CHAPTER 26
Warranty

A warranty is defined as a promise, either written or implied, that the material, workmanship, or services meet a specific level of performance for a specified period of time. Warranties may provide buyer with a time frame to have a particular item repaired or replaced when the item fails for reasons warranted under the contract. Service warranties may simply note that the persons performing the services possess the required skills, education, certifications, etc., required to do the job.

Warranties fall under the Uniform Commercial Code (UCC) when goods are in question or Common Law when services are rendered. Prior to considering any risk regarding warranty provisions, it is necessary to understand the definition of the different types of warranty provisions as they relate to the UCC or Common Law.

UCC constructive warranties apply only to goods and are categorized as either implied or express. Constructive warranties address the quality of ownership of the goods being sold, i.e., seller has the right to transfer ownership of the goods being sold. For example, a used car dealership must have the right to transfer ownership of an automobile sold to buyer. A constructive warranty also provides assurance that liens or encumbrances on goods will not be present when delivered to buyer. A good example of liens or encumbrances is unpaid taxes applied against the property at the time of sale. Finally, all goods must be free from any third-party claims of copyright, trademark, or patent infringement.

As the term suggests, implied warranty signifies that the warranty automatically exists in each contract whether mentioned or not. A specific remedy such as a repair or replacement will take place if the article or service fails to comply with the warranty. An example of an implied warranty may be that a car will run or a camera will take pictures. Implied warranties can only be overridden by an effective disclaimer such as the car does not run or the camera does not take pictures.

Express warranties are specific to service contracts. Express warranties imply that the product provided by seller will be as advertised or specified in the contract. Express warranties are factual statements made by seller in either the advertising or contract language, which may be either written or verbalized. A good example of an express warranty is a suitcase manufacturer’s claim that the suitcase will hold up to three cubic feet of clothing. The manufacturer is expressly warranting that the suitcase will indeed hold three cubic feet of clothing.

RISK

The warranty provision places the buyer in the position they would occupy if seller’s performance or service delivered what was specified in the contract. This could become an issue when the law implies certain warranties and reads them into the contract even when the contract is silent on the subject. This could be a costly endeavor to seller.

RESPONSE

Consider disclaiming liability for certain kinds of damages such as indirect, consequential, and punitive. Also, disclaim any liability for warranties other than those specifically provided for in the contract. This will ensure that any express warranties made in advertising or implied warranties are omitted in their entirety. The following examples are typical disclaimers that seller may try negotiating into the contract:

1) Best Case Scenario Disclaimer:

Services and/or software are provided without warranty. No warranties of any kind whether express or implied, including all warranties of merchantability and fitness for a particular purpose, shall apply. All warranties arising from course of dealing or usage of trade are specifically excluded.

2) Disclaimer for Services Contracts:

Seller warrants that project activities will be performed by qualified personnel in accordance with high professional standards and currently accepted warranty practices. No other warranty or representation, express or implied, is made relative to the information, opinions, and/or recommendations to be provided under a resultant contract. Such information, opinions, and/or recommendations are for the sole use of buyer and shall not be relied upon or used by any third party.

3) Disclaimer Intended for Products:

The warranties expressed in the provision are in lieu of all other warranties, express or implied, including but not limited to warranties of merchantability or fitness for a particular purpose.

In addition to the language proposed in the above examples, seller should always try resisting consequential and indirect damages. Consequential damages are those reparations or losses that do not arise from the immediate act of seller, but as a consequence of that act. An example of a consequential damage is when a construction contractor builds a drainage ditch to divert water away from the construction site, but inadvertently floods the neighboring businesses. Incidental damages are those damages imposed as a means of compensation for any reasonable charges, expense, or commissions incurred by the injured party, such as inspection, transportation, care, or custody of property.

Keep in mind during review of the terms and conditions that most buyers provide standard, boilerplate terms and conditions that often include warranty provisions that may not be relevant to the type of product or services that seller is providing. In this case, request that the warranty be replaced by one that appropriately addresses the product or service in question. Ensure that the disclaimers noted above are included in the warranty.

If buyer’s warranty suits the product or service in question, the warranty will often lend itself more rights than seller will wish to agree to, such as inclusion of extended warranty periods and indemnification provisions. For example, I reviewed a repair contract whereby the entire unit rather than simply the replacement parts and services was warranted for a year after date of repair. This could be costly for seller since even old worn-out parts were re-warranted once a repair was made to any part of the unit. Seller lost considerable revenue on this agreement because the repairs continued for years beyond the initial warranty. Had only the replacement parts and labor been warranted, the company would have secured more profits.