When any business closes, its commitments are typically cancelled along with the business itself. Whether or not the closing business actually files a case in bankruptcy court does not significantly affect the business’s obligations in the context of the business’s closing. Essentially, if a business owns little to nothing, there is little to nothing to use to satisfy that business’s obligations, regardless of whether the business is in bankruptcy.
As a result, for example, if a retailer ceases operation, the retailer may have the ability to walk away from its property lease as well as the retailer’s other contracts with local vendors for landscaping, uniforms, security or other services.
Locally owned and operated businesses are less likely to abandon all of their responsibilities in the event of closure for two reasons. First, the local business owner may have personally guaranteed the business’s contracts and obligations. Second, the local business owner is likely to feel some moral obligation to others, particularly if the local business owner remains in the community.
Among the contracts that a business may walk away from if the business closes are warranties. Warranty liability for closed businesses typically breaks out into two categories.
First, there are warranties offered by the retailer itself, like an “extended warranty” sold as an add-on at the time of purchase of an item. A warranty like this is likely unenforceable if the retailer goes out of business.
Extended warranties offered by retailers themselves are typically “flow through” warranties offered by third party companies (repairers) who essentially provide insurance that purchased items actually work and some repair services if a purchased item can be repaired upon the item’s dysfunction. This is true even if the retailer promotes the warranty as being the retailer’s own warranty.
In these circumstances, even though the warranty may not be the ultimate responsibility of the retailer, it is the retailer that has the direct relationship with the repairer. And, such a warranty often requires that the retailer will be the exclusive conduit for any warranty claims made to the repairer. Thus, if the retailer is not in operation, the repairer may not have to stand behind the warranty.
Second, there are some “manufacturer warranties” associated with the purchase of a retail item, most of which manufacturer warranties are legally required. Manufacturer warranties are usually limited to a very short-term guarantee that the item will actually, basically do what the item is primarily supposed to do.
Manufacturer warranties may still be valid and enforceable if a retailer goes out of business unless the retailer owns (or publicizes itself as owning) the manufacturer. However, like retailers’ extended warranties, some manufacturer warranties are only able to be claimed and enforced through the selling retailer.
Unfortunately, the limited scope of warranties in general, coupled with the contractual web of the relationships between and among retailers, repairers and manufacturers, means that most warranties for consumer goods are likely not be worth fighting for if the retailer who sold the warrantied item goes out of business.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.