Warranty disputes in the automotive industry are fairly common. They generally follow a similar progression: after accepting delivery of parts, the buyer (sometimes soon after delivery; sometimes years down the road) discovers a defect and expects the supplier to remedy that defect, either by replacing or repairing the part, and compensating the buyer for the damages it incurred as a result of the defect, which can include recalls.
The COVID-19 pandemic has exacerbated the likelihood of warranty claims, given the chaos that OEMs and suppliers have endured while trying to balance full production capacity amid product and labor shortages, strict government orders and other supply chain disruptions. These challenges, coupled with OEMs looking to offset their financial strife, may result in even more warranty claims in the future. Accordingly, a supplier that receives a warranty claim or cost recovery demand should follow certain steps.
The first and most important step in any warranty claim is to read the contract—paying particular attention to the contract’s warranty provisions, assuming such provisions exist.
Here are a few key considerations to keep in mind during your review:
What is the scope of the warranty provision? Does it apply to the parts at issue?
Is the remedy for the warranty limited in any way (e.g., exclusively a repair or replace remedy)?
Does the warranty have a specified duration (e.g., a one-year warranty)?
Does the warranty provision state what notice must be provided to the seller, and if so, what are parameters of that required notice?
Does the warranty provision give the seller an opportunity to cure the purported defect?
In situations where a contract is silent regarding one or more of the issues identified above, the Uniform Commercial Code (UCC), a set of laws which govern commercial transactions in the United States, will fill in the gaps of your contract.
For example, if a contract does not address the notice afforded to a seller, the parties must look to the UCC for guidance. Under Michigan’s UCC, in order to recover for defective parts after accepting them, a buyer must notify the seller of the breach of warranty “within a reasonable time” after it discovers or should have discovered the breach. Stated differently, to recover on a breach of warranty claim, the buyer’s notice must be both timely and the content of the notice must be sufficient. Failure to provide adequate notice will bar the buyer from any remedy associated with nonconforming goods.
Michigan courts take a strict view of the notice requirement. The courts hold that a buyer’s notice of nonconformity must specifically inform the seller that the buyer believes the seller to be in breach of the warranty. In other words, the buyer must actually utter the magic words: “You are in breach of the warranty.” Failure to do so may be fatal to the buyer’s breach of warranty claim. In fact, the United States District Court for the Eastern District of Michigan recently held that providing notice of the facts surrounding the breach is insufficient; the buyer must actually notify the seller that the facts constitute a breach of the warranty. See Reid v. Gen. Motors LLC, --- F.Supp.3d --- (E.D. Mich. 2020).
Not only must the buyer use the “magic words,” the buyer must also provide the seller with notice of the warranty breach “within a reasonable time” after the buyer discovered or should have discovered the breach. The definition of “reasonable time” under the UCC is vague. It states, “The time of notification is to be determined by applying commercial standards to a merchant buyer.” One thing is clear, however, from Michigan case law, and that is the act of filing a lawsuit does not amount to reasonable notice. Indeed, the United States District Court for the Eastern District of Michigan previously held that the buyer’s notice—given eight months after the buyer discovered the defect—was unreasonable as a matter of law.
In addition to the considerations above, it is important for the buyer to pay attention to the statute of limitations. Michigan’s UCC requires breach of warranty claims to be brought within four years after the claim accrues, unless the parties have agreed by contract to a shorter time period. Determining when the claim accrues depends on whether the warranty extends to future performance of the goods. If so, the warranty claim accrues when the breach is discovered or should have been discovered. If not, the four-year statute of limitations begins to run when tender of delivery is made, regardless of the buyer’s knowledge of the breach.
There are many factors that must be taken into consideration before a breach of warranty claim may be asserted. Among other things, there are magic words that must be stated before the OEM can bring suit against a supplier for breach of warranty. Warner’s Automotive Industry Group is ready to help suppliers navigate warranty claims and cost recovery demands.