Selling Used Vehicles Without Warranty Worries

If you are selling a used vehicle “as is,” take steps to ensure that it doesn’t come back to haunt you. If you are providing limited warranties or service contracts, you need to be aware of the types of warranties that apply, and how to effectively limit them.

You might be thinking that the whole point of “as is” sales is to avoid any further responsibility or liability. However, problems arise if a 60 or 90 day guarantee or warranty is provided, or if a service contract is entered into at the time of the sale of the “as is” vehicle. The Magnuson-Moss Warranty Act (MMWA) is the Federal law that regulates warranties and disclaimers. The MMWA is clear that if a dealer offers its own warranty or enters into its own service contract on a used vehicle, the “as is” status is lost and Iowa implied warranties apply to the sale. Because these warranties are implied by statute and do not appear in the contract, it is beneficial to know what they are and how they may apply to the sale of your used vehicles.

Iowa Implied Warranties on the Sale of Used Vehicles:

In Iowa, the applicable implied warranties to avoid are:

1) The Implied Warranty of Merchantability, and

2) The Implied Warranty of Fitness for a Particular Purpose.

The Implied Warranty of Merchantability:

A purchaser of a used vehicle can bring a claim under the Implied Warranty of Merchantability so long as 1) the dealer is a merchant, 2) the used vehicle is not merchantable (see below), 3) the purchaser is proximately damaged, and 4) the purchaser gives dealer timely notice of defect. If you are receiving this newsletter, you certainly qualify as a merchant. The purchaser’s damages are usually the cost to repair the problems with the used vehicle. Lastly, if the purchaser doesn’t tell you about it and keeps driving the car despite the problems, after a reasonable passage of time,  the customer likely  can’t come back later and win a suit under an implied warranty claim.

The real crux of the Implied Warranty of Merchantability is whether the used vehicle is merchantable. So what does it mean for a used vehicle to be merchantable? Iowa courts have not addressed this particular issue at the time of publication, but it is likely they would approach such a case as follows.  At the time of sale, a used car must be in reasonably safe condition, substantially free of defects that could render it inoperable, and perform up to the level reasonably expected of a car of the same age, mileage, and price. This means that a vehicle with many miles and sold for a significant discount would not be held to the same standard as a premium used vehicle with fewer miles and a higher price tag.

When the purchaser fails to win their Implied Warranty of Merchantability case, it is typically because they fail to show that the defects existed at the time of sale.  However, this is a determination that may be made by a jury, based on circumstantial evidence.

The Implied Warranty of Fitness for a Particular Purpose:

The Implied Warranty of Fitness for a Particular Purpose does just what it sounds like, it warrants that a vehicle is fit for the particular purpose that the purchaser has in mind. Although this varies from purchaser to purchaser, almost all vehicles are purchased with the intent that they be used as transportation. As such, when a used vehicle is defective, both the warranties of Merchantability and Fitness for a Particular Purpose are breached. This warranty becomes more important when a purchaser comes to the dealership with a specific purpose in mind, like hauling trailers or off-roading, and then relies on the dealership sales person to select a particular vehicle that meets that purpose. As long as the vehicle can do what is promised, this warranty is not a problem. But, if you sell the vehicle knowing that they need to haul up to two tons and the vehicle can only handle one ton, the purchaser may have a claim under the Warranty of Fitness for a Particular Purpose.

Avoiding Warranties Altogether – Selling Vehicles “AS IS”:

Now that you have a better idea of the kinds of implied warranties that might apply to your used vehicle sales, you might be wondering how you can avoid such warranties. The key here is two words — “AS IS”. When you sell a used vehicle “as is” the implied warranties are excluded from the transaction. If you are selling the vehicle “as is” then under no circumstances should you add any 60 or 90 day warranties or enter into any service contracts. Adding these warranties or service contracts may negate the “as is” language and reinstate the implied warranties to the transaction.

Properly Limiting Implied Warranties:

Now you might be wondering if you can make a 60 or 90 day warranty or service contract, and then be free from liability after the time period expires. Generally, the implied warranties discussed above still apply to the transaction after the express warranty expires.  The MMWA allows the dealer to limit the application of the implied warranties so that they expire at the same time as the express warranty. An example of language upheld by courts in Illinois:

To the extent allowed by law, any implied warranty of merchantability or fitness applicable to this vehicle is limited to the 12-month/12,000 mile duration of this written warranty. 

If you are concerned about properly selling your used fleet, contact your auto dealer counsel.