McGILL LAW JOURNAL
Volume 18
Montreal
1972
Number ]
Manufacturers’ Guarantees
M. J. Trebilcock*
I. IN TR OD U CTIO N
……………………………………………………………………………………….
a. The Case for Change ……………………………………………………………………..
b. Why the Present State of Affairs? ……………………………………………….
c. The Economics of Change …………………………………………………………….
…………………………………………………
II. FRAMING GUARANTEE PROPOSALS
Page
2
2
4
6
10
a. The Specific Elements of the Problem from the Consumer’s
b. Possible R esponses
(i) H .R . 18056
(ii) H .R . 10690
(iii) S . 3074
P ersp ective ……………………………………………………………………………………
………………………………………………………………………
…………………………………………………………………………..
……………………………………………………………………………
…………………………………………………………………………………..
………………………………………………………..
………………………………………………………..
……………………………………….
III. SOME GUARANTEE PROPOSALS
a. Coverage of the Legislation
b. The Requirements of the Legislation
G uarantees
(i) The Prevention of Deceptive Practices in Relation to
……………………………..
(ii) The Disclosure of Basic Guarantee Information to the
….. ……………………………
in the Offering of
(iii) The Stimulation of Competition
-………………………. ……
Consumer
.
..
………….
c. The Statutory Guidelines
G uarantees
……………………………………………………………
…………………………………………………………….
IV. INFORMING A CONSUMER OF HIS LEGAL RIGHTS
V. ENFORCEMENT OF A CONSUMER’S RIGHTS
V I. CO N CLU SIO N
…………………………………………………………………………………………….
…………………………………
………………….
*Of the Faculty of Law, McGill University.
10
12
14
21
24
25
25
28
28
28
28
35
42
43
44
McGILL LAW JOURNAL
[Vol. 18
I. Introduction
a. The Case for Change
One of the most prevalent consumer complaints today concerns
both the nature of obligations and the performance of obligations
by suppliers of goods or services under written guarantees or
warranties (the terms are here used interchangably). While little
empirical work has been undertaken in Canada on the operation
of guarantees, data in some areas is available in the United States,
and as many of our products are American designed or manufactured,
this is likely to have a broad application here.1
The magnitude of the problem facing consumers today is indi-
cated by the following figures: 1969 model cars tested by Consumers
Union averaged 36 defects per car – more than twice as many as
were discovered in 1967 models.2 More than one in four 1967 model
cars had been involved in safety-related recall campaigns by the
end of 1967.
The National Association of Fleet Administrators reported to
the Federal Trade Commission (hereinafter F.T.C.) that dealers hand-
led only 53% of warranty work satisfactorily, that 26% of all
warranty repairs required repeated visits and 14% required the
manufacturer’s assistance.4 In testimony before the Senate Com-
mittee on Commerce, David A. Swankin of Consumers Union
reported their 1969 annual questionnaire elicited the information
that 35% of interviewees described their latest new car as being
in unsatisfactory condition when it was delivered. In answer to the
‘In
this article, reliance is placed primarily on testimony and briefs at
twelve days of hearings before the U.S. Senate and the House of Representa-
tives on various Consumer Guarantee Bills during 1970 and 1971, on the Report
of the Senate Committee on Commerce on S. 986, S. Doc. No. 92-269, 92nd
Cong., 1st Sess. (July 16, 1971), the Federal Trade Commission’s (hereinafter
F.T.C.) Reports on Automobile Warranties, (1969 and 1970), the U.S. President’s
Task Force Report on Appliance Warranties and Service, (January 8, 1969),
and in Canada on two studies by the Canadian Appliance Manufacturers’
Association, (May, 1968 and March, 1971), a study by Professor Louis Romero
of the University of Saskatchewan on new car warranties, (1971), a report
on standard form contracts and warranties by a McGill Law School Oppor-
tunities for Youth Project, (October, 1971), and a study by the Automobile
Protection Association, (Montreal), on relationships between manufacturers
and new car dealers (October, 1971).
2 F.T.C., Report on Automobile Warranties, (1970), at p. 56.
3 F.T.C., Staff Report on Automobile Warranties, (1969), at p. 169.
4F.T.C., Report on Automobile Warranties, (1970), at p. 64.
No. 11
MANUFACTURERS’ GUARANTEES
question, “were you successful in having repair work done under
factory warranty in a satisfactory manner?”, 55.4% said yes, 32.3%
said no, and 12.3% said that no work was required.5 Even with
generally unsatisfactory performances under auto warranties, manu-
facturers found themselves having to absorb an unexpectedly es-
calating level of costs. In 1966, manufacturers estimated that the
cost to them of a basic 24 month/24,000 mile warranty was $50 – $60
per car. In 1967, when these manufacturers joined Chrysler in offer-
ing as well a 5 year power train warranty, warranty costs jumped
to between $110 – $120 per car. In 1968 through 1969, manufacturers
reduced their basic warranty to 12 month/12,000 miles and in some
cases made the additional power train warranty an extra. These
reductions resulted in an estimated saving to manufacturers of
$65 per car on repairs which consumers will now have to meet
themselves at ordinary retail rates (approximately $100 for the
same repairs).”
The same pattern of experience appears to obtain in Canada.
In a random survey undertaken by Professor Louis Romero of the
University of Saskatchewan Law School in mid-1971 of 363 Ontario
residents who had purchased new 1970 model American cars, it was
found, inter alia, that:
(a) 15.74% of the respondents were not satisfied with the performance
of their car;
(b) 51.31% had encountered mechanical problems;
(c) 21.87% defects in appearance;
(d) 4227% squeaks or rattles;
(e) 31.97% were not able to have these defects corrected under their
warranties.
The foregoing figures show not only how unsatisfactory many
warranty practices are from a consumer’s standpoint but also how
valuable warranty protection potentially can be to him. The general
position which obtains in the auto industry is not of course confined
to it. In a survey in 1968 of 90,000 colour T.V. owners, Consumers
Union found that 74% had been required to have repairs made to
their sets (most of which were 1966 models or later). Of sets in
service less than one year, owners of one set in ten were dissatisfied
over service. In the case of Westinghouse, 1 person in 4 reported
himself dissatisfied. 6% of the sets in the sample which had been
GHearings on S. 3074 Before the Consumer Subcom. of the Senate Comm.
on Commerce, 91st Cong., 2nd Sess., Ser. No. 91-52, at p. 251 (1970), hereinafter
referred to as Hearings on S. 3074.
GF.T.C., Staff Report on Automobile Warranties, (1969), at p. 202.
McGILL LAW JOURNAL
[Vol. 18
bought in 1968 had to have their picture tubes replaced before the
year was out7
Senator Moss in hearings of the Senate Committee on Commerce,
January 20, 1970, reported that there are more than 70 million service
calls per year on about 235 major appliances in some 60 million
households in the U.S. In other words, on average, every U.S. family
every year is likely to be involved in a service problem.8 In Canada,
a Canadian Appliance Manufacturers’ Association study in 1971
showed that for a one year period, April 1970 to March 1971,
automatic washers sold by leading manufacturers required 0.68
service calls for every unit installed during the first year of warranty
protection. Almost 50% of these calls were “product fault” calls.
b. Why the Present State of Affairs?
A number of reasons have been advanced for the generally un-
satisfactory warranty situation that obtains in the consumer market-
place. The Ford Motor Company, in a brief to the Senate Committee
on Commerce, March 10, 1970, 9 pointed out in relation to autos
(although the same considerations apply to many consumer “dura-
bles”), that the nation’s car and truck population grew from 66
million in 1959 to 95 million in 1969. At the same time, vehicles
became more complex and the range of accessories more extensive.
Also, at the same time, the nation was being taxed by a soaring
economy and the Vietnam war. Ford pointed out that there are
three ingredients that are requisite to the creation of an adequate
automotive service capability. The first is facilities, the second is
tooling and equipment, and the third is skilled manpower. The
pressures on the economy in this period created the most critical
problems in the third sector –
skilled manpower. This deficiency
has an effect not only on the quality of service facilities available
but also on quality control and other measures that can effectively
be maintained in the factory. Ford pointed out that in their own
case, between 1963 and 1969, there was an increase of 20% in Ford
vehicles on the road, an increase of 24% in physical service capacity,
but an increase of only 10% in the number of mechanics available
to man these facilities. Ford thus argued for substantially increased
public appropriations to vocational training programmes. It would
clearly be irrational for the community to demand an increasing
output of consumer products, an increasingly vigorous warranty
7Hearings on S. 3074, op. cit., n. 5, at p. 250.
8 Ibid., at p. 23.
9 Ibid., at pp. 180 et seq.
No. 1]
MANUFACTURERS’ GUARANTEES
regime and decline to provide the resources which in turn will
provide the technicians that the community needs. Thus, the ade-
quacy of existing vocational training programmes would seem to be
a matter. worthy of examination by concerned governments. This is
underlined today when the demand for university graduates in many
areas has become uncertain while the need for trained personnel in
the service industries is undisputed and likely only to grow. A re-
examination of educational priorities may, therefore, be called for.
Further reasons for the unsatisfactory warranty situation in the
consumer market-place are given by dealers, particularly in the auto
industry. They see themselves caught between very demanding
consumers on the one hand requiring instant and flawless service,
and on the other, very large manufacturers, with great market power,
who are interested primarily in sales. Many dealers claim, for
example, that they are compensated by manufacturers for warranty
work at a lower scale than for ordinary retail service work, and
that they are thus forced to do rushed jobs with junior mechanics
to make the work pay. This claim is disputed by manufacturers,
although in the auto industry there have been recent moves to
review scales of compensation for warranty work. Dealers also
claim that they are put under unreasonable pressure because of
inadequate quality control measures in the factory which results
in cars coming to them in a state which involves “remanufacturing”
–
“do-it-yourself kits” as some dealers told the F.T.C. This means
that either the dealer must spend much more of his time on the
pre-delivery inspection than he will be reimbursed for or he will do
a shoddy pre-delivery inspection and risk subsequent warranty
claims which impose new burdens on him.’
The argument that it is unreasonable to place the full force of
warranty obligations on the dealer seems to have some force.
Clearly it is in the consumer’s interests to receive a defect-free car
rather than simply be assured that if defects develop they will be
fixed, because no matter how perfect a warranty scheme, the
consumer will still be faced with (often unquantifiable) impositions
on his resources of time and effort and convenience in having the
warranty work done. The argument of Ford that the lack of trained
personnel accounts for the inadequacy of quality control measures
in the factory is not entirely convincing. If less money were to be
spent on annual styling changes and more on developing a techno-
logy which would substantially reduce the margins of error in the
basic manufacturing process, improvements could surely be achieved.
10 See F.T.C., Reports on Automobile Warranties, (1969 and 1970).
McGILL LAW JOURNAL
[Vol. 18
Of course, fewer cars may then be needed, and some may question
whether there is sufficient incentive to auto manufacturers to
reorganise their priorities in this way. Perhaps the impact of more
austere imports from the Continent and Japan may force a change
of thinking on this issue.
c. The Economics of Change
The F.T.C. was so concerned about the issue of quality control
that the basic recommendation of its study was that a Quality
Control Act be enacted specifying with great precision the level of
quality that must be attained in various components of a car.
This mandatory, statutory warranty would be enforceable by in-
dividual consumers and also -by a government agency such as the
F.T.C. when it came to its notice, through subsequent testing, etc.
(it was not envisaged that State inspectors would be present in the
factory), that particular models of automobile did not comply with
the prescribed standards. The F.T.C., in submissions to the Senate
Committee on Commerce, estimated that, given adequate financial
appropriations, it would take two years to develop appropriate
standards.”-
One may reasonably entertain reservations as to the practicality
of this approach. Prescribing standards
in the way apparently
envisaged by the Commission would seem to create many of the same
problems that arise in the case of direct public standard setting.12
Different standards would have to be set for different categories
of cars. There would be considerable potential debate arising simply
on the threshold question of what category a given car should be
placed in for purposes of the standards to be applied to it. Having
established the categories, the standards themselves, as the whole
experience in the standard-setting field indicates, would be a matter
of enormous controversy. As new cars are developed, especially
those serving different purposes from present cars, e.g., cars specially
suited for urban commuter purposes, new standards would be
required. This would be an immense task, and so far one has dealt
only with cars.
While noting these reservations, it must still be acknowledged
that from the consumer’s point of view, it is better to get a product
“Hearings on S. 3074, op. cit., n. 5, at p. 179.
12The Chairman of the F.T.C. himself conceded that direct public standard
setting in relation to quality, in the case of cars, would be “hideously ex-
pensive”, inter alia: ibid., at p. 179. See generally on problems of standard
setting, Dr. Robert F. Legget, Standards in Canada, Information Canada,
(Ottawa, 1970).
No. 1]
MANUFACTURERS’ GUARANTEES
without defects than one which is defective but which he can have
rectified (even at the manufacturer’s expense). It must also be
acknowledged that to start at the other end of the transaction and
give the consumer increased warranty rights enforced, in practice,
principally against the dealer in the first instance, is likely to
increase the pressure on the latter when, through no particular fault
of his own, he is unable to procure the personnel to handle the
volume of work involved.
However, as the recent readjustments of compensation rates
show, this pressure is sooner or later passed back to the manu-
facturer. No matter what market power is possessed by manu-
facturers, the fact of the matter is that they need retail outlets to
sell their goods. If anti-trust laws prevent manufacturers setting up
their own retail outlets (as U.S. anti-trust laws presently do), manu-
facturers are forced to offer terms to dealers which make entry
into this sector of industry worthwhile to them. The Ford Motor
Company pointed out in its brief to the Senate Committee on
Commerce 1 3 that in 1969, their total expenditure on advertising
was $150 million, the cost incurred to amortize the special tools
that are required to produce its new models $325 million, and
warranty expenses $300 million. With warranty expenses forming
so large a portion of a company’s operating expenditure, there is
every incentive to the manufacturer to reduce them. If the possibility
of reducing them by reducing the term of its warranty is foreclosed
by competition or otherwise, and if the facts of life are that manu-
facturers need independent retail outlets in order to sell their
products, the only way warranty costs can be reduced is by making
a better product. It is true that on the Canadian scene, anti-trust
laws have not prevented vertical integration of manufacturing and
retailing stages in the distribution process
to nearly the same
extent as in the U.S., and indeed one of the principal complaints of
independent auto dealers in Canada is that they are subject to
improper competitive practices from “tame” dealerships owned or
controlled by manufacturers who are able to view the profitability
etc. of these dealerships against their total manufacturing and
retailing operations. To prevent abuses of market power that may
thus arise, consideration may need to be given to the development
of an appropriate anti-trust policy in this regard. If this is not done,
oligopolistic situations which exist at the manufacturing
level
(e.g., in the auto industry) will be re-created at the retailing level.
Even if this can be avoided, there may be a case for an additional
13 See supra, n. 9.
McGILL LAW JOURNAL
[Vol. 18
safeguard to prevent specific, “short-term” abuses of market-power
which, while in the larger picture, may be capable of resolution
by the market itself, can in the short term cause unfairness to a
particular dealer. To this end, a provision such as section 2-302 of
the U.S. Uniform Commercial Code, which enables a court to review
unconscionable transactions in both a consumer and a commercial
context, should be adopted in Canadian jurisdictions. It is worth
noting that several members of the U.K. Law Commission, in its
report on Exemption Clauses in Sales of Goods (1969), favoured
following the American experience and allowing courts to review
not only consumer transactions but commercial transactions as
well. 4 On the other hand, little would seem to be gained by going
further and attempting to prescribe the rates at which the dealer
must be reimbursed by the manufacturer for warranty repairs,
as some recent U.S. Warranty Bills, e.g., H.R. 10690 (1970)” before
Congress have sought to do. The relationship between manufacturer
and dealer is too complex to single out one aspect of their dealings
alone for regulation. If warranty work was required to be reimbursed
at normal retail rates one might find, for example, that manu-
facturers would reduce the profit margins allowed to dealers on the
sale of new cars, on the ostensible grounds that, through the sale
of these cars, dealers would in the future be assured of “captive”
repair work at profitable rates.
On the assumption that competitive forces will, by and large,
compel manufacturers to offer reasonable terms, including reason-
able warranty reimbursement rates, to (independent) dealers, it
would seem to follow that increased warranty costs resulting from
increased levels of consumer protection are going to have to be
passed back to the manufacturer. The prospect of increased costs
of this kind may act as an added inducement to manufacturers to
deal with the product quality problem directly through improved
quality control measures rather than indirectly and less satisfactorily
through warranty reimbursement. At some point, presumably, eco-
nomies of scale enter the picture. For a dealer to deal with defects
individually must, at some point, be more expensive ultimately
for the manufacturer than if the latter through improved techno-
logy attacks the problem en masse on the production line.
Of course, one objection to this line of analysis may be that in a
highly oligopolistic industry like the automobile industry, where
14The Law Commission and the Scottish Law Commission, Exemption
Clauses in Contracts, First Report: Amendments to the Sale of Goods Act, 1893,
H.M.S.O., No. 24, (London, July 24, 1969), at pp. 34 et seq.
15 See infra, p. 21.
No. 1]
MANUFACTURERS’GUARANTEES
also there is little cross-elasticity of demand between automobiles
and other means of transport, increased warranty costs resulting
from improved warranties will simply be passed straight back to
the consumer in the form of higher prices for the product so that
neither the manufacturer nor the dealer meets these costs, and no
attempt will be made to improve the product. In this way, the
volume of cars required by consumers would also be less threatened.
This argument raises complex and important issues that are
beyond both the province of this article and the competence of this
writer. However, it again serves to underline how complex the inter-
relationships are in a field such as that under inquiry and how
sterile any approach is which ignores them.
On the oligopoly argument, however, one or two tentative
thoughts can be offered. First, while it may be true that the American
automobile industry is oligopolistic and not therefore in itself truly
competitive, American consumers can turn elsewhere for their cars.
The rapid growth in volume of imported cars is testimony to the fact
that consumers are now doing just this. Therefore, to analyse the
automobile market in America only in American terms mistakes
the extent of the market and the extent of competitive forces oper-
ating in the market. Secondly, as our cities become more congested,
and as public transportation improves, a real alternative to the
use of the motor car may emerge, so that at some point consumers
may feel it worthwhile to transfer their demand for cars to public
transport. If this occurs, the automobile industry will be facing a
form of competition from the public transport sector. This again
may operate as an inducement to build a better, or at least a
different, car. Finally, even if in every sense the American automobile
industry is oligopolistic, and will remain so, many sectors of industry
producing consumer products are not, and in these cases increased
warranty costs resulting from improved warranty protection should,
given a truly competitive market, create incentives to produce
better products. In the case of the automobile industry (on the
present hypothesis), the State may be compelled to develop an
industrial strategy special to it. Even on the present hypothesis,
and without a special industrial strategy, the possibility that all
increased warranty costs may be passed on to consumers may still
amount to a net benefit to them. Costs will be spread both over
persons and over time. Consumers will, in effect, have been forced to
buy an insurance policy against the contingency of defects materi-
alising. The misfortune will have been spread around.
One concluding observation that should be made in this intro-
duction to the topic of manufacturers’ guarantees is this. A whole
McGILL LAW JOURNAL
(Vol. 18
variety of factors present today in the market-place account for
the fact that a consumer’s expectations about a product or service
are not met. Only a composite attack on all these factors is likely
to produce a reasonable result. To hang everything on some form
of regulation of manufacturers’ guarantees is to distort the nature
of the problem and prejudice the formulation of viable and balanced
solutions to it. For example, it is important that adequate private
law redresses be available for deceptive advertising and sales practi-
ces (as under the recently proposed U.S. Uniform Consumer Sales
Practices Act). The law of misrepresentation also requires reform
so that a larger range of sales pitches at the point of sale will
attract relief and so that a coherent range of remedies covering the
present condition, warranty, representation hierarchy is available
tailored to reflect the gravity of the impact of the seller’s conduct
on the buyer’s expectations in each case. Moreover, in transactions
between seller and buyer, the problem of contracting out of the
law’s implied terms needs to be resolved. In relation to manu-
facturers, a doctrine of strict product liability without privity is
obviously called for in Canada. Finally, in relation to safety-related
defects, a comprehensive system of public standard setting needs
to be developed (as recommended by the U.S. National Commission
on Product Safety in 1970). While it is not possible in this article
to argue the case for these various proposals, the guarantee proposals
that are here advanced are posited against a legal setting in which
these other deficiencies in the law have also been met.
II. Framing Guarantee Proposals
a. The Specific Elements of the Problem
from the Consumer’s Perspective.
The problems besetting consumers in this area, in specific terms,
seem to be reducible to these:
(1) Consumers, at whatever point of time they come to consult
a guarantee, are often unable to comprehend clearly its terms.
An interesting insight into this issue is provided by a consumer
survey recently undertaken by Professor William W. Whitford in
Wisconsin.’0 In his survey of 300 consumers who had bought con-
sumer goods to which guarantees with disclaimer clauses applied,
fewer than 10% said that the disclaimer clause was explained to
16 Strict Products Liability and the Automobile Industry: Much Ado About
Nothing, [1968] Wisconsin L.R. 83.
No. 1]
MANUFACTURERS’GUARANTEES
them at the time of purchase. When consumers in the survey were
asked to read a typical disclaimer clause, fewer than 50% reported
a generally accurate conception of the meaning of the disclaimer.
About 25% in the sample flatly stated that they did not know what
the disclaimer meant. These patterns were reinforced by a survey
Professor Whitford made of all first year law students at Wisconsin.
Students were presented with an automobile guarantee form con-
taining common provisoes, exceptions and disclaimers, and then
given a straightforward hypothetical personal injury situattion to
which they were required to apply the guarantee. Only 50% of the
students demonstrated some awareness of the meaning of the
guarantee in their answers. In Canada, a Canadian Appliance Manu-
facturers’ Association study in 1968 asked 14 housewives to sit down
and apply 10 typical major appliance warranties then in use in
Canada to a variety of hypothetical, standard, situations, to test
their capacity to understand the coverage and terms of the warran-
ties. 40% of the answers were incorrect.
(2) Even if the terms of a guarantee are drafted clearly, the
operation of the market process today is not conducive to the
guarantee being projected, at or before the point of sale, as a major
factor in a prudent shopping decision. Typically, the guarantee
will be packed with the goods or be “buried” in an operation manual
and will not be readily accessible until after the goods are delivered
to the consumer’s home. While consumers seem generally concerned
with whether they are receiving a guarantee, the offering of guar-
antees is not competitive in the sense that the consumer will not
easily be able to compare the precise benefits conferred by one
guarantee with those conferred by that accompanying a competing
product before he makes his shopping decision. Even if he was
able to make these comparisons, the consumer would still be unable
to compare the crucial factor of relative performances under the
guarantees, i.e., how fully is each honoured? To the extent that
guarantees are presently advertised, a consumer is often not much
better informed. If product A is advertised as being accompanied
by a one year guarantee, and product B by a five year guarantee,
the consumer cannot rely on product B’s guarantee being superior
to that of product A. Product A’s guarantee may be an all-inclusive
one year guarantee, while product B’s may be five year parts only
and not labour. Moreover, again, the question of relative perform-
ance under the guarantees cannot be determined by their terms.
(3) Partly because of factors (1) and (2) and partly in addition
to them (e.g., as a result of considerations such as market power
in particular industries), guarantees, even where they are not
McGILL LAW JOURNAL
[Vol. 18
misleading or inaccessible, often do not provide acceptable minimum
standards of product quality and after-sales service. Indeed, through
disclaimer clauses etc. contained in them, guarantees often give a
consumer less protection than he would have had under the general
law in the absence of a guarantee.17 This point invokes considerations
similar to those usually relied on in the context of the case for
non-exclusion of implied terms as to quality, and the doctrine of
strict liability in tort providing compensation to third parties
damaged as a consequence of the unmerchantability of a product.
One of the arguments that can be advanced in the latter context
for a doctrine of strict liability (including liability for economic loss)
is that this could be a major instrument in the regulation of manu-
facturers’ guarantees. The obligation of merchantability applying
both as between immediate parties and as between remote parties
would, in effect, operate to put a “floor” under every manufacturer’s
(or supplier’s) guarantee. Whatever the guarantee provided, a sup-
plier would be bound to live up to the minimum obligation to
provide a merchantable product. The writer strongly favours this
position. The potential impact of these more general proposals on
the guarantee problem, of course, illustrates the desirability of a
comprehensive, balanced attack on the problem of product quality.
(4) However reasonable the terms of a guarantee, the fact
remains that in many cases a manufacturer or supplier does not live
up to those terms. In other words, the problem has two faces:
(a) how to ensure that reasonable obligations as to standards of
quality and service are undertaken in a guarantee by the manu-
facturer; (b) how to ensure that these obligations, once reasonable,
are properly observed. It is clear from evidence received by the
F.T.C. and other investigators in this area that the problem of proper
execution of guarantee obligations is one of the major causes of
consumer unhappiness with manufacturers’ guarantees.
b. Possible Responses
A number of broad policy options for legislation present them-
selves for consideration. It may be possible to prohibit certain
forms of warranties or warranty practices by means of criminal
17See U.S. President’s Task Report on Appliance Warranties and Service,
(1969), at pp. 43 et seq; Report of the Senate Committee on Commerce on S.
986, op. cit., n. 1, at pp. 8 and 9; the F.T.C., Report on Automobile Warranties,
(1970), at p. 31. For a specific example of such a warranty, see the warranty
of the American Automobile Manufacturer’s Association in issue in Henningsen
v. Bloomfield Motors Inc., 161 A.2d 69 (1960, N.J. Sup. Ct.).
No. 1]
MANUFACTURERS’ GUARANTEES
sanctions. Again, it may be possible to vest in a regulatory agency
or government department power to approve warranty forms and
to issue cease and desist orders, etc., when violations of administra-
tive rules occur. Further, it may be possible for the law to attempt
to make guarantee practices more competitive by a policy of proper
disclosure. Additionally or alternatively, the law might underwrite
all guarantees by imposing mandatory, minimum obligations. In the
latter two cases, breach of guarantee obligations might only give
affected consumers a private right of action and attract no public
enforcement measures.
It is now intended to examine some specific legislative schemes,
either existing or proposed, which reflect these various policy
options, and attempt to evaluate their respective strengths and
weaknesses as responses to the various elements of the guarantee
problem outlined above.
An example of a proposed criminal law response to the problem
is section 20(1)(c) of Bill C-256, the Canadian Competition Bill,
1971. This section provides:
No person shall…
(c) make a representation to the public in a form that purports to be
(i) a warranty or guarantee of a commodity or service,
or
(ii) a promise to replace, maintain or repair a commodity or any
part thereof or to repeat or continue a service until it has achieved
a specific result
if such form of purported warranty or guarantee or promise is misleading
or if there is no reasonable prospect that it will be carried out.
While this provision is a useful addition to Federal legislation
directed at misleading advertising, for a number of reasons it cannot
by any means be regarded as a total answer to the guarantee problem.
First, because it is a public law response, the general problem of
effective enforcement arises. Will resources be available to enforce
the provision widely? Experience suggests the contrary. After all,
the F.T.C. has, for many years, had power to enjoin misleading
advertising of guarantees, and indeed since 1960 has had in force
specific guidelines dealing with misleading advertising of guarantees.
Despite this, all the evidence of unsatisfactory practices in this area
outlined earlier has continued to accumulate, if not escalate. Second-
ly, because a criminal sanction is, after all, an extreme sanction,
the provision is likely to be narrowly construed, and in practice
applied primarily to situations involving dishonest guarantee claims,
and an appropriately high onus of proof demanded. Thirdly, on
the very wording of the provision, it has a highly limited scope.
McGILL LAW JOURNAL
[Vol. 18
It applies only where the guarantee is “misleading” or where “there
is no reasonable prospect that it will be carried out”. However,
as was pointed out earlier, many guarantee problems arise either
out of the fact that a guarantee which is in no respect misleading
may nevertheless simply not adopt acceptable minimum obligations
as to product quality or service, or out of the fact that even where
acceptable obligations are undertaken, these obligations are not
subsequently performed. The reference in the provision to the case
where there is no reasonable prospect that a guarantee will be
carried out can only possibly strike at the most extreme (and
indeed probably fraudulent) situations. In the typical case, e.g.,
the automobile warranty, some franchised dealers of the manu-
facturer will perform the guarantee, other dealers will not. Other
dealers are likely to be spread all along the spectrum between the
two extremes. Section 20 of the Competition Bill will not deal with
this situation. Fourthly, criminal sanctions will not normally com-
pensate affected consumers. It is true that section 55 of the Com-
petition Bill contemplates damages actions, but relief is apparently
conditioned upon of the commission of a criminal offence, e.g.,
under section 20. Moreover, section 55 may be of doubtful consti-
tutional validity.
It is unlikely that any reformulation of section 20 could meet
the burden of these limitations. The provision is a useful one, but
substantial additional measures are required. It should also perhaps
be pointed out here that deceptive advertising of guarantees would
fall within the private law redresses provided for deceptive sales
practice in Acts such as the U.S. Uniform Deceptive Trade Practices
Act and more recently in the proposed Uniform Consumer Sales
Practices Act. The adoption of similar legislation has frequently
been advocated in Canada and is badly overdue.
Leaving the criminal law sphere, it is instructive to examine
three Bills which were the subject of extensive U.S. Congressional
hearings in 1970 and 1971. The Bills are interesting because of the
wide divergences of approach that they reflect.
(i) H.R. 18056
H.R. 18056 was introduced into the House of Representatives by
the Nixon Administration in 1970.18
This Bill has two broad thrusts: (a) the prohibition of deceptive
advertising practices in relation to guarantees; and (b) the disclosure
18 Warranties and Guaranties, Hearings Before the Subcomm. on Commerce
and Finance of the Comm. on Interstate and Foreign Commerce, 91st Cong.,
2nd Sess., Ser. No. 91-79 (1970).
No. 1]
MANUFACTURERS’ GUARANTEES
in meaningful form of all relevant information as to the scope
and operation of the guarantee in the guarantee form itself.
The first objective is sought to be attained by defining guarantee
and warranty very broadly as “any express statement of guarantee
or warranty, or any description, sample, model or any affirmation
of fact or promise, whether in advertising or otherwise, made by
the guarantor to the purchaser, which relates to consumer products
or services and becomes part of the basis of the bargain, as to that
description, sample, model, affirmation or promise.” Expressions
of opinion or commendation are excluded. “Consumer products”
are defined as “goods that are normally used for personal, family,
or household purposes and that actually cost the purchaser more
than $25.” “Services” are defined as meaning “repairs or other work
actually costing more than $25 performed on consumer products.”
A deceptive guarantee is one which is false, fraudulent or misleading
to a reasonable man exercising due care. The Bill goes on to provide
that, unless excluded, a warranty that a consumer product is fit
for the ordinary purposes for which such product is used shall be
implied in every sale of a consumer product by a supplier. This
term may be excluded by the use of words such as “as is” or “with
all faults”. However, if a supplier uses the term “warranty” or
“guarantee” in advertising, labelling, point of sale material, or
other representations concerning a consumer product or service,
any attempted disclaimer of the statutory warranty of fitness for
purpose is deemed to be a deceptive guarantee and of no effect.
It is an offence under the Bill for any supplier (a) to make
any deceptive guarantee with respect to a consumer product or
services, or (b) to fail to perform any obligation under the statutory
‘warranty as to fitness where this exists. These offences under the
Bill are also deemed to be unfair or deceptive practices within
section 5 of the Federal Trade Commission Act and expose a supplier
to the usual cease and desist order procedures under the latter Act
or the injunctive proceedings which may be brought by the F.T.C.
under the Bill itself in Federal District Courts. Where an injunction
has been issued, or a cease and desist order becomes final (and
conditional upon this), any consumer affected by the practice in
question is given a right of action in damages. The Bill (section 18)
makes it clear, however, that the consumer retains a right of original
action in respect of breaches of implied warranties or other causes
of action arising outside the Bill.
The second broad thrust of H.R. 18056 – meaningful disclosure
takes the form of a broad regulation-making
of guarantee terms –
McGILL LAW JOURNAL
[Vol. 18
power vested in the F.T.C. enabling the latter to make regulations
providing that a guarantee:
(1) is expressed in simple and readily understood terms;
(2) clearly and conspicuously discloses the name and address of the
guarantor and, where applicable, the name and address of any person
or persons, or the identification of any class of persons authorized
to perform the obligations set forth in the warranty or guarantee.
Regulations may provide, among other things, that the warranty
or guarantee:
(1) describe the parts of the product which are covered by the warranty
(2) state the nature of the damage and defects which are covered by the
or guarantee;
warranty or guarantee;
(3) disclose’the duration of any obligations under the warranty or guar-
antee;
(4) state the conditions, if any, which the person claiming under the
warranty or guarantee must fulfill before the guarantor will perform
his obligations;
(5) state the time at which and the manner in which the guarantor will
perform his obligations;
(6) state the period of time within which, after notice of malfunction or
defect, the guarantor shall repair, replace, or otherwise perform any
obligations under the warranty or guarantee;
(7) disclose the characteristics or properties of the products, or parts
thereof, that are not covered by the warranty or guarantee;
(8) not contain words or phrases which would mislead reasonable men
as to the nature or scope of the warranty or guarantee;
(9) state the step-by-step procedure which the owner should take in order
to obtain performance of any obligation under the warranty or guar-
antee;
(10) state any means available for quick informal settlement of any war-
ranty or guarantee dispute.
Mr. James Lynn, General Counsel, Department of Commerce, in
hearings before the Senate Committee on Commerce, justified the
Bill in the following terms:
We firmly believe that informative, accurate, clear and fairly written
guarantees, backed up by guarantors who deliver what they promise are
essential to our free market economy. Fair presentation of the guarantee
prior to sale as well as full performance of obligations after sale are
needed to facilitate value comparisons by consumers and promote com-
petition in marketing and servicing. And it is our view that competition,
if allowed to work, will cure existing problems connected with war-
ranties.
However, the Department opposes legislative solutions that would
dictate to the manufacturer and the consumer the kind of warranty or
guarantee protection that must be sold. We oppose the imposition by
No. 1]
MANUFACTURERS’ GUARANTEES
the Government of compulsory warranties. We think that it is a basic
commercial right –
to freely and knowingly
allocate the economic risks relating to the quality of goods.’ 9
of both buyer and seller –
Thus, the essential thrust of the Administration’s Bill is seen
to be disclosure –
the consumer is to be accurately informed of the
terms of a guarantee so that he can make appropriate comparative
shopping choices and secure the benefits of a more competitive
market-place. The Bill effectively allows the parties to exclude or
modify all substantive obligations as they desire.
How realistic is this approach? Mr. George Gordin Jr., Senior
Attorney, National Consumer Law Center at Boston College Law
School, in Senate Committee hearings put the objections well:
I think, Mr. Chairman, there is a broad misconception about warranties
and I think this is perpetuated by business spokesmen and others. It
is
that somehow the consumer bargains for the kind of warranty he gets,
and they cite this as a principal reason for opposing the imposition of
minimum standards for warranties.
I think we heard that this morning from Mr. Lynn, who in effect
reiterated what he stated at the January 20 hearing, when he said he was
opposed to dictating the kinds of warranty protection that must be sold,
because, he said, it is a basic commercial right of both the buyer and
seller to freely and knowingly allocate the economic risk relating to the
quality of the goods.
I would ask you, Mr. Chairman, or anyone in this room, when the
last time was when they had an opportunity to bargain, freely and know-
ingly, or in any other way, for the kind of warranty that they received.
I think it is pure myth to suggest that consumers bargain for their
warranties. There is no competition in warranty today. I don’t really
believe there ever has been. The only competition in warranty that most
of us are familiar with was the so-called competition of the automobile
manufacturers in warranties and we know from the reports of the Federal
Trade Commission what in effect the consumers got for the so-called
bargaining that was offered to them and the bargains that they supposedly
received. These are contracts of adhesions, they are presented on a purely
take-it-or-leave-it basis. You can’t shop around for better bargains in war-
ranties. The only difference is in language, it is not in the substance of
a warranty.
It seems to me that if people who say that there ought to be com-
petition in warranty really mean what they say, then they ought to have
no objection whatever if the statute that you are proposing here would
say something to the effect that you cannot have any boiler plate language
in warranties, you cannot have any prewritten warranty language in a
warranty offer, because then clearly it is not bargained for.
19 Hearings on S. 3074, op. cit., n. 5, at p. 35.
McGILL LAW JOURNAL
[Vol. 18
They ought to be prepared to accept a statute that would require
them to prove that warranties were bargained for. This at least would
go along with the notion they offer of competition, it seems to me 2 0
This point was, in fact, conceded at various points by industry
representatives during the hearings. For example, Mr. Winston H.
Pickett, Associate Counsel, General Electric Co., and Chairman of
the Legislation and Policy Subcommittee of the Consumer Issues
Committee of the U.S. Chamber of Commerce, in an exchange with
counsel assisting the Senate Committee said:
Mr. Pickett: I have a very good respect for the consumer’s perception.
I think you can say a guarantee is the word which attracts his attention
and if specifically explained will enable him to make his own judgment
between your guarantee and mine.
Mr. Sutcliffe: Will that be at the time of sale or will that be if in
fact the thing malfunctions?
Mr. Pickett: You raise a very difficult question. How do you get
across contents of a guarantee prior to the time of sale?
Mr. Sutcliffe: S. 3074 has provisions for making sure that the con-
sumer is aware of the guarantee prior to the time of sale.
Mr. Pickett: I think that is a very difficult problem to assure any
consumer. For example, I don’t know how you can guarantee at the retail
level that every product that has a guarantee is read to the consumer
prior to the time he buys it. That is a very troublesome administrative
thing.
Ideally, it would be wholly desirable, and that is why manufacturers
try to hang them on the products that are displayed, that is why they run
their guarantees in ads and the like.21
These views are reinforced by the survey undertaken by Professor
Whitford 22 where it will be recalled that fewer than one in
ten
consumers had terms of guarantees explained to them at the time
of purchase. Professor Whitford in his article expresses doubts as to
whether, no matter how guarantees were to be re-worded, consumers
would be likely ever to achieve a substantially different level of
acquaintance with their terms at the time of sale. These doubts
appear to reflect a realistic appreciation of the shopping process
in the modern consumer market-place. First, many appliances etc.
today are bought by mail-order, so that the fact that the guarantee
might be hanging on a demonstration model in some distant show-
room is irrelevant to this form of transaction. Secondly, even where
the purchase is made in the shop, and even assuming that the
guarantee is displayed with the product and not buried in an opera-
20 Ibid., at pp. 239-240.
21 Ibid., at p. 139.
22 Supra, n. 16.
No. 1]
MANUFACTURERS’ GUARANTEES
tion manual etc., and even assuming that it is neither deceptive
in its terms nor incomplete in its information on essential matters,
the fact remains that a comparative shopping decision in relation
to guarantees accompanying competing products is, for the average
consumer, still likely to be an incredibly difficult exercise. Under the
Administration’s proposals, provided these points were set out
clearly in the guarantee, it would be possible (e.g., in relation to a
washing machine) for guarantee A to cover the machine for 3 years
all parts but not labour with shipping charges back to the factory,
in the event of the need for repair, to be paid by the consumer,
guarantee B to cover the machine for 5 years some parts only
(e.g., transmission, i.e., fewer parts than in guarantee A), and labour
included, and transportation to be arranged by the manufacturer,
guarantee C to cover all parts and labour in the event of malfunction
during the first 6 months but, thereafter, for the next 18 months
some parts only, and guarantee D to cover all parts and labour
for 12 months, transportation for repair to be arranged by the
manufacturer. Different combinations of coverages could be elab-
orated almost endlessly. The clear result is that even given the
earlier assumptions (an accessible guarantee etc.), the average
consumer has not the slightest hope of making meaningful com-
parisons. After all, the fact must be faced that a consumer is being
asked to make a comparative evaluation of what are essentially
legal documents. It is difficult enough for him to make comparative
evaluations of competing products of a technical nature, although
even there in day-to-day life, he is likely to have picked up some
minimal appreciation of what functions the machine which he
wants should perform. However, the exercise of evaluating com-
peting legal documents which, under the Administration’s proposals,
can be as complex and qualified as the supplier desires, provided
all the provisoes etc. are included, is one which is entirely foreign
to any competence the consumer is likely to possess. To argue that
the Administration’s Bill requires all relevant points to be set out
clearly misses the point entirely. From the consumer’s point of view,
to allow provisoes, disclaimers, etc. without restriction is necessarily
to enable the creation of documents which he will be unable to
understand. If more than 50% of first-year law students at a major
American law school are unable to understand existing automobile
guarantee terms, one cannot be optimistic that any reformulation
of these terms in “clearer” language is going to lift the fog signifi-
cantly for the majority of lay consumers. Moreover, the assumption
above has been that the consumer is at least going to try to read
and comparatively evaluate competing guarantees. This assumption
seriously mistakes the way consumer bargains are struck today.
McGILL LAW JOURNAL
[Vol. 18
As experience with standard form contracts at large has shown,
a consumer’s principal concern at the time of purchase is usually
simply the subject matter of the contract and the price together
with any verbal representations or assurances made to him by his
seller. Collateral terms relating to credit, guarantees etc., embodied
in printed documents are taken, for the most part, as read. Beyond
the broad fact that credit is available, and a guarantee is offered,
the consumer is usually unwilling or unable to go.
It might be argued that one way of ensuring that the importance
of comparison shopping in relation to guarantees could more
forcibly be brought to impinge on the consumer’s consciousness
is to require that they be advertised whenever the product which
they accompany is advertised. Firstly, it should be noted that the
Administration’s Bill does not provide this, although one would
have thought that if it was seriously intended to utilize free market
forces to regulate guarantees, something in this direction would
have been attempted. However, it would obviously be both im-
practical and pointless to require the full terms of a guarantee to be
advertised each time that the product is advertised. The consumer
would be just as confused by the combinations of coverages as in
the example given above. On the other hand, as will be seen shortly
when Bill S. 3074 is examined, it might be possible broadly to
categorize guarantees by reference to statutory criteria and insist
that at least the broad category of the guarantee be indicated
whenever the product is advertised, e.g., “full” guarantee, “partial”
guarantee, so that broad comparisons of respective coverages could
be readily made from advertisements, and also indeed from the
title to the guarantees themselves if these were to be required
to be displayed with the products. This proposal will be discussed
more fully shortly, but it is relevant to note at this point that both
Administration spokesmen and industry representatives were vehe-
mently opposed to it. The principal objection appears to have been
that to require a supplier to describe his guarantee as a “partial
guarantee” (e.g., because it related only to parts and not labour)
was to suggest that it was something mediocre and second-class
in nature and was really like asking a salesman to deprecate his
own products. Moreover, it was argued that this proposal would
operate unfairly against a small supplier who, because of inability
to maintain a large service network, could only offer a parts
guarantee and not labour. Thus, further concentrations of economic
power would be encouraged. The answers to these objections seem
to be clear. A guarantee providing a partial coverage is inferior to
one providing full coverage. The only question is whether the con-
No. i]
MANUFACTURERS’ GUARANTEES
sumer is to be allowed to know this. If we believe in competition
and bilaterally informed sellers and buyers, the answer is easy.
Again, even if to force a small supplier to disclose that he cannot
offer as extensive a guarantee as other suppliers may damage him,
the question must still be asked, why is the consumer not entitled
to the guarantee information. Competition is designed precisely to
weed out efficient suppliers from less efficient suppliers. If this
favours larger industrial units who through economies of scale, etc.
can offer a better service, the consumer is at least entitled to know
what his choices are. To describe this as an improper form of
competition, as Administration spokesmen did, is impossible to
follow. If in order to protect the smaller and less efficient supplier,
one must deliberately withhold relevant information from the con-
sumer, one has abandoned the very principle which the Administra-
tion’s Bill purports to utilize.
(ii) H.R. 10690
This Bill, introduced at various times and by various members
during the first and second sessions of the 91st Congress, 23 lies
at the opposite end of the spectrum to the Administration’s Bill.
H.R. 10690 starts by implying into every contract of sale by
every manufacturer implied terms as to title and merchantability.
Where the manufacturer has reason to know that goods are required
for a particular purpose by the buyer, there is an implied warranty
of fitness for purpose and this applies in some cases even though
the buyer has not dealt directly with the manufacturer. In other
cases, the retailer himself is subject to such a term. These terms
are non-excludable except that where the buyer has examined the
goods, there is no implied warranty with respect to defects which
an examination ought to have readily revealed to him. These propo-
sals are broadly in line with proposals referred to earlier in this
article dealing with non-exclusion of implied terms. H.R. 10690
also requires certain information to be clearly stated in a guarantee.
This information broadly follows that required in the Administra-
tion’s Bill except, most significantly, it provides that the duration
of a warranty must be “at least one year measured from the time
of delivery of the product to the buyer except where in the opinion
of the Commission [the F.T.C.] a warranty of greater or lesser
duration would be more appropriate”. The Bill also provides that
23Hearings on H.R. 10690 Before the Subcomm. on Commerce and Finance
of the Comm. on Interstate and Foreign Commerce, 91st Cong., 2nd Sess., Ser.
No. 9179 (1970).
McGILL LAW JOURNAL
[Vol. 18
a warranty is transferable during its lifetime to subsequent purcha-
sers. The Bill then goes on to set out in detail the servicing obliga-
tions of a manufacturer:
Sec. 9. The manufacturer of goods subject to this Act shall be prepared
without cost or undue convenience and delay to the buyer to repair or
replace merchandise which fails to meet the warranty standards estab-
lished by this Act. In meeting this requirement, manufacturers shall –
(a) establish service facilities of their own or designate service repre-
sentatives in such quantity and location as the Commission shall
deem appropriate, considering the cost of maintaining such facilities,
the total sales volume of the manufacturer, the ease and frequency
of repair of the product, its size, and other similar factors;
(b) notify the buyer of the location of the nearest service facility;
(c) supply promptly to their own or their agents’ servicing centers all
repair parts and components required for servicing of goods covered
by the warranty;
(d) provide without cost such technical manuals and other information,
including technical analysis and factory representatives, necessary for
the prompt and satisfactory correction of all damaged and defective
products;
(e) develop procedures for servicing which will insure prompt repair or
replacement of defective goods;
(f) bear the entire cost of maintaining their own service facilities;
(g) fully and promptly compensate their service representative for work
done under the warranty in an amount equal to that which the serv-
icing agent would receive for like service rendered to retail customers
who are not entitled to warranty coverage, including such items as
parts, service charges, labour charges, shipping and storage costs,
overhead and a reasonable profit; and
(h) establish a reserve fund and set aside such spare parts as, in the
Commission’s opinion, would be sufficient to meet the warranty obli-
gations required by this Act even though the manufacturer were to
go out of business or were to cease production of that product.
These provisions are followed by provisions requiring manufac-
turers to maintain detailed records of warranty claims, mode of
settlement, etc., and to file public reports summarizing this informa-
tion annually with the F.T.C. Violations of the Bill are deemed to be
also violations of section 5 of the F.T.C. Act with the consequences,
in terms of remedies, that that entails. Certain violations of the
Bill are also made criminal penalties. Buyers are given civil remedies
for damages for violations of the Bill without preconditions.
The principal thrust of H.R. 10690 is to provide a machinery, via
the F.T.C., for public standards to be set for the terms of all guar-
antees. Earlier in this article, reference was made to some of the
difficulties involved in setting minimum quality standards for goods.
Precisely the same range of difficulties arise in respect of setting
No. 1]
MANUFACTURERS’GUARANTEES
minimum quality standards for guarantees. These are well set out
by the Chairman of the F.T.C., Miles W. Kirkpatrick, in comments
on the Bill to the House Committee:
… As H.R. 10690 is presently drafted, it contemplates in effect a full and
complete supervision by the designated administration authority over all
the warranties now being offered in the market-place. Although we have
no firm estimate of the number of different products covered by war-
ranties today nor of the number of manufacturers and sellers offering
warranties with their products, it is not unreasonable to assume that
product warranties presently being offered number well in to the thou-
sands.
In our judgment, effective and meaningful administration of the bill’s
provisions would require the administering body to examine the text of
every warranty offered in the market-place in order to check its con-
formity to the Act’s provisions. Further, the administering authority will
have to examine the manufacturers’ and retailers’ performance under their
warranties and will also have to collect data on the reasonable life ex-
pectancy of each warranted product, the propensity of the product to
require servicing and other data relevant to the question of whether the
duration of the warranty should be lengthened or shortened. Finally, the
administering agency will have to make inspections and investigations as
are necessary to enable it to determine whether adequate service facilities
and price inventories are being maintained in order to provide the prom-
ised performance under the warranty as set forth in Section 9 of the
bill.24
It will readily be apparent from these remarks that the State
would be embarking upon an enormously expensive and complex
exercise if it sought to prescribe the terms of every guarantee, or
even only guarantees in those sectors of the market in which the
highest incidence of complaints arise. Moreover, if the State were
to be willing to embark upon this type of exercise, there would
seem to be virtues in proceeding directly to the prescription of
quality standards for goods, rather than guarantees, and thus elim-
inate the problems at source. However, either exercise, outside the
realm of personal safety where different considerations apply and
in relation to which experience in the setting of effective public
standards has not been such as to justify venturing further afield
with any confidence,2 5 would not seem to be a practical possibility
in Canada. Moreover, it is submitted that the extreme measures
contemplated by H.R. 10690 are unnecessary if one attacks all aspects
of the product quality problem,26 which objective this article assumes
as one of its initial premises. H.R. 10690 seems to make the mistake
24 Ibid., at p. 60.
25 See e.g., Report of the U.S. National Commission on Product Safety, (1970).
26 See supra, p. 10.
McGILL LAW JOURNAL
[Vol. is
of attempting to solve the whole product quality problem through
the medium of regulation of manufacturers’ guarantees. This distorts
the nature of the problem and leads to harsh and unworkable
measures.
(iii) S. 3074
This Bill, The Consumer Products Warranty and Guaranty Bill,
was passed unanimously by the U.S. Senate in 1970. It has since
been stalled in House Committees. It was subsequently reintroduced
in the Senate as S. 986, which, in addition, contains sweeping
additions to the powers of the F.T.C. in the administration of this
and other consumer legislation. S. 986 has been the subject of
further Congressional Hearings, and at the time of writing has been
passed by the Senate but not the House.27
S. 3074 is thus important because of the widespread support
it has received from legislators and also from the U.S. Federal Trade
Commission in Congressional hearings.
The Bill relates to consumer products (not services) costing
more than $5. It requires, as did the previous two Bills, disclosure
of certain basic information in all written warranties. The Bill then
proceeds to introduce its most important requirement, the designa-
tion of warranties. If a warranty incorporates the Federal minimum
standards for a warranty set out in the Bill, it must be conspicuously
designated a “full [period of duration] warranty”. Where these
standards are not met, a warranty is to be designated a “partial
warranty”. The Federal minimum standards, in essence, require that
a supplier must repair, or replace if repair is not possible or cannot
be timely made, any malfunctioning or defective warranted product
within a reasonable time, and without charge.
A consumer product within the Bill is permitted to carry both
full and partial warranties (successively), and service contracts in
addition to or in lieu of warranties are also permitted.
Where any express warranty against defect or malfunction is
given, disclaimer of implied warranties is prohibited except that
implied warranties may be limited in duration to the duration of an
express warranty of reasonable duration.
The F.T.C. or the Attorney-General is empowered to apply to the
Court for injunctive relief to restrain the issuance of deceptive
warranties. A consumer’s private law remedies for breach of either
27 For Hearings on S. 3074, see supra, nn. 7 and 18; for hearings on S. 986,
see Hearings on S. 986 Before the Consumer Subcomm. of the Comm. on Com-
merce, 92nd Cong., 1st Sess., Ser. No. 92-8 (1971).
No. 1]
MANUFACTURERS’ GUARANTEES
express or implied warranties are not affected by the Bill, although
provision is made for recovery of costs, including attorney’s fees
in successful suits. Under S. 986, the F.T.C. is given wide rule-
making power to define prohibited deceptive practices, and also
power to obtain preliminary injunctions from the courts pending
cease and desist proceedings on the part of the Commission. Both
these proposed additions to the F.T.C.’s powers, particularly the
former expanding the Commission’s rule-making power, have proved
very controversial.
While the provisions of S. 3074 are by no means free from
criticism, the Bill suggests some interesting possibilities and, in the
development of the proposals which follow, it is used as the major
point of reference.
III. Some Guarantee Proposals
a. Coverage of the Legislation
S. 3074 is confined in its coverage to consumer products costing
more than $5. Other bills before Congress have used other monetary
floors, e.g., $10, and $25. Earlier versions of S. 3074 had confined
its warranty provisions to “mechanical, electrical or thermal” parts
of a consumer product. None of the three Bills discussed in this
article apply their disclosure provisions in relation to written guar-
antees to guarantees of service. All three Bills deem affirmations of
fact or promises made by a supplier to a purchaser in respect of
consumers’ products or services to be express warranties. These
variations raise important questions.
First, there does not appear to be any justification in applying
disclosure provisions etc. only to guarantees of products costing
above a certain figure. If a supplier chooses to offer a guarantee, he
presumably does so because he considers that there are competitive
advantages to be gained in so doing, and he ought therefore to be
made to accept the basic obligation of providing something which
is meaningful and not misleading. It is very important to note that
S. 3074 does not require a supplier to issue a warranty at all, nor
if a warranty is issued does the Bill stipulate any minimum period
of duration. This approch is prima facie desirable in that it is
consistent with the enhancement of the integrity of the free market
process. Only in so far as a supplier chooses to issue a warranty is
he bound to meet the standards of disclosure imposed by the Bill.
As will be argued later, there may be a justification, in framing
requirements for giving consumers notice of their legal rights
McGILL LAW JOURNAL
[Vol. 18
in this and other regards, for imposing requirements in relation
to products and services proportionate to the incidence of complaints
in particular commodity or service areas. But the substantive
regulations to be applied should apply to all suppliers who choose
to issue guarantees.
Whether minimum standards for guarantees should relate only
to some components of a product, e.g., electrical, mechanical or
thermal parts is doubtful. Fine problems of definition would in-
evitably arise, and in any event even if a part clearly does not fall
within these categories, a defect in it may equally render the
whole unit non-operational. For example, a leaking tub in a wash-
ing machine may render the whole machine unusable, although
strictly speaking the tub is not an electric, etc. part. The clearest
form of coverage is that already used in the better guarantees:
a product is simply guaranteed against “defects in materials and
workmanship” for a stipulated period. The law is very familiar
with this kind of concept where, under the Sale of Goods Acts,
courts must assess the total operability of a product, whatever
the source of the defect in the particular case. S. 3074 in its guide-
lines correctly adopts this approach.
Should warranty legislation cover services? Clearly it should.
We are becoming in many areas a service-intensive society and it
is very common today to find suppliers of services, e.g., educational
services, health services, television and appliance repairs, automo-
bile overhauls, offering guarantees in relation to their services. As
a minimum, the information requirements imposed by S. 3074
should, with suitable modifications, be extended to services. In-
deed, one bill before Congress, H.R. 13390 (1970), provides for
this.”‘ The question of what guidelines should be framed for guar-
antees of services will be considered shortly.
It will be recalled that all three Bills discussed concern them-
selves with affirmations of fact or promise, deeming these to be
express warranties. S. 3074 applies this provision to products and
services, although the information to be provided and the provi-
sions in S. 3074 pertaining to the designation of warranties by
reference to statutory guidelines apply only to products. It is prob-
ably unnecessary to attempt to deal with non-written “warranties”
in this context. “Affirmations of fact or promise” can more effec-
tively be dealt with in the context of both civil law redresses for
28 Hearings on H.R. 13390 Before the Subcomm. on Commerce and Finance
of the Comm. on Interstate and Foreign Commerce, 91st Cong., 2nd Sess., Ser.
No. 91-79 (1970).
No. ii
MANUFACTURERS’ GUARANTEES
deceptive practices and the law of misrepresentation. One of the
criticisms that has been directed at these provisions of S. 3074 is
that they appear to allow a retailer’s salesman to make express
warranties which override a manufacturer’s written warranty and
bind the latter to statements by a person over whom he has no
control. Under the law relating to deceptive practices and mis-
representation, this issue will fall to be resolved on ordinary
principles of contract, agency and vicarious liability. No policy
factors seem to be present which call for the application of dif-
ferent principles. Legislation concerning itself with the problem
of written guarantees which unquestionably do emanate from a
manufacturer cannot easily, within the same framework of regu-
lation, deal also with the problem of oral misrepresentations or
misleading advertisements which may emanate from any of a num-
ber of sources in the distribution process and may relate to any
of a variety of issues. The legislation presently under considera-
tion should confine itself to warranties by way of written instru-
ment. The short but clear definition of warranty in section 20 of
the Canadian Competition Bill, subject to an amendment making
clear that the definition refers only to written promises, seems
generally appropriate to define the scope of legislation in the
present context in so far as it relates to warranties of products
or services.
However, two substantive additions need to be made to the
definition. First, service contracts, which are becoming quite com-
mon, should be put on the same footing as warranties. If this is
not done, there will be a temptation for some elements in industry
to convert their warranties into service contracts (perhaps for a
token consideration) and place themselves beyond the ambit of
the legislation. Secondly, and more importantly, warranties of resi-
dential buildings should be included within the legislation. These
are often mass-produced today and marketed in much the same
way as goods, they are often accompanied by written guarantees
of the workmanship and materials, they involve a far larger in-
vestment for the consumer than either goods or services, and
complaints to Box 99 of the Department of Consumer and Corpo-
rate Affairs in Ottawa indicate that they are a growing source of
complaint on the part of consumers.29 For all these reasons, homes,
garages, outbuildings, etc., built or supplied in a residential con-
text and accompanied by a written guarantee can and should be
29 See Annual Report of the Department of Consumer and Corporate Affairs,
Consumer Service and Information Branch, (1970).
McGILL LAW JOURNAL
[Vol. 18
brought within the ambit of legislation regulating guarantees.
Again, as a minimum, provisions setting out informational require-
ments on important issues pertaining to the operation of building
guarantees should be developed following the pattern of provisions
on this question in the context of products and services.
b. The Requirements of the Legislation
Legislation should have three broad aims.
(i) The Prevention of Deceptive Practices in
Relation to Guarantees
Adoption of an Act modelled on the U.S. Uniform Deceptive
Practices Act or the proposed U.S. Consumer Sales Practices Act
and reform of the law of misrepresentation in the civil sphere,
together with provisions such as section 20 of the Competition Bill
in the criminal sphere, should adequately take care of this problem.
(ii) The Disclosure of Basic Guarantee Information
to the Consumer
It can scarcely be a matter of debate that a guarantee should
adequately inform a consumer as to the scope and operation of
the guarantee. This requirement is common to all Bills presently
before Congress, including that of the Administration. The specific
requirements of these Bills are closely similar and seem entirely
adequate models for legislation in Canada, provided that products,
services, and residential buildings are all included.
The writer is highly sceptical that this information will have
more than a minimal impact on the consumer at, or before, the
time of purchase, but when his purchase gives him trouble, he
should at least at that point of time be able to ascertain the
application of the guarantee to the situation with maximum ease
and accuracy.
(iii) The Stimulation of Competition in
the Offering of Guarantees
This is by far the most difficult issue to meet in the area of
guarantees. The importance of the issue is highlighted by the posi-
tion the writer has taken on two of the three U.S. Bills considered.
In relation to H.R. 10690, he argued that detailed prescription of
the terms of all guarantees, including the extent of their coverage,
and their duration, involved standard-setting exercises of a magni-
tude that rendered the proposals impractical. If the prescription
of minimum standards is abandoned as the operative philosophy
No. 1]
MANUFACTURERS’ GUARANTEES
in the area, one is thrown back on the discipline of market forces
to control the quality of guarantee terms. On the other hand, it
was argued, by way of objection to the Administration’s Bill H.R.
18056, that simple disclosure in a guarantee of vital information,
without more, would achieve almost nothing towards the end of
making the provision of guarantees more competitive. It was
pointed out that often guarantees were not accessible at the point
of sale, that if they were accessible, they were unlikely to be read,
that if they were read, comparative evaluation of competing guar-
antees, with the complex combination of coverages and exemptions
possible, would be almost impossible.
Having argued that standard setting is impractical, and that
consumers are unlikely to read guarantees at the point of sale,
no matter how clearly worded, what other possibilities are there
for regulating the quality of guarantees?
The essential premises adopted here are these: consumers gen-
erally do regard the provision of guarantee coverage as important
when they shop for products, etc. However, for reasons which have
already been advanced, the prospect of consumers making detailed
pre-purchase evaluations of guarantees accompanying competing
products is slight. The one proposition that consumers are capable
of fastening on to quickly and easily is the duration of the guar-
antee. More than this, in the popular conception of a guarantee,
when an item is advertised, or stated, to be guaranteed for a
particular period, the assumption commonly made by consumers
is that if the product goes wrong during this period through no
fault of theirs, it will be fixed free of charge. The consumer tends
to assume prima facie that this element is common to all guar-
antees. He is well aware that some guarantees are for longer
periods than others. That fact is generally readily ascertained i.e.,
is it a 6 month guarantee, or is it a 12 month guarantee? What
is not readily ascertainable is whether a particular guarantee de-
rogates from the prima facie assumption that within the duration
of the guarantee, any defect which develops will be fixed free of
charge. Because this fact cannot be readily ascertained, the con-
sumer tends usually to proceed with the transaction with this
assumption undisturbed, and only when trouble develops is he
likely to find that his assumption was false. This, of course, is a
major cause of consumer disappointment with guarantees.
These two very important points –
first, that a consumer is
capable of, and interested in, distinguishing e.g. a 6 month guar-
antee from a 12 month guarantee, i.e., is concerned about the issue
of duration of the period for which he is protected, and secondly,
McGILL LAW JOURNAL
[Vol. 18
that he tends to assume that, beyond differences in duration, all
guarantees within their respective periods of duration enable him
to have defects fixed without cost to himself –
are borne out by
authoritative testimony before Congressional Committees. Mr. Cas-
per Weinberger, then Chairman of the F.T.C., in evidence before
the Senate Committee on S. 3074, said:
Mr. Weinberger. Frequently, there is no deception in the legal sense
because if the full proposed contract had been gone through carefully by
the purchaser or his counsel, they would have learned precisely the limits
of the protection that is offered. This is not practical and ordinarily is
not done. With the term such as “guarantee”, that conveys a certain set
of rights to the average person; then, I think if that term is going to be
used, it is essential, as I say, that the reasonable expectations of the
purchaser be carried out.
Senator Moss. The normal purchaser sees that big word “guarantee”
and he never stops to read the fine print?
Mr. Weinberger. That is too often the case.30
Also, Professor Whitford, in the second of two articles describing
the results of an automobile warranty study done in Wisconsin,
found in his survey of new car buyers that 64% of all buyers
were correct in their impressions of the duration of their war-
ranties, while in relation to various hypothetical repairs required
to their cars, accuracy of impression of warranty coverage ranged
from 34% to 50%.11
It is submitted that if one accepts the premises from which
this discussion has been proceeding, the objectives of legislation
in this context become clear:
(1) to bring strongly to the mind
of the consumer before the time of purchase the one fact about
guarantees that he can quickly and readily appreciate –
their
duration; (2) while allowing differences in the duration of com-
peting guarantees, to encourage as far as possible the develop.
ment of common obligations on the part of manufacturers which
are in accord with the popular conception of a guarantee. In this
way, competitive forces in the market-place will be able to focus
exclusively on the duration of competing guarantees as a means
of evaluating their comparative quality. The problem of ensuring
that guarantees which are comparable in their terms (other than
duration) are comparably honoured is for the moment left aside.
At this point, it is instructive to return to S. 3074. One of the
principal thrusts of the Bill is to ensure that guarantees satisfying
3o Hearings on S. 3074, op. cit., n. 5, at p. 12.
31 Laiv and the Consumer Transaction: A Case Study of the Automobile
Warranty, [1968] Wisconsin L.R. 1006, at p. 1055.
;t
No. 1]
MANUFACTURERS’ GUARANTEES
the popular conception of guarantees are clearly differentiated
from guarantees offering a less complete coverage. This is sought
to be achieved by the designation “full [x] month guarantee” in
the case of the all-inclusive guarantee and the designation “partial
[x] month guarantee” in the case of a guarantee something less
than all-inclusive.
These provisions of S. 3074 warrant a number of comments.
First, it is curious that the Bill, having taken the initial step
of categorising guarantees in broad and hopefully meaningful terms,
does not go on to propose measures that would ensure that these
broad comparative characterizations are, in particular cases, brought
forcibly to the mind of the consumer before he makes his shopping
choice. An obvious measure would be to require that guarantees,
conspicuously designated in the above terms, be prominently dis-
played on or with products themselves on display for sale. This,
however, would not in itself go nearly far enough. As has been
pointed out earlier, many sales today do not take place in the shop,
mail order transactions being a prime example. Also, many con-
sumers by the time they come to visit a shop, particularly in the
case of major consumer purchases, are to a large extent already
psychologically committed to a particular purchase. In order to
inject the guarantee forcibly into a consumer’s decision-making
processes, relevant information about competing guarantee cov-
erages must reach him at an earlier point of time than this. These
factors lead clearly to the conclusion that essential guarantee in-
formation must be included in all advertisements (including e.g.,
mail order catalogues) of products which are accompanied by
guarantees.
Applying the thesis developed earlier, the only information that
should be mandatory is the broad designation of the guarantee and
its duration, e.g., “Full [x] months guarantee”. This kind of in-
formation is already often advertised. The principal effect of man-
datory advertising of guarantee designation and duration would
simply be to standardise, in readily comparable form, this infor-
mation. Moreover, such a requirement would be merely an extension
of a principle presently operating in all Canadian jurisdictions in
relation to advertisements of consumer credit terms. Where terms
are advertised, certain essential information, particularly the effec-
tive rate of interest, must be included so that comparisons with
competing sources of credit are facilitated. It is, of course, true
that a retailer offering credit facilities is not obliged, under exist-
ing legislation, to advertise any credit terms at all when he ad-
vertises goods in respect of which credit is in fact available. But
McGILL LAW JOURNAL
[Vol. 18
one of the principal reasons for this limitation is that a credit
supplier must be free to fix his credit terms by reference to the
particular needs and credit worthiness of each customer, and it
would not be practicable to insist that credit suppliers set out in
their advertisement the criteria which govern these variables. How-
ever, these variables do not exist in the case of guarantees. Different
guarantees are not offered to different customers. It would be per-
fectly practicable to insist on essential guarantee information (des-
ignation and duration or some other unit of usage, such as mile-
age) to be included in all advertisements of products carrying
guarantees. Guarantee legislation which seeks to utilize competitive
forces to control the quality of guarantee terms cannot hope to
achieve this end without taking the two steps of requiring basic
guarantee information to be conspicuously displayed on the product
at the point of sale and (more importantly) of requiring the same
information to be included in all advertisements of the product.
A second major reservation about the proposals contained in
S. 3074 is that they provide insufficient “incentives” to use the
all-inclusive or “full” guarantee form. This is a serious shortcoming
of the Bill. While the Bill categorises all guarantees into two broad
classes, “full” and “partial”, the position remains that all of the
existing combinations of coverages and exemptions will still be
possible and will in many cases render the designations meaning-
less and indeed misleading. For example, product A carries a guar-
antee designated “full 6 months guarantee”, product B carries a
guarantee designated “partial 5 year guarantee”. Let us suppose
that the product in question is a washing machine and the partial
guarantee covers only the transmission, parts only, not labour, and
requires that the machine be shipped back to the factory at the
customer’s expense for repair. If we continue to apply our assump-
tion that a consumer typically will not look past the broad issue
of duration and investigate the fine print, the designation may
serve only to confuse him. If, however, it puts him on notice that
further investigation may be desirable, and he does read the fine
print, the process of comparative evaluation is in fact as difficult
as ever it was. It is a central tenet of the writer’s position that
the only basis of comparison that the typical consumer will be able
to make work is one where the only comparison he has to make
is duration (or some other unit of usage, such as mileage) and
all other factors can be taken as given.
One might then ask whether this line of reasoning leads us
to the conclusion that any form of guarantee other than a full
guarantee should be prohibited. This conclusion is not, in fact,
No. 1]
MANUFACTURERS’GUARANTEES
inevitable, nor indeed would it be in the best interests of con-
sumers. The fact of the matter is that with many products, some
components, quite naturally, wear out faster than others. It is
perfectly proper, and in the consumer’s interest, that a supplier
should, for example, be able to offer a warranty which covers for
an initial period the whole product but for a subsequent period
covers only limited components which can reasonably be expected
to last longer than those excluded. However, this example itself
points the way to the solution to the problem. If a supplier cares
to offer a guarantee with a product, etc., with all the connotations
that that commonly has for the consumer, it seems reasonable to
assume, and expect of the supplier, that for some initial period
following the provision of the product, building or service, it will
operate as an entire unit without defect or malfunction. The
converse of this proposition is that notwithstanding the furnishing
of a guarantee, the supplier reserves to himself the right to have
some components in the product break down (probably render-
ing the whole product inoperative) immediately following the sale,
without responsibility on his part for the malfunction. A consumer
receiving a product carrying a guarantee is entitled to assume that
the product in its entirety, i.e., as a unit, will function effectively
for some period after the sale. It might then be argued, however,
that the most that this analysis adds up to is that guarantee for
some initial period after the sale of the product etc. should cover
all components, but nevertheless that labour charges should be
excludable at the supplier’s choice, subject to him being prepared
to suffer the designation “partial” for his guarantee. There are
several answers to this argument. First, the popular consumer
conception of a guarantee is that he is going to receive cost free
service from the product for the duration of the guarantee. The
inclusion of the word “partial” is unlikely in many cases to shake
that assumption at least for the initial period of life of the product
etc. Secondly, to allow exclusion of liability for labour charges, in
the initial period of the guarantee at least, is to seriously compro-
mise the possibility of achieving a situation where competitive
forces can really work to control the quality of guarantee, i.e. by
focusing only on duration, all other factors being talen as given.
Thirdly, the non-excludable implied term as to m.rchantability
already adopted in several Canadian jurisdictions even now recog-
nises the right of a consumer to the use of a product free of
defect costs for a period after purchase. To insist on a full guar-
antee for this period is only to render more explicit what this term
as to merchantability already largely provides for in the case of
an immediate seller.
McGILL LAW JOURNAL
[Vol. 18
A provision
to the following effect is therefore proposed:
Guarantees covering any initial period of life of a product, build-
ing or service which are “partial” guarantees only, and notwith-
standing that they are designated as such, should be deemed
“deceptive” within civil legislation dealing with deceptive prac-
tices, e.g., a Uniform Deceptive Trade Practices Act, when such
legislation, hopefully, is adopted in Canada, and possibly also with-
in criminal legislation such as the Competition Bill, unless the
supplier can show that (a) the derogations from the standards of
a “full” guarantee were reasonable having regard to conditions in
the relevant industry and to the commercial setting of the trans-
action and (b) the derogations from the statutory standards were
specifically pointed out to, and formally acknowledged by, the con-
sumer at the time of sale.
These proposals while retaining some measure of flexibility
create strong incentives in favour of a supplier offering a full
guarantee for some period of the initial life of a product, etc. It
may be objected that what will happen is that a supplier will offer
a trivial, e.g., three weeks, full warranty followed by a partial
warranty of some kind. But because of the proposals relating to
the display of guarantees at the point of sale, and mandatory ad-
vertising of essential guarantee information, this is unlikely to
prove a very attractive expedient. For a supplier to advertise only
a three weeks full guarantee is likely to be construed by a con-
sumer as meaning that after three weeks the supplier acknowl-
edges that almost anything might happen to his product. It should
be remarked here that the ends of these proposals would be ade-
quately served if the mandatory advertising requirement were to
be applied only to guarantees or service contracts covering any
initial period of life of a product, etc.
On the key question of how much cost-free life can a consumer
expect to get out of competing products, i.e., how long is each
supplier prepared to stand behind the entire product, it is sub-
mitted that the proposals set out above will provide the consumer
with a meaningful answer. That simplicity of warranty is achieva-
ble even in relation to complex consumer products is illustrated
by the 1972 American Motors warranty which in its entirety reads
as follows:
1972 New Car Guarantee
When you buy a new 1972 car from an American Motors dealer, American
Motors (Canada) Limited guarantees to you that, except for tires, it will
pay for the repair/replacement of any part it supplies that is defective
in material or workmanship.
No. 1]
MANUFACTURERS’ GUARANTEES
This guarantee is good for 12 months from the date the car is first
used or 12,000 miles, whichever comes first. All we require is that the
car be properly maintained and cared for under normal use and service
in the 50 United States or Canada and that guaranteed repairs or replace-
ments be made by an American Motors dealer.
This guarantee is, to the extent not prohibited by law, in lieu of all
other guarantees or warranties, express, implied or implied in law, of
American Motors (Canada) Limited or others, including implied war-
ranties of merchantability or fitness for a particular purpose.
The only feature of this warranty about which there could be
serious objection is the disclaimer clause which would infringe sev-
eral of the obligations which would be imposed on manufacturers
if a doctrine of strict products liability (including liability for eco-
nomic loss) were to be adopted in Canada. At negligible additional
cost to the manufacturer, this clause could, and should, be deleted
altogether. Very short, simple notes accompany this warranty and
explain that warranty service is available from any authorized
dealer for any owner who moves, or travels with the car, that
warranty coverage extends to subsequent owners on payment of
a nominal “identification” fee ($2). Also, for overnight warranty
work, a “loaner car” is provided free by participating dealers.
Finally, procedures for registering complaints are outlined, includ-
ing free telephone tolls to the manufacturer.
c. The Statutory Guidelines
This brings us to one last general issue in relation to regulating
the terms of guarantees. What are to be the norms by which guar-
antees are classified “full” or “partial”?
The provisions of S. 3074 are broadly satisfactory in this regard,
because the guidelines in the Bill give effect to the popular con-
sumer conception of a guarantee.
The duties of a supplier warranting consumer products in
writing are stated in S. 3074 to be:
(1) to repair, or replace if repair is not possible or cannot be timely
made, any malfunctioning or defective warranted product;
(2) within a reasonable time; and
(3) without charge.
The expression “malfunctioning or defective”, or variations of
it, is quite common in existing guarantees and seems a satisfactory
operative concept for the legislation. In this case, the argument
for maintaining a unity of concept throughout the products liability
area by invoking, perhaps, the concept of “unmerchantability” would
seem to be outweighed by the consideration that a supplier under
McGILL LAW JOURNAL
(Vol. 18
a “full” warranty is commonly expected by a consumer to fix
squeaks, rattles and defects in finish (and often does acknowledge
an obligation to attempt to fix these), although these may not
render the product unfit for its usual purpose, i.e., unmerchantable.
“Malfunctioning or defective” seem equally viable concepts in the
case of warranties of buildings and services.
The duty of a supplier when this state of affairs arises is “to
repair, or replace if repair is not possible or cannot be timely
made”.3- The term “repair” is defined as including replacement,
and “replacement” is defined as including the refunding of the
actual purchase price less reasonable depreciation based upon
actual use if the warrantor is unable to effect replacement and
repair is not possible or cannot be timely made, or if the person
guaranteed is willing to accept such refund in lieu of repair or
replacement. If services are to be brought within the one set of
standards, “repair” would have to include “rectify”, and “depre-
ciation” would need to include “compensation for use” or “net
benefits obtained”.
32 Curiously, the enforceability at common law of an express warranty
offered by a manufacturer has not been clearly ruled on by an Anglo-Canadian
court. However, the privity problem would seem readily overcome by recourse
to the doctrine of collateral contract: Carlill v. Carbolic Smoke Ball Co., [1892]
2 Q.B. 484 (C.A.); Shanklin Pier Ltd. v. Detel Products Ltd., [1951] 2 K.B. 854;
Ranger v. Herbert A. Watts (Quebec) Ltd., (1970), 10 D.L.R. (3d) 395 (Ont. H.C.),
aff’d (1971), 20 D.L.R. (3d) 65 (Ont. C.A.). In a specific guarantee context, see
Haley v. Ford Motor Co., (1966), 57 D.L.R. (2d) 15 (Alta. A.D.), aff’d (1967),
60 W.W.R. 497 (Sup. Ct.), and Duhamel v. Lanrol Motors (1960) Ltd. and
Chrysler Canada Ltd., Quebec, Superior Court, May 5, 1971, in C.C.H. Canadian
Sales and Credit Law Guide, Vol. I, par. 21-027 et seq., although there were
special factors present in the first case and the second case comes from a
civil law jurisdiction. American courts have long held express manufacturers’
warranties enforceable: see e.g., Henningsen v. Bloomfield Motors Inc., 161
A.2d 69 (1960, NJ. Sup. Ct.) and Seely v. White Motors Co., 403 P.2d 145 (1965,
Cal. S.C.), and authorities discussed therein. An express warranty would seem
equally enforceable even where the consumer does not discover it until some
point of time subsequent to the purchase, provided he assumed at the time
of purchase that he was buying guaranteed goods: see G.H. Treitel, The Law
of Contract, 3rd. ed., (Stevens and Sons: London 1970), at p. 66. Under s.
58 (8) of the Manitoba Consumer Protection Act, R.S.M. 1970, c. C200, as
amended 1971, c. 36, s. 8 and s. 62 of the Quebec Consumer Protection Act
1971, certain claims made by a merchant about his goods are deemed to be
express contractual warranties. However, it seems clear from the wording
of both provisions that they apply only to claims made by a dealer to a
customer in the course of advertisements, negotiations, etc. leading to a
contract of sale and thus not to claims by a manufacturer.
No. 1]
MANUFACTURERS’GUARANTEES
Where repair is not possible or it is expected that it cannot
be timely made, the supplier has an option to replace the goods
or refund the consumer his purchase money. One would have
thought that here the option should clearly rest with the pur-
chaser. Where the supplier concedes that repair is not possible,
or cannot be timely made, or where this has not in fact been done
within the prescribed delays, the consumer should be given the
option of having the goods replaced or getting his money back.
The latter is tantamount to cancellation of the transaction and the
prospect of it should act as a spur to the supplier to effect timely
repairs. Moreover, if the consumer has bought a “lemon” or a
product with a design weakness, getting a replacement of the
same model may not be much consolation to him. The supplier
is required to repair, etc., “within a reasonable time”. It is obviously
difficult to define what this may be as it will be different from
one product line to another, one kind of defect to another, and
may be affected by considerations such as labour strikes which
interfere with the provision of the necessary parts or services.
However, it would seem useful to set some outside limit in order
to give the requirement some precision and “bite”. For example,
in Saskatchewan, The Agricultural Implements Act, 1968 3
in sales
of new farm implements requires a prescribed contract of sale form
to be used which contains detailed clauses setting out precise time
delays governing the repair obligations of both the vendor and
the general provincial distributor in the event of the supply of
a defective product. This legislation dates back to depression days.
Its very detailed warranty rules do not seem to have created prob-
lems, and the buyer’s right of rejection and refund after the stated
time delays has not elicited massive complaints of injustice by
suppliers, notwithstanding that the goods in issue are often big-
ticket items. How widely the Act has been invoked by consumers,
on the other hand, is not known.
The Saskatchewan rules are probably too detailed to be emulated
closely in a set of general guidelines but it would seem to be
reasonable and practicable to state that a supplier is under a duty
to repair “within a reasonable time but not exceeding [e.g. 30 days]”.
This proposal closely follows provisions in the Song-Beverly Con-
sumer Warranty Act 34 passed in California in March, 1971, where
a 30 day repair period is imposed. While in relation to the duties
3317 Eliz. II, S.S. 1968, c. 1, as amended.
34 Chap. 1333, California Stats., 1971, enacted as Title 1.7, Part IV, Division
III, Cal. Civil Code.
McGILL LAW JOURNAL
[Vol. 18
of replacement or refund, the example of goods has been taken,
the same concepts seem readily applicable to services. If a de-
fective service cannot be rectified within a reasonable time not
exceeding 30 days, the consumer should have the option of having
the entire service re-executed, or as is likely to prove more desira-
ble from his point of view, demand a refund of money paid, less
a reasonable allowance for net benefits obtained. In the case of
residential buildings, replacement of something which in its par-
ticulars may well be unique does not seem an apposite concept.
However, a refund of money paid less compensation for use does
seem appropriate where the building cannot be made defect-free
within the prescribed delay. It must be recalled that a non-excluda-
ble implied obligation of merchantability in all consumer trans-
actions both as between seller and buyer,35 and as between manu-
facturer and buyer if a doctrine of strict products liability were
to be adopted in Canada, would in itself largely produce this conse-
quence. Repair, replacement or refund should be the only remedies
arising under a written warranty. Actions for personal injuries or
loss of profits etc. should be left to be resolved under general legal
principles governing the obligation of a seller and a manufacturer
to supply a merchantable product.
The third duty of the supplier under S. 3074 is to repair etc.,
“without charge”. The Bill goes on to state that the warrantor
shall not impose any duty other than notification (of the need
for repair) upon any person as a condition of securing repair un-
less the warrantor can demonstrate that such a duty is reasonable.
In determining whether such additional duties are reasonable, the
Bill requires that “the magnitude of the economic burden neces-
sarily imposed upon the warrantor (including costs passed on to
the purchaser) shall be weighed against the magnitude of the
burdens of inconvenience and expense necessarily imposed upon
the person guaranteed”. This clause is altogether too cumbersome
and vague to be acceptable. From hearings on the Bill it becomes
evident that the purpose of the provision is to try to meet the
problem of transportation charges where a product requires repair.
The problem arises in this way. To require a supplier to pick up
from the consumer for repair very small items which could easily
be transported back by the consumer himself to the point of sale
35 See Ontario, s. 29(a), The Consumer Protection Act, 1966, S.O. 1966, c. 23,
as amended 1971, c. 23, s. 2; Manitoba, s. 58, The Consumer Protection Act,
R.S.M. 1970, c. C200; British Columbia, s. 21A, Sale of Goods Act, R.S.B.C. 1960,
c. 344, as amended 1971, c. 52, s. 1.
No. 1]
MANUFACTURERS’ GUARANTEES
creates excessive expense for the supplier which will only have to
be passed on to all his customers so that all suffer in order to
meet the unreasonable demands of some of their number. On the
other hand, always to require a consumer to bring or send the
goods back to the point of sale or, worse, to the manufacturer,
would often create quite unreasonable burdens on him, particu-
larly with large items. A case of this cited in Congressional hearings
was that of a well-known grand piano manufacturer who in his
guarantees required the customer to ship the piano back to the
factory at his own expense in order to have any repair effectedY0
If this problem is the object of this provision in S. 3074, the
Bill would be better advised to proceed directly to the question.
First, it seems reasonable that in the case of items that can easily
be brought back by the consumer personally to the point of sale
(not to the manufacturer’s premises), or can be mailed to the
manufacturer, by means of the ordinary post, or where the manu-
facturer does not provide service facilities in the province, to the
retailer, then in these circumstances, the supplier should not be
placed under an obligation to arrange for transportation or meet
transportation charges. Similarly,
if the consumer has moved
away from the place at which he made the initial purchase and
is not within a similar distance of another service facility of the
supplier, he should be required to meet transportation costs. In
all other cases, i.e., where the goods are large or the supplier is
remote, it would seem reasonable to place this burden on the sup-
plier. These criteria are, of course, too crude in their present form
to be adopted as such as statutory standards, but nevertheless the
policy objectives seem clear and their incorporation into statutory
standards not beyond the range of legislation.3 7
Two other preconditions to warranty work commonly imposed
by manufacturers but not included in S. 3074 should be mentioned.
One relates to scheduled maintenance work during the period of
the warranty. Sometimes it is provided that this work must be done
by the selling dealer (at the consumer’s expense). Provided that the
consumer does follow regular maintenance procedures and can
produce reasonable proof of this, the statutory “full” guarantee
norms should not permit a dealer or manufacturer to “tie” a con-
sumer to him for this work. This is anti-competitive and cannot be
justified on any objective business grounds. Often also, guarantee
clauses pertaining to maintenance requirements go on to provide
36 Hearings on S. 3074, op. cit., n. 5, at pp. 261-262.
37 Cf. the Song-Beverley Consumer Warranty Act, op. cit., n. 34.
McGILL LAW JOURNAL
[Vol. 18
that, in the event of the consumer failing to observe prescribed
maintenance schedules, the whole warranty is voided. This clause
is altogether too draconian to be acceptable in a guarantee pur-
porting to meet the statutory “full” guarantee norms. If a consumer
fails to change the engine oil in his car, this should not disqualify
him from having a defective rear wheel bearing rectified under
warranty. At most, failure to observe prescribed maintenance sched-
ules should disqualify a consumer only from warranty protection
in relation to those parts of a product that may possibly be affected
by his default. The statutory norms should permit a “maintenance”
precondition to warranty performance only to this extent.
The second precondition invariably imposed by manufacturers
is that the warranty work must be undertaken by one of the
manufacturer’s authorized dealers. In theory, such a requirement
is anti-competitive, but in this case, objective business considerations,
such as the need for the manufacturer to supervise the quality and
cost of warranty work, in the interests both of himself and of con-
sumers generally, who may have to bear a share of any over-all
increase in warranty costs, favour permitting this precondition.
There are several other matters which are not presently covered
at all by the S. 3074 standards but which ought to be included.
The first is the transferability of warranties. If a supplier has
warranted a product for a particular period, it would seem of no
consequence to him who owns the product during this period. A
warranty has an economic value and it should be possible for a
buyer, who has after-all paid a consideration for it, to realise it by
charging for it on a subsequent sale. Also, in the case where A buys
a product as a gift for B, there is no reason whatever why B should
be prevented from enforcing the warranty. Many warranties today
are transferable but this practice should be translated into statutory
standards defining full warranties. Mr. Miles W. Kirkpatrick, Chair-
man of the F.T.C., so recommended in hearings before the House
of Representatives Committee on Interstate and Foreign Commerce
in 1970.38 This position is also in line with proposals for a doctrine
of strict products liability to third parties where such a doctrine
includes liability for economic loss.
Another matter that should be dealt with is the problem of the
owner of warranted goods who moves locales, or when travelling
with his goods encounters problems normally covered by the
38 Warranties and Guaranties, Hearings Before the Subcomm. on Commerce
and Finance of the Comm. on Interstate and Foreign Commerce, 91st Cong.,
2nd Sess., Ser. No. 91-79 (1970), at p. 72.
No. 1]
MANUFACTURERS’ GUARANTEES
warranty. Again, best warranty practice today permits him to have
repairs made in these cases at any dealer authorized by the manu-
facturer of the product to undertake warranty work. Subject to the
rules on transportation charges suggested above, the statutory
norms for full guarantees should embody these rights.
Another deficiency in the S. 3074 standards is that they appear
only to make the person actually issuing the guarantee liable on it.
But as Mr. Kirkpatrick pointed out in evidence, 39 often retailers
hold out the manufacturer’s guarantee as an inducement to the
consumer. Moreover, in many cases, the manufacturer may be located
at a considerable distance trom the point of sale, and may indeed
export from another country. In either case, he will not be readily
accessible to the consumer. Finally, there is an ineluctable and
perfectly reasonable tendency on the part of the consumer to look
to the much more tangible person who actually sold him the product
for satisfaction if the product proves unsatisfactory. In many cases,
he will in fact be the person designated or authorised by the manu-
facturer to provide the warranty service. Many existing warranties
already make both the manufacturer and retailer legally liable under
the guarantee. If legislation defining “full” guarantees is to embody
best guarantee practice, then this principle of joint and several
liability ought to be adopted.
In complying with the foregoing statutory standards, a supplier
ought to be permitted in his warranty to spell out in a detailed way
how he intends to apply the standards. Without in any way binding
a court by his “interpretation” of the standards, he should never-
theless be allowed, for example, to state what work on a product
he will not regard as coming within the category of “defects” (e.g.,
particular routine maintenance matters).
One final matter in relation to S. 3074, although it does not
strictly go to the question of statutory standards, is the provision
in the Bill pertaining to disclaimer of warranties. Implied war-
ranties can be limited to the duration of express warranties of
reasonable duration. This provision is curious. On the necessary
assumption that terms implied by law are by nature reasonable,
it is difficult to see what point is served by allowing them to be
limited to the duration of express terms of reasonable duration. In
both cases, a court will have to decide what is reasonable. In this
article, the writer has referred to the need for the law to under-
write consumer transactions at least to the extent of requiring a
supplier of goods and services to measure up to a minimum obli-
39Ibid., at p. 61.
McGILL LAW JOURNAL
[Vol. 18
gation of supplying something which is merchantable. Proposals
for the non-exclusion of the implied term as to merchantability
in contracts of sale and the introduction of a doctrine of strict
products liability already recognize such a need. To the extent
that the present provision in S. 3074 may enable the supplier to
derogate from these minimum obligations, it is undesirable.40 How-
ever, one concession that could properly be made in this con-
text is to require a consumer, faced with defects in a product
rendering it unmerchantable, to allow the manufacturer or his
dealer the prescribed delays to attempt to rectify the defects. It
may be recalled that under the general law relating to the implied
term as to merchantability in contracts of sale, unmerchantability,
under the rule in Jackson v. Rotax Motor and Cycle Co.,41 gives the
consumer an immediate right of rescission. However, in the full
guarantee situation, where the manufacturer or his dealer must
necessarily have a repair facility, and has in the guarantee informed
the consumer of this, and what steps have to be taken to utilize
this facility, it seems reasonable to expect the consumer to give
the supplier a limited opportunity to repair the goods before
rescinding the contract.
Two issues remain to be examined in relation to warranties:
(a) how is a consumer to be informed of his rights;
(b) how are these rights to be enforced?
IV. Informing a Consumer of his Legal Rights
All the rights in the world are of no avail to a consumer if he
never comes to learn of them. Much well-meaning legislation in the
40 It may be argued that to retain a minimum “floor” in guarantee obliga-
tions reflected in the requirement of merchantability is to adopt a form of
public standard setting, a general policy which was rejected earlier in this
article. However, firstly, it is always much easier to set standards a posteriori
in particular cases than a priori in all possible cases. Secondly, even
if
public standards were attempted to be set, it is most unlikely that it would
prove feasible to act in all sectors, which would leave a need for a general,
residual principle. Thirdly, the concept of merchantability is a very well-known
one in the law and a large body of judicial experience involving interpreta-
tions of it is available to be drawn on. Obviously, detailed a priori public
standards more precisely communicate to a consumer what he is entitled to
expect by way of minimum quality than merchantability, but it is doubtful
whether the advantages of this added clarity justify the considerable costs
involved in securing it.
41 [1910] 2 K.B. 397 (C.A.); see also, LB.M. Ltd. v. Shcherban, [1925] 1 D.L.R.
864 (Sask. C.A.).
No. 1]
MANUFACTURERS’ GUARANTEES
past has failed in its purpose because its intended beneficiaries never
knew of its existence. An Act of Parliament is not everybody’s idea
of a vademecum.
In relation to all rights which a consumer may have in relation
to unsatisfactory merchandise, including statutory warranty rights,
it should be possible, in one very short brochure or pamphlet drawn
up not by lawyers alone, but by lawyers in consultation with mass
communications experts, to summarize these rights in a simple,
summary, colloquial form, together with the means of their enforce-
ment, so that at least a consumer would be put on notice of possible
claims and told whom to approach for further assistance.
It is envisaged that such a pamphlet would, in the first instance,
be the subject of a mass mailing by the State, much as was done
recently by the Federal Minister of Health and Welfare in his
pamphlet on comparative drug prices, which was posted out with
family allowance cheques. Subsequent to this, particularly in relation
to big-ticket consumer items and items occasioning a high incidence
of consumer complaints, legislation could provide a regulation-
making power which would enable regulations to require the sup-
pliers of these items to furnish each consumer with a copy of the
advice brochure at the time of sale.
The cost of this in relation to smaller items, even if accompanied
by a guarantee, would probably not be justified. The cost may be
both disproportionate to the amount involved in the transaction
and disproportionate to any real prospects of meaningful recovery
by the consumer. Obviously, a strongly pragmatic approach should
dictate where the emphasis here is to lie.
V. Enforcement of a Consumer’s Rights
The plight of a consumer in relation to the enforcement of
warranty rights and other rights is well-known. The writer has
argued at length elsewhere 42 that at least three major innovations
are called for if a real impact is to be made on this problem:
(a) an enlargement of the Small Claims Court concept;
(b) an enlargement of the concept of voluntary mediation by Commis-
sioners or Registrars of Consumer Affairs to provide for a system of
trial by correspondence by expert committee;
(c) the introduction of the class action procedure.
A system of trial by correspondence by expert committee,
modelled on that presently in force in Sweden, and administered
42 Private Lav Remedies for Misleading Advertising, (1972), 22 U. of Toronto
LJ. 1, at pp. 11 et seq.
McGILL LAW JOURNAL
[Vol. is
by Provincial Consumer Protection Bureaus, would seem particularly
apt to deal with most warranty complaints. While similar, it is
clearly preferable to the grievance-solving procedures presently
offered by some manufacturers because the credibility of the latter
can never be put beyond doubt. A manufacturer should not be
prevented from setting up an informal complaints procedure, but
use of it should not be permitted to be made a precondition for
invoking state-provided adjudicatory procedures.43
An additional measure that might be taken is to require Commis-
sioners of Consumer Affairs who mediate complaints to report to
Parliament at least annually, setting out the names of firms against
whom any complaints have been received, the number of complaints,
and the manner generally in which they were settled. There are
few more effective sanctions for business than adverse publicity.
Moreover, the consumer is entitled to know which firms his fellow
consumers have found it unsatisfactory to deal with. In Australia,
for a number of years, the Victorian Government’s Consumer
Council has adopted this procedure, and it has proved very salutary.
The argument from business that this procedure transgresses prin-
ciples of natural justice by creating potential prejudice while denying
a proper hearing of complaints will at least be partly met if a
trader who wishes to contest a complaint has the opportunity of a
determination by an independent specialist committee as envisaged
above.
VI. Conclusion
The warranty proposals developed in this article are intention-
ally of a relatively simple and straightforward nature, and should
require a minimum of administrative effort both in their implementa-
tion and in their continuing operation. Given the introduction of
imaginative private law enforcement procedures, there is every
ground for believing that these measures would go far to meeting the
problems which are prevalent in the warranty area today. Their
avoidance of complex public law administrative arrangements, even
if at the cost of some ideal form of comprehensiveness or effective-
ness that more detailed measures might theoretically possess, should
meet any arguments of excessive expense, inflexibility or State-
involvement in the market-place which some warranty proposals
that have been advanced legitimately attract.
43These reforms are discussed in much more detail in the article noted
above, n. 42, and will not be re-canvassed here.
