Supreme Court Requires Vertical Privity To Maintain Breach Of Implied Warranty Claim

The Kentucky Supreme Court recently published Compex International Co., Ltd. v. Taylor, a case involving a products liability claim for the alleged breach of an implied warranty of merchantability. Stephen Taylor visited the home of his parents. During the visit, he was injured when the chair he was sitting in collapsed. The chair, which his parents purchased at K-Mart, had been manufactured by Compex. The sole issue presented was whether his implied warranty claim was properly dismissed by the trial court. They argued that their implied warranty claim fell within the exception to the privity requirement defined in KRS 355.2-318. An argument the court of appeals accepted.

Taylor relied on Griffin Industries, Inc. v. Jones, 975 S.W.2d 100 (Ky. 1998) (citing Dealers Transport Co., Inc. v. Battery Distributing Co., 402 S .W.2d 441 (Ky. 1965)), for his claim that privity was not required. The Court noted Griffin mischaracterized Dealers, which actually reiterated the privity requirement in products liability actions involving breach of warranty. This requirement was confirmed in Williams v. Fulmer, 695 S .W.2d 411, 413 (Ky. 1985). As the Court acknowledged, "if liability is based on sale of the product, it can be extended beyond those persons in privity of contract only by some provision of the U.C.C. as adopted in Kentucky. The only provision of the U.C.C. extending breach of warranty in injury cases is KRS 355.2-318 . . . ."

The Court found that a seller's warranty protections are only afforded to one with whom there is privity of contract, or, to use the terms of the statute, a "seller's" warranty protections are only afforded to "his buyer." KRS 355.2-318. Although the statute provides an exception to the privity requirement, that exception is limited to its clear terms and includes only those individuals who enjoy the specified relationship with the buyer. While Taylor's parents were "buyers" under the U.C.C., they had no buyer-seller relationship with Compex. The exception set forth in KRS 355.2-318 is "simply inapplicable in the absence of an underlying contractual relationship."

What the Court is talking about is "vertical privity", which is privity between the manufacturer, seller, and ultimate buyer, although that term is never used. What KRS 355.2-318 deals with is "horizontal privity", which is privity between the "buyer" and "seller", although that term is never used either. KRS 355.2-318 is silent with respect to any requirement of "vertical privity", although the Court uses its language to reach its decision. The problem is that the Court reaches this conclusion without any discussion regarding the difference between vertical and horizontal privity and without citation to any case law when it finds "KRS 355.2-318 simply inapplicable in the absence of an underlying contractual relationship." Kentucky has never held, since the adoption of the UCC, that "vertical privity" was required to recover for a breach of implied warranty claim. In fact, I could not even find a case discussing "vertical privity" in Kentucky.

The use of the Williams by the Court to reach a decision regarding "vertical privity" is likewise faulty, a fact noted by the 6th Circuit Court of Appeals in a dissent some fifteen years ago. In Scott v. Stran Bldgs., 923 F.2d 855, 1991 WL 3377 (C.A.6 Ky.), Judge Boggs in his dissent pointed out the flaw in using Williams to reach a decision on "vertical privity" He stated:

While I agree that Kentucky requires privity, the privity required is not that discussed in the opinion, privity between injured party and seller. Instead, it is privity between buyer and manufacturer, which does not exist here.

While the Court's discussion of the Fulmer [Williams v. Fulmer] case is accurate as far as it goes, it does not really cover our situation. In Fulmer, the injured party never bought the product. She simply received it from the actual buyer. Fulmer therefore only interprets Kentucky law regarding "horizontal" privity, that is, whether privity is necessary between a seller and an injured person who received a good without buying it from the seller. The law interpreted by Fulmer, KRS 355.2-318, is expressly neutral as regards any requirement of "vertical" privity where an injured buyer sues the manufacturer, not the party who sold to the buyer.

Judge Boggs ultimately concurred in dismissal of the warranty claim reasoning:

Thus, in the absence of any indication of how Kentucky stands on "vertical" privity, I believe that the reason no warranty can flow from Stran [the manufacturer] to Scott [the buyer] is that Stran is not a "seller" under 2-313, 2-314, and 2-315 of the U.C.C., because Stran did not sell to Scott and "seller" is defined in the U.C.C. as "a person who sells or contracts to sell a good." A "seller" cannot include a remote manufacturer like Stran without holding that "vertical" privity is never required. Kentucky has not made this decision, and we should not make it for Kentucky.

So fifteen years after Judge Boggs dissent has Kentucky finally held that vertical privity is required to maintain a breach of implied warranty claim when it never used the term much less discussed the difference? This opinion would seem to say, "yes." However, is the Court truly aware of the implications of such an opinion? Does anybody purchase consumer goods "directly" from the manufacturer? Hardly. What good are the implied warranties extended by the U.C.C. in terms of a products liability action for personal injury if you can't recover from the manufacturer who built the product? Does this opinion do away with breach of warranty claims as a form of recovery in products liability actions? What good is the exception noted in KRS 355.2-318 if it doesn't apply in situations such as this one? Would KMart, or any other retailer for that matter, ever be in a position to sue Compex for personal injury extending from a breach of implied warranty? Of course not. Does that mean that the Taylor is forced to bring his warranty claim against KMart, the "seller", when all KMart did was sale the product it purchased from Compex with the manufacturer's warranties? If so, what good is Kentucky's middleman statute, if you must maintain your breach of warranty claim directly against the middleman? Wouldn't KMart or any other middleman just have a claim of indemnity against the manufacturer for breaching an implied warranty to it, if the middleman is later found to have breached the same implied warranty to its buyer?

While Judge Boggs comments are noteworthy, I disagree with his reasoning just as I do with the Compex Court's. I think Compex is a "seller" under the U.C.C., because they sold the good to KMart. Nothing in U.C.C. requires the seller to sell directly to the buyer. The fact remains that the U.C.C. is silent on the issue of vertical privity. It merely requires a "contract for sale." I think the resolution of the "vertical" privity issue can be found in the statute.

KRS 355.2-314, Implied Warranty: merchantability; usage of trade, states:

(1) Unless excluded or modified by (KRS 355.2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.

The statute holds that the warranty exists in every "contract of sale", conditioned not on privity between the seller and buyer, but only on the seller being "a merchant with respect to goods of that kind." Therefore, unless excluded this warranty would flow from seller to buyer and from buyer to buyer as long as, 1) There is a contract for sale, and 2) The goods are sold by a merchant who deals in those goods. Both Compex and KMart are merchants with respect to the goods as defined by the U.C.C. (Compex sells the chairs to retailers like KMart and KMart sells the chairs to consumers). The implied warranties would then flow from Compex to KMart and from KMart to the Taylors' parents by virtue of the "contract of sale" and the fact that both Compex and KMart are "merchants with respect to goods of that kind." However, there is no contract between the Taylors' parents and the Taylors, (i.e., no horizontal privity), therefore, the implied warranties would not flow in that situation absent some exclusion. That is the purpose of KRS 355.2-318, to avoid the "contract for sale" requirement of KRS 355.2-314 and allow the implied warranties to extend to a person, who is not a party to the contract.

In my opinion, KRS 355.2-314 dispenses with the vertical privity requirement by its very language and operation. Because the implied warranty would flow as long as the two conditions are met, KMart, the middleman, would be let out of the action, because the same implied warranty it has made is the same implied warranty Compex made to it. Otherwise, KMart would appear to have an indemnity claim against Compex as discussed earlier. The middleman statute dispenses with the legal fiction and places the implied warranty on the manufacturer where it belongs.

Finally, I take issue with the Compex's Courts conclusion that this is a decision best left for the legislature to address. While sales is governed by the U.C.C., which is legislative in nature, privity is a common law concept. The Supreme Court dispensed with the privity requirement in products liability actions involving strict liability and negligence. I think the absence of direct U.C.C. statute requiring privity or at least commenting on it gives the Court the authority it needs to interpret how the U.C.C. stands on the "vertical privity" issue. I certainly don't think that the Court has interpreted the U.C.C. consistently with other statutes passed by the legislature, including the products liability act. The inconsistencies now abound. This issue was important enough to entitle it to more than the five page published opinion.