Monday, January 26, 2009

The "Cardinal" Rule: No "More Than Four" Year Statute of Limitations Period Under UCC 2-725 Without Specific Time Reference

Cardinal Health 301, Inc. v. Tyco Electronics Corp., (2008) 169 Cal. Ap. 4th 116, 87 Cal. Rptr. 3d 5.

Cardinal Health manufactured medicine-dispensing cabinets for use in hospitals. When these suffered repeated malfunctions, Cardinal sued the suppliers of the defective component.

First Key Issue: Statute of Limitations Under UCC 2-725-- Four Years or More?
Applying California's version of UCC 2-725, the court ruled that the statute of limitations for breach of warranty causes of action is four years from the date of tender. Cardinal argued for more than four years, based UCC 2-725(2), which allows for a greater warranty period if the "warranty explicitly extends to future performance"--in which case the accrual date is triggered when the breach is, or should have been, discovered. Cardinal's warranty stated that the defective part would function for "50,000 cycles." This wasn't good enough to extend the limitations period beyond four years. The "more than four" warranty extension only applies if the warranty "refers to a specific time period."

Second Key Issue: No Privity Required For Implied Warranty Claim When There Are Direct Dealings
Cardinal claimed that the successor in interest to the manufacturer of the defective component was also liable for breach of implied warranty. The successor asserted the defense of "lack of privity" because it had no contract with Cardinal. Under express warranty claims no privity is required. However, under California law, vertical privity is required for a breach of implied warranty claim--unless an exception applies. Applying the rule of US Roofing, Inc. v. Credit Alliance Corp., (1991) 228 Cal. App. 3d 1431, 279 Cal. Rptr. 533, the Court held that no contract privity was required when there are "direct dealings." Since the successor adopted the same designs, used the same manufacturing tools, and continued to manufacture the parts in the same manner as the initial supplier, and the parties understood that "things would be business as usual," the court found sufficient evidence of direct dealings to establish liability for breach of implied warranty.

The opinion covers a number of other important areas. Bottom line for us:
(1) No "more than four" years for breach of express warranty without a specific reference to time.
(2) There may be liability for breach of implied warranty, without express contract privity, when there are "direct dealings" between buyer and seller.

1 comment:

dencook said...

From: Dennis Cook
Essex, Vermont

Re: Question about UCC Article 3-308 (b)
Perhaps someone can help with the question set out below:

I understand this blog focuses on matters relating to the Uniform Commercial Code. This is a question concerning collecftion of a promissory note.


My client ( Plaintiff ) is the original Payee of a $ 15 K note . Maker filed suit to collect. Payee files an answer that says: "I admit I signed the note but the notes are void for want of consideration"

Maker's answer says nothing else . It is conclusory. It does not plead facts to show why maker would have signed a note in a situation where there was a complete lack of consideration at the time the note was signed.

In the usual "want of consideration " case the defendant admits signing the note but claims that the signature was obtained thru fraud, duress, mistake, insanity

( Maker's defense is "want of consideration" which claims that at the time the note was signed, the maker received nothing . He does not plead " failure of consideration" which would mean that at the time the note was signed he received considerration and later found the consideration to be defective.


Article 3-308 says : (b) " If the validity of signatures is admitted or proved and there is compliance with subsection (a), a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under Section 3-301, unless the defendant proves a defense or claim in recoupment." .

If a defense or claim in recoupment is proved, the right to payment of the plaintiff is subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff has rights of a holder in due course which are not subject to the defense or claim..

We are thinking of filing a Motion for Judgment on the Pleadings that will argue as follows:

" Want of consideration means that the maker received nothing for the note , i.e, there never was a contract' "It is different from "failure of consideration" which is a situation where at the time the note was signed, the maker received consideration, but later it found that the consideration was defective.

" Under 3-308 (b) Where a maker admits it signed a note,, it is admitting it entered into a contract at the time the note was signed and in turn, since every contract must have consideration , a maker who admits he signed a note cannot plead want of consideration UNLESS THE SIGNATURE WAS OBTAINED BY FRAUD, DURESSS, MISTAKE, INSANITY or thru some other means.

3-308 (b) says is silent as to when the maker must prove its defense... and says only that that" unless the defendant proves a defense or claim in recoupment"

This is a Pleading question.

Does the defendant have to plead sufficient facts in its answer, to establish at least a suspicion of a defense, or can the defendant do , what has been done here, where he is simply saying in conclusory terms, without alleging supporting facts, that may be there is a a lack of consideration and asks that the court to accept his answer and thereby allow him discovery to prove that there was a lack of consideration?

I would argue that the purpose of a note is to reduce the liklihood of litigation. and that that purpose is negated if a maker can force a payee to litigate thru nothing more than whispering the phrase " want of consideration" .

Would like to receive comments .

Thank you.

Dennis Cook