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Taking Advantage of Legal Warranties in the Manufacturing Chain of Supply

Manufacturers routinely rely on suppliers to provide quality components to be used in the final product. Manufacturers may assume that suppliers have a legal obligation to provide components that work properly. Indeed, the law does provide for certain warranties in the sale of goods even when the parties to the transaction do not reduce their supply agreement to a written contract. Nonetheless, if a buyer of goods wishes to take advantage of these legal warranties, the buyer must adequately communicate to the seller the necessary specifications of the component. A recent opinion by the Indiana Court of Appeals in the case of Gared Holdings v. Best Bolt Products illustrates this point.

The Problem

Gared Holdings makes basketball goals that hang from the ceiling and can be raised or lowered. Best Bolt primarily sells fasteners such as bolts and screws. When Gared’s supplier of pulleys for the basketball goals raised its price, Gared asked Best Bolt whether it could supply the pulleys. Gared gave Best Bolt a sample pulley from the previous supplier, but did not provide a drawing or detailed specifications for the proposed pulley. Gared indicated to Best Bolt that there were some quality issues with the sample pulley in that the cable sometimes slipped off of the wheel. Best Bolt told Gared that it would do what it could to supply a pulley at the price desired by Gared. The parties did not execute a written contract.

Best Bolt subcontracted with an engineering firm in China for the design and manufacture of the pulleys. The engineering firm produced sample pulleys, which Best Bolt provided to Gared. Gared sent the sample pulleys to a testing firm to determine how much weight the pulleys could withstand. The pulleys passed this test. Gared did not perform any testing of how many cycles of lifting and lowering the pulley could withstand. Gared accepted the pulleys and placed an order.

Soon after beginning to sell basketball goals with the Best Bolt pulleys, Gared received reports that the pulleys were “seizing up” and would no longer turn. The cause of the seizing up was that the pulleys did not contain lubricated bushings to reduce friction between the wheel and axle. Gared had assumed that the pulleys included lubricated bushings because those were standard components of a pulley. Gared sued Best Bolt for the defective pulleys under legal theories of breach of the implied warranty of fitness for a particular purpose and the implied warranty of merchantability.

Warranties Provided by Law

The implied warranty of fitness for a particular purpose protects a buyer of goods when the seller has reason to know of a particular purpose for the goods and that the buyer is relying on the seller’s skill and judgment in providing suitable goods. The buyer must also actually rely on the seller’s skill and judgment.

In regard to the Best Bolt pulleys, the courts determined that the particular purpose warranty did not apply. Although Best Bolt knew that the pulleys would be used in basketball goals, the evidence did not establish that Gared relied on Best Bolt’s skill and judgment in providing the pulleys. Gared assumed that Best Bolt would include a lubricated bushing, but Gared did not provide any drawings or specifications requiring that part. Additionally, Gared did not require that Best Bolt perform any testing. Instead, Gared took responsibility for all testing.

The appeals court next turned to Gared’s claim under the implied warranty of merchantability. This warranty applies to sellers that deal in the goods involved in the transaction or otherwise hold themselves out as having special knowledge or skill in regard to the goods. Best Bolt argued, and the trial court agreed, that the merchantability warranty did not apply because Best Bolt was merely a distributor of the pulleys and had sold them to only one customer. The appeals court rejected these arguments, stating that a distributor as well as a manufacturer could be a merchant. The court further noted that a small number of sales would not conclusively disqualify a seller from being a merchant. Rather, a small number of sales could merely reflect that the product is relatively new, as was the case with Best Bolt’s pulleys.

After deciding that Best Bolt was a merchant, the appeals court was left with the question of whether Best Bolt breached the merchantability warranty. Generally, the merchantability warranty requires that goods be fit for the ordinary purposes for which such goods are used. At the trial, most witnesses testified that a lubricated bushing was a standard and essential part of a pulley. An expert witness for Best Bolt, however, testified that under certain circumstances of very low dynamic loads, a pulley without lubricated bushings might suffice. Therefore, there was conflicting evidence. Because the trial court had ruled that Best Bolt was not a merchant, it never considered the question of whether the pulleys must have lubricated bushings to be fit for the ordinary purposes for which pulleys are used. Consequently, the appeals court remanded the case to the trial court to determine that issue.

How to Avoid this Court Battle

As in many business disputes, Gared could have avoided protracted litigation if it had maintained better documentation and more clearly communicated with Best Bolt. The best course would have been for the parties to execute a written contract that clearly identified the specifications for the pulley. Additionally, the contract should have included an express warranty for the pulley’s performance requirements. Absent a written contract, Gared still could have availed itself of the particular purpose warranty if it had provided detailed drawings and specifications to Best Bolt. It often takes only a little extra effort when the deal is done to avoid going down the long road of litigation.

For more information, please contact KDDK attorney Steve Hoar at (812) 423-3183 or SHoar@KDDK.com, or contact any member of the KDDK Business Law practice team.

About the Author

Steve Hoar

Steve Hoar, a partner at Kahn, Dees, Donovan & Kahn, LLP, in Evansville, Indiana, is a litigator focusing on business disputes. He handles contract, construction, corporate, and real estate disputes through state and federal courts, and arbitration. Steve is committed to exploring cost-effective alternative dispute resolution opportunities, such as mediation, while also aggressively building a case for trial. Steve also has extensive experience enforcing creditors’ rights through liens, replevins, receiverships, garnishments, and other enforcement techniques. Steve is a member of KDDK’s Litigation and Trial Services; Bankruptcy, Collection and Creditors’ Rights; Construction Law and Real Estate Law practice teams.