] E.g., First Choice Armor & Equip., Inc. v. Toyobo Am. Inc., 839 F. Supp. 2d 407, 412 (D. Mass. 2012) (“For a time, Massachusetts courts assumed that § 2-318 eliminated the privity requirement for all breach of warranty actions regardless of the kind of injury involved.” (citing cases)); W.R. Constr. & Consulting, Inc. v. Jeld-Wen, Inc., Civil Action No. 01-10098-DPW, 2002 U.S. Dist. LEXIS 18686, at *20 n.3 (D. Mass. Sept. 20, 2002) (“Throughout the early 1980s, the Massachusetts courts appeared to treat § 2-318 as covering all breach of warranty claims.”).
[vi] 404 Mass. 103, 105–11 (1989).
[vii] 886 F. Supp. 1082, 1097–98 (S.D.N.Y. 1995).
[viii] 420 Mass. 323, 327–31 (1995).
[ix] Consumer goods are those “bought for use primarily for personal, family or household purposes.” G.L. c. 106 § 9-102 (made applicable by G.L. c. 106 § 2-103).
[x] 420 Mass. at 328–29. The UCC’s § 2-318 is captioned “Third Party Beneficiaries of Warranties Express or Implied” and provides three alternatives for state legislatures. Alternative A is the version Massachusetts adopted in 1957. Compare Bay State-Spray, 404 Mass. at 108 n.6 with Jacobs, 420 Mass. at 328 n.4. Alternative B abolishes the privity requirement for “any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person” by a warranty breach. Jacobs, 420 Mass. at 328 n.4. Alternative C abolishes the defense for “any person who may reasonably be expected to use, consume or be affected by the goods and who is injured” by a warranty breach, the only alternative that “concerns more than personal injury.” Id. Massachusetts’ current § 2-318, captioned “Lack of Privity in Actions Against a Manufacturer, Seller or Supplier of Goods,” like Alternative C, contains no limitation either to “natural” persons or injury “in person,” but is even broader in that, for example it also governs claims “for negligence.”
[xi] Hadar v. Concordia Yacht Builders, 92 Civ. 3768 (RLC), 1997 U.S. Dist. LEXIS 11182, at *11–15, 1997 WL 436464 (S.D.N.Y. Aug. 1, 1997).
[xii] 18 F. Supp. 2d 70, 97–99 (D. Mass. 1998).
[xiii] See First Choice, 839 F. Supp. 2d at 412–13; Irish Venture, Inc. v. Fleetguard, Inc., 270 F. Supp. 2d 84, 87 (D. Mass. 2003); W.R. Constr. & Consulting, Inc., 2002 U.S. Dist. LEXIS 18686, at *18–20.
[xiv] In Canal Electric Co. v. Westinghouse Electric Corp., an opinion on certified questions, the SJC declined to address whether a commercial plaintiff would be barred from recovering purely economic losses from the manufacturer of an allegedly defective generator absent privity, as that question was not certified to the Court. 406 Mass. 369, 370 n.1 (1990).
[xv] 431 Mass. 736 (2000).
[xvi] E.g., Colter v. Barber-Greene Co., 403 Mass. 50, 57 (1988) (“We hold a manufacturer liable for defectively designed products because the manufacturer is in the best position to recognize and eliminate the design defects.”).
[xvii] Goodridge v. Dep’t of Pub. Health, 440 Mass. 309, 319 (2003).
Mr. Geiger and Mr. Baldwin are partners in the litigation department of the Boston office of Foley Hoag LLP. They are both members of the firm’s Product Liability and Complex Tort Practice Group, of which Mr. Geiger is the chair.