What this means is that if a breach of warranty is used as an affirmative defense in a civil action to collect an unpaid purchase price that this does not bar a later claim based upon the same breach of warranty brought by the purchaser if more harm is suffered later by the purchaser from the breach of warranty.
For example, suppose that you buy a shipment of hair dryers for your beauty college's fundraiser and they have loose power cords that make them almost worthless for resale purposes. When the hair dryer salesperson sues the beauty college for not paying for the hair dryers, the beauty college could assert the loose power cords as a defense to the purchase price and avoid paying the bill for the defective goods which breach the warranty of merchantability for the hair dryers. But, suppose that the hair dryers are then used by students and someone is electrocuted and the beauty college is held responsible. It could then sue the hair dryer supplier again for the harm caused by the personal injury arising from this defect in the hair dryers.
This is notable, because the usual rule is that when someone brings a lawsuit against you, you must bring a counterclaim against them at the same time for all claims against them that you have notice of, such as a breach of warranty, even though you don't know at that time precisely how much damage you will ultimately suffer from the breach of warranty or other counterclaim you might have arising out of the same transaction as the primary lawsuit. This act creates a "wait and see" exception to this general rule in the case of breaches of warranty involve the sale of goods.
Diminution or extinction in this context means a partial (diminution) or complete (extinction) setoff against the claim for the purchase price of the good due to the affirmative defense of breach of warranty.
The following legal definition for 'extinction' (verbalized as
'extinguish') doesn't fit the context:
Yes it does. When you purchased the good, a debt arose on the part of the buyer for the purchase price that was extinguished by the breach of warranty.
Set up in this context means asserted as an affirmative defense to a an affirmative claim for.