Attorneys' Fees Now Available for UCC Implied Warranty Claims "Based in Contract"

The general rule in Texas is that a plaintiff may recover attorneys' fees only if authorized by statute or by a contract between the plaintiff and defendant. The primary statutory vehicle for fee recovery is Texas Civil Practice and Remedies Code Section 38.001(8), which allows fee recovery "if the claim is for … an oral or written contract." Houston's First Court of Appeals recently took many of us who handle contract disputes by surprise with an opinion allowing recovery of attorneys' fees based upon an implied warranty of merchantability claim. Even more surprising, the court also awarded attorneys' fees against three upstream defendants, none of whom had a contract with the prevailing plaintiff, again relying upon Section 38.001(8).

For more than 20 years, the Texas Supreme Court has instructed that "[b]reach of contract and breach of warranty are not the same cause of action. The remedies for breach of contract are available to a buyer where the seller fails to make any delivery; the remedies for breach of warranty are available to a buyer who has received and accepted goods, but discovers they are defective in some manner." Southwestern Bell Tel. Co. v. FDP Corp., 811 S.W.2d 572, 576 (Tex. 1991). For example, if you order oilfield equipment, but nothing shows up at the location, you have a contract claim against the provider – and attorneys' fees are recoverable for prosecuting that claim. On the other hand, if you order oilfield equipment that is delivered, but it is defective in workmanship or materials, you have a potential Uniform Commercial Code breach of implied warranty of merchantability claim. While the warranty claim exists against both the seller and against the manufacturer, with whom you do not have privity, attorneys' fees historically were not recoverable against either. Nobility Homes Texas v. Shivers, 557 S.W.2d 77 (Tex. 1977) (holding "that a manufacturer can be responsible, without regard to privity, for the economic loss which results from his breach of the UCC's implied warranty of merchantability"); Hyundai Motor Co. v. Rodriguez, 995 S.W.2d 661 (Tex. 1998) ("For breach of an implied warranty a plaintiff may recover only actual damages, but recovery under the DTPA may include statutory damages and attorney fees.").

The recent opinion of Howard Industries, Inc., et al. v. Crown Cork and Seal Company, LLC, complicates what previously appeared to be clear delineations on fee recovery. At trial, the jury found that the defendant manufacturer, Howard Industries, along with three defendants who were part of the "distribution chain," had each breached the UCC implied warranty of merchantability. The trial court entered a judgment against all defendants, awarding the plaintiff, Crown Cork and Seal Company, actual damages of $69,400, as well as attorneys' fees of $200,000, relying upon Section 38.001(8) of the Texas Civil Practice and Remedies Code. On appeal, the defendants argued that the award of attorneys' fees was improper because Texas law does not provide for an award of attorneys' fees based on a claim of breach of implied warranty of merchantability.

In upholding the award, the First Court of Appeals justified its decision based upon two Texas Supreme Court opinions which expanded Chapter 38 attorneys' fees awards to "contract-based" claims. First, the court examined the Texas Supreme Court opinion of Medical City Dallas, Ltd. v. Carlisle Corp., 251 S.W.3d 55 (Tex. 2008), a breach of express warranty case governed by UCC Article 2, wherein the court held that a party who prevails on a breach of express warranty claim may recover attorneys' fees under Chapter 38 because a breach of warranty claim is "a creature of contract." Next, the court examined ½ Price Checks Cashed v. United Automobile Ins. Co., 334 S.W.3d 378 (Tex. 2011), a dishonored check case governed by UCC Article 3, wherein the Court held that, because a check is a contract, a holder of a dishonored check may recover attorneys' fees under Chapter 38 against the drawer.

The Howard court reasoned that, even though there was no oral or written contract between the plaintiff Crown and the upstream defendants, "if Crown's claim for breach of implied warranty of merchantability is a contract-based claim, then it is entitled to recover attorney's fees under section 38.001(8)." Finding that the only damages sought by Crown were economic damages, the Howard court concluded that Chapter 38 applied to Crown's breach of implied warranty claim, because the claim was "based in contract."

Take-aways from Howard: The ability to recover attorneys' fees frequently changes the fundamental economics of a lawsuit, often changing a defendant's exposure from a liquidated sum to an uncertain and ever-increasing risk mainly dependent upon factors beyond your control, such as your opponent's choice of counsel. Should it stand, the Howard opinion appears to materially increase the exposure of entities upstream in the distribution chain.

Although not specifically addressed in Howard, we further note that a ruling that an implied warranty claim which "sounds in contract" likely would make it improper to submit a jury question allocating the proportionate responsibility of others for any injuries suffered, including the plaintiff's own conduct. JCW Elecs., Inc. v. Garza, 257 S.W.3d 701, 707 (Tex. 2008) (holding that the Texas proportionate responsibility statute set forth in Chapter 33 of the Texas Civil Practice and Remedies Code applies to UCC Article 2 breach of implied warranty claims in which the plaintiff "seeks damages for death or personal injury under a breach of implied warranty claim seeks damages in tort"). Thus, following the principles set forth in Howard and JCW Elecs., defendants found to violate an implied warranty claim "based in contract" will face additional liability associated with a claim for attorneys' fees, and they will be unable to reduce their exposure by arguing that plaintiff's harm was caused by others.

The best defense to a UCC implied warranty claim, and the resulting exposure to attorneys' fees claims, is a well-drafted disclaimer in a contract or in standard terms and conditions of sale/rental. Admittedly, however, for those who do not directly sell to end-users, it is unclear how one would enforce a disclaimer of warranty against a party with whom no contractual privity exists. To take into account the Howard opinion, we recommend that providers of goods and equipment include contract terms providing that immediate buyers will not provide warranties beyond those provided in your contract, along with an indemnity for harm caused by noncompliance. In certain circumstances, another potential solution may be to expand your indemnity clauses so that the indemnitor class includes those downstream to the immediate buyer.

To learn more, please contact Gardere Trial Attorneys Peter Scaff ([email protected] or 713.276.5193) or Rhonda Reed Weiner ([email protected] or 713.276.5733).