"As-Is" Sales, Small Claims Proceedings, and the Economic Loss Doctrine
The world of small claims hearings can be a little rough and tumble. Our founding partner, Fred Hoffman, was known to refer to the decisions rendered in those hearings as “JP Justice” — referring to the old Justice of the Peace system. In those cases, it was not unusual for the small claims judges to “split the baby,” give each side a little of what they want, and move on to the next case. This is not to cast aspersions on the small claims judges. The process is designed to be faster and less expensive, but unfortunately, that sometimes means that the facts and law are not developed as clearly by the litigants and so the judge often does not have the greatest material to work with and might find him or herself relying on gut feelings a little more than in a more formal proceeding.
The Court of Appeals, in the case of Griffin v. Martin (pdf), decided that the small claims court had gotten it wrong. The plaintiffs bought a used car from defendant pursuant to a sales agreement that said that the agreement was an “as is” sale in a couple of places and was generally pretty clear about the fact that the dealer was not taking any responsibility for the quality of the vehicle. On the drive home, the plaintiffs discovered the car did not even have brakes – they were forced to rely on the brakes for the trailer they were pulling with the car. So, they immediately had to pay about $1,200 for brakes. The car buyers sued the dealership.
The dealership defended by saying that the contract clearly waived any warranties and that this was an “as is” sale. Plaintiffs responded in a more or less clever fashion, saying (in effect) that they were not suing for breach of contract but, rather, suing under “civil tort law.” Tort law is the body of law that allows you to sue someone who has wronged you, not as a matter of contract, but as a matter of duties of reasonable care imposed by the law. (For example, you have a duty to exercise reasonable care when you drive your car so you don’t hit other people who are also expected to exercise reasonable care when driving their cars.) The trial court’s ultimate finding was that, notwithstanding the as-is sales agreement:
Griffin “committed a tort against the [Martins] by selling a vehicle that was not road worthy and placed them in danger, as well as any other individuals on the road” and that, “because of [Griffin’s] tort, [he] is liable to the [Martins] for their reasonable expenses in repairing the vehicle as well as their reasonable attorney fees.”
The Court of Appeals disagreed and reversed. There was no civil tort because of something known as the “economic loss rule” which precludes tort liability for purely economic loss.
Economic losses are disappointed contractual or commercial expectations. Damage to the product itself, including costs of repair or reconstruction, is an ‘economic loss’ even though it may have a component of physical destruction. If the plaintiff’s injury results from a defective product or service, the defendant is liable under a tort theory only if the defect causes personal injury or damage to property other than the product or service the plaintiff purchased. A defendant is not liable under a tort theory for a pure economic loss caused by its negligence, including damage to the product or service itself.
(internal citations omitted).
One of the main purposes of the economic loss rule is to prevent a disappointed party from doing an end-run around the contract. Contracts are supposed to be the means by which parties to economic transactions lay out their expectations and negotiate a price accordingly. Presumably the price at which the dealer was willing to sell the car reflected the fact that the dealer was not providing a warranty that the car was any good. The facts of the case say that the dealer had purchased the car from another dealer and did not have much knowledge about the car. Because of the economic loss rule, the Court of Appeals said that the contract was binding.
Furthermore, the Court of Appeals cited the statutory basis for the “as is” language in the contract and its effect:
Ind. Code § 26-1-2-316 provides in part that, “unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like ‘as is’, ‘with all faults’, or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.” It is well-settled that automobile dealers may use this law to exclude express warranties and make it plain that there are no implied warranties.
The purchaser of the automobile was, therefore, bound by the terms of the contract and was not entitled to recover the cost of repairs from the dealer.
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