Published May 8, 2016, Dealer’s Voice – Used vehicle sales are a significant and profitable portion of any dealer’s business. However, they can also be an unnecessary source of liability for dealerships, whether it be from undisclosed accidents, or mechanical problems giving rise to alleged breaches of implied and express warranties.
Many dealerships try to avoid liability by selling used cars “as is.” But is this enough to relive a dealership from liability for major mechanical failures on the vehicles? Maybe not. Consider this scenario: A customer comes into your dealership to purchase a used vehicle. One of your salespersons shows the customer a used vehicle that is being offered for sale “as is.” Knowing that the vehicle is being sold as is, your salesperson also offers the customer an optional service package. The consumer purchases the as is vehicle, along with the optional service package to cover any unforeseen circumstances. One month later, the vehicle’s transmission fails, and the customer brings the car back to the dealership asking for her money back. What is the dealership’s liability in this situation?
The answer may surprise you. In California, a dealership’s largest source of consumer liability in the sale of vehicles is the Song Beverly Consumer Warranty Act. Under Song Beverly, dealerships may be held liable for breaches of not just express warranties provided with their vehicles, but also for breaches of warranties implied by the law, including the implied warranty of merchant-ability.
Because of the inherent uncertainty in the quality of used vehicles, dealerships often try to limit their liability under Song Beverly by selling used vehicles as is (i.e., without express warranties). While selling a vehicle as is may generally relieve a dealership of liability for mechanical failures, this is not always the case. Under Song Beverly, all new vehicles are sold with an implied warranty of merchant ability, and as you might expect, implied warranties are generally not extended to used vehicle sales. However, if your used vehicles are sold with an express warranty, the implied warranty of merchant-ability will also apply.
Moreover, one line of California cases has found that selling a used vehicle with a service contract will also result in the imposition of an implied warranty of merchant-ability for the vehicle – even if the vehicle is sold as is. In Reveles v. Toyota by the Bay, 57 Cal. App. 4th 1139, 1145 (1997), a customer purchased a used vehicle from a dealership. The vehicle was sold “as is,” and without an express warranty, but with an optional service contract. Two months after purchasing the vehicle, the front bumper fell off. The customer returned the vehicle, seeking a refund or replacement vehicle. The dealership refused to refund the consumer’s money, claiming that the vehicle was sold as is. The customer filed suit under the Song Beverly Act, and a trial court found in favor of the consumer. The court of appeal agreed, holding that the optional service contract purchased by the consumer constituted an “express warranty” within the meaning of California law. The Court therefore found that because the vehicle was sold with an express warranty (i.e., the service contract), the implied warranty of merchant-ability attached to the sale of the used vehicle. And this was despite the fact that the vehicle was sold “as is.” To add insult to the injury, the court of appeal also upheld the trial court’s finding that the consumer was entitled to all of its attorneys’ fees and costs incurred in litigating the case.
While the Reveles decision has been disapproved of by other courts, none have overturned it, and it remains good law in California. Thus, dealerships should be mindful that when selling service contracts with their “as is,” used vehicles, they may also be unwittingly providing their customers with implied warranties regarding the quality and merchant-ability of the vehicle, all of which could have severe unintended consequences.