Auto DefenseJames S. SifersUsed-Car Dealerships

Pitfalls in Warranty

Pitfalls in Warranty

Whether your dealership provides a warranty for the vehicles it sells may be a decision based on business practices or it may be required by law. When a warranty is provided by a dealership oftentimes that warranty can expose the dealership to consumer claims should the purchaser claim issues with the vehicle. Before you decide whether your dealership should offer warranties on the vehicles you sell, you should first determine whether California law requires you to offer a warranty at all.

If your dealership keeps 10 percent of your purchase contracts as in-house deals, then you are considered to be a “Buy-here-pay-here” dealer. (Cal. Veh. Code § 241.) There are exceptions to the “Buy-here-pay-here” rules, but those require you to either lease relatively new vehicles or sell certified vehicles and maintain a Bureau of Automotive Repair facility with qualified technicians. (Cal. Veh. Code § 241.1.) If your dealership is a “Buy-here-pay-here” dealer, California law requires that you provide an expansive warranty which, at a minimum, lasts for 30 days or 1,000 miles and requires the dealership to pay 100 percent of the costs of labor and parts for any repair made per the warranty. (Cal. Civ. Code § 1795.51.) In the alternative, and during the duration of the warranty, the dealer may elect to unwind the purchase should issues arise with the vehicle that would otherwise be covered by the warranty. (Id.) If you are a “Buy-here-pay-here” dealer, then the choice is made for you, you are giving a warranty.

If you are not a “Buy-here-pay-here” dealer, then your dealership has the choice whether to offer a warranty or not. Warranties give customers peace of mind. That goes a long way in finalizing a sale. However, if your dealership voluntarily provides a warranty, for whatever length and coverage, consumer attorneys will argue that the implied warranties apply to the entire vehicle. (See Mega RV Corp. v. HWH Corp. (2014) 225 Cal.App.4th 1318, 1334-1335.) Implied warranties generally provide that the consumer is able to use the vehicle as advertised and to re-sell the vehicle in the marketplace without objection. (Cal. Civ. Code § 1792.) While there is an argument to be made that the standard 553 Retail Installment Sales Contract disclaims these implied warranties, that position alone will not stop a consumer attorney from attempting to utilize this argument in litigation.

While the argument that the implied warranties broadly attach may not be founded in settled law, it is an argument that will nevertheless be presented against your dealership. This means that should you sell a vehicle with a negative history announcement from auction or a negative notation on a vehicle history report, such as a frame damage or prior accident, then a consumer attorney will allege that since the vehicle came with an express warranty, even if that express warranty was limited in duration and coverage unrelated to the vehicle’s negative history, that warranty gave rise to the implied warranties so that the dealer is obligated to repurchase the vehicle, and pay attorneys’ fees, should a violation of an implied warranty be found. While you may have a decent chance of prevailing in such a case, this still means litigation, which should be avoided whenever possible.

California, and dealers, have an interest in seeing that consumers are provided with safe, reliable, vehicles that are generally free from major defects that would endanger the occupants. However, in attempting to force dealerships to provide warranties, the California Legislature and consumer attorneys have removed any incentives for dealerships to provide written warranties given that, if a warranty is provided, a dealer may be opening itself up to claims by a purchaser. While providing a warranty may give a purchaser peace of mind, it may have an unintended result of opening up your dealership to potential claims unrelated to the warranty.

James S. Sifers, Esq.