3. Implied Warranty

If the changes in the privity rule went a bit too far, and created other problems as yet unsolved, they were at least a legitimate use of judicial power – changes were needed in the privity doctrine, and the changes made were not so much an exercise in judicial legislation as an effort to bring legal doctrine into line with the reality of the modern economy. While the courts were clearly interested in helping plaintiffs recover, it was because such recovery was justified by causation, not simply the desire to see the plaintiff receive compensation from some source. In MacPherson, for example, the plaintiff was injured in an auto accident resulting from a defective wheel which the manufacturer had warranted to be in good condition.

However, it was not long before the courts explicitly embarked on a type of social engineering, attempting to use the tort system to do that which the legislature had declined to do – create a system of social insurance for accidents.

While Justice Traynor’s concurrence in Escola V. Coca-Cola signaled the intent of some judges to make war on the products liability system, it was not until some years after that decision that the battle was actually joined. One early victory for the judges was the creation of an implied warranty.

A lynchpin case was Henningsen v. Bloomfield Motors, Inc. [34] Henningsen’s contract to purchase a new car explicitly disclaimed any warranty on the part of the dealer or the manufacturer except one limiting liability to replacement of defective parts for the first 90 days or 4000 miles. Yet after Henningsen’s wife suffered injuries in an accident, the court upheld recovery on the grounds that, " [W]hen a manufacturer puts a new automobile in the stream of trade and promotes its purchase by the public, an implied warranty that it is reasonably suitable for use as such accompanies it..." [35] Other than a desire to see Mrs. Henningsen recover for her injuries, there seems to be no logical reason for the court’s decision. Absent any element of fraud or duress, the court failed to explain why the explicit release signed by Mr. Henningsen should not be binding.

Traynor’s California court soon did Henningsen one better. In Greenman v. Yuba Power Products, Inc., [36] the plaintiff was injured while working with a power tool. The defendant was not negligent and the plaintiff had indisputably violated the terms of his warranty agreement with the manufacturer. The Court finessed this by essentially ignoring any idea that recovery should be based on a warranty theory, refusing to even consider the warranty provisions which might have limited the manufacturer’s liability. Wrote Traynor, for the Court, "The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers... rather than by the injured persons... Sales warranties serve this purpose fitfully at best." [37]

In other words, voluntary agreements made before the accident would be replaced by coercive tort rulings after the fact. And traditional notions of right and wrong, duty and responsibility, were to be swept aside, since the "purpose" of the courts was to make manufacturers pay.

In its 1965 decision, Piercefield v. Remington, [38] extending protection beyond the user or purchaser to encompass bystanders, the Michigan court declared its decision was "for the same reasons" as Greenman, and also endorsed Henningsen. [39] By 1978, the destruction of a manufacturer’s or seller’s ability to place any restrictions on its warranty liability in Michigan had become so complete that in Blanchard v. Monical Machinery, the sale of an admittedly, obviously "ancient" machine with clear contract language that the sale was "as is" was found not to place limits on the seller’s liability. [40]

In addition to making it harder for the manufacturer to control his risk once the product is sold, this destruction of limits on warranties also makes it impossible for sellers to do any "underwriting" of their risks, i.e. they cannot eliminate certain unacceptable risks in advance, as the seller tried to do in Blanchard.

While the court reasons that sellers and manufacturers should insure the public, it is not clear exactly how an insurance company underwriter or actuary is to estimate the risk to the manufacturer resulting from the resale of an admittedly "ancient" machine, which has been out of the manufacturer’s possession for some years and no longer meets the needs of the original purchaser.

The result of these decisions, for insurance availability and price, should be clear. In Henningsen, the plaintiff expressly chose not to receive warranty coverage, presumably at some cost savings. Certainly, after the fact, such warranty coverage was desired. But in advance, not knowing when or where an accident might strike, the plaintiff had chosen to take his chances. The Court’s decision gives the plaintiff the best of both worlds – the lower price of the disclaimer, coupled with the protection of the warranty. Insurers, however, are anything but dumb. They will soon charge all consumers the cost of insuring the risk as if no warranty restrictions existed. Those individuals who choose to live by their agreements, or prefer the risk associated with a lower price, are out of luck.

This is not the only ill side effect of the implied warranty concept. Manufacturers are forced to pass the cost of the warranty on to every buyer, which is precisely what the court intended. However, since it is unrealistic, (and in many cases illegal) for the manufacturer to price discriminate between consumers based on their risk characteristics, the result is that high risk individuals pay the same as low risk individuals. When low risk users decide the warranty is not worth the added cost, they can shift to other products or cease their activity. Thus only the poorer risks are left in the manufacturer’s risk pool, and the system begins to unravel due to adverse selection. [41]

The implied warranty, by switching contractual arrangements to coercive tort arrangements, adds to unpredictability and adverse selection that the insurance industry must deal with. The industry deals with it in the best way it can – through higher premium charges.