Warranty Agreement Defined
A warranty agreement refers to a statement or a set of statements that basically promises the performance of a particular task or service. A warranty agreement can also be in the form of a guarantee, which basically affirms that a product, service, or act will perform in an expected manner. In general, a warranty agreement constitutes a legal protection against possible defective performance or service by a seller of goods and/or services. This is an important legal document that is often included in transactions to protect a party against possible financial losses due to the dishonesty or deliberate failure of the other party.
Essentially, the purpose of a warranty agreement is to provide a contractual obligation that requires the seller of the product or service to repair or replace it if it is found to be faulty within a specified time period. It is essentially a guarantee offered to the purchaser that damage, destruction and/or defects will be repaired by the seller at their own expense. This law is governed by a combination of common law cases , formal statutes and principles derived from the Restatements of the Law.
Warranty agreements are a common inclusion in transactions for anything from a simple hand shake commitment between the buyer and seller of a car to a complex comprehensive document for the construction of an entire building. Warranties are most often classified as express, implied or special warranty. Most consumer products come with express warranties because it is cost effective for the manufacturer to minimize the risk of product liability by offering some free replacement repairs and keep the consumers satisfied; it is good for business and protects the manufacturer as well.
Additionally, all products sold by the seller for commercial purposes have an implied warranty of merchantability, thus implied warranties exist by operation of law. These warranties are often found in price and description labels on products and are often found to be limited in time. For instance, a common limitation may be that the warranty is valid only after registration of the product or within a reasonable period of time, which is generally ten to twelve months. Special warranties or other kinds of restrictions may also be included in the writing.
Categories of Warranties: Express Versus Implied
Further differentiating contract warranties is another subdivision into the types of warranties: express and implied.
Express Warranties
An express warranty is a carefully worded statement in an agreement and has generally been found to be binding on the parties to the agreement. An example of an express warranty is as follows:
In the event that the Buyer purchase any ___ as outlined in Schedule 1, the Seller guarantees and warrants that the work will be performed in a good and workmanlike manner to the industry standard, using new materials and workmanship of the highest quality, in the event there is a problem with the work, Seller’s sole liability shall be to pay back the assessment value of the work. Covering an individual item with an express warranty may also be in the form of a statement about the entire set of items.
An example in the sale of a car would be:
The person selling the car says the car has never been in an accident. If the person selling the car later reveals previous accidents it is an express warranty because it was an express statement about the car’s past.
Implied Warranties
Someone who sells goods or services is expected to do so in good faith, expecting to make money from the sale. The expectation is that the goods or services are complete and safe for use. The person selling the goods or services is assumed to know about them and their use. Further, although the person selling the goods or services is expected to have knowledge about the items being sold, they are also expected to warn the buyer about known problems. Unless otherwise stated, a seller is expected to be competent in the provision of what is being sold. An implied warranty also provides that the goods or services are what the buyer agreed to buy and what the seller agreed to sell.
Essential Elements of a Warranty Agreement Contract
To effectively protect the interests of all parties, the warranty agreement contract should contain certain key elements. These include, but are not limited to:
1. Coverage. This portion of the contract should set forth exactly what is and is not covered under the warranty. If there are any deductions (or "allowances") for depreciation, these must be specifically detailed here as well.
Considerations:
• What conditions or parts of the property are covered and which are not?
• Are there any deductibles?
• What components of the property are excluded from coverage?
• Are there parts that are covered as long as they are replaced with the same or better quality (such as an appliance) at 100% cost, but partially (say 80%) covered if a lower quality item is used?
• Are there any caps? Caps are monetary limits on a warranty agreement contract.
2. Effective Date. This section should clearly state when the warranty agreement contract goes into effect and what conditions must be satisfied for the effective date to be enforceable.
Considerations:
• Is it necessary for any work to be completed before the effective date?
• Are there any inspections, repairs, etc. that must be done?
3. Duration of Coverage. This part of the warranty agreement contract should specify the length of time the warranty is in effect. It should also detail any conditions when the warranty may be terminated prematurely (e.g. the default of the buyer).
Considerations:
• Does the duration of coverage depend on any specific circumstances?
• Is there a possibility of extending or renewing the warranty agreement contract?
• Does the warranty automatically terminate if the property is sold?
4. Reinstatement of Coverage. This section should list any conditions that must be satisfied for the warranty coverage to be reinstated after it is terminated.
5. Limitations. In this part of the warranty agreement contract, some may wish to include any limitations on liability. Some items that may be considered for inclusion:
Considerations:
• Are there caps on liability? Excessive caps may be found to be unconscionable by a court of law.
• Are there restrictions on the use of third party suppliers, subcontractors, etc. for materials or services?
Common Warranty Agreement Contract Provisions
Warranties may be used in multiple contexts in the daily operation of a business. For example, warranties could be used when applying for a loan to a bank or leasing commercial space, while other warranties may arise in contracts for the sale of goods, licenses for software, leases, or service agreements.
All warranties will contain some standard clauses. The most essential clauses and ones to scrutinize closely are:
Description
The Description clause describes the scope of the warranty being granted. For instance, the warranty may cover personal liability for employee actions that are undertaken within the scope of employment for the company. On the other hand, if the Description clause is more narrow, it could limit the liability for personal actions by the employee while at work or in the line of duty.
Duration
Duration of the warranty is important to understand. For warranty agreements for sales of goods , the duration of the warranty should be clearly stated. For example:
The Language will generally flow naturally from the Description. More broadly, the Language clause should state whether the Client is providing the warranty or a third party is providing a warranty. If a third party is providing the warranty, the vendor representative will likely provide that third party’s warranty language.
The Language clause is typically followed by the Exclusions clauses. These clauses, along with Language, may be the most important clauses of the warranty. Together, they clearly define the preconditions for the provision of the warrant within the overall agreement contract. The Exclusions may also describe what is not covered under the terms of the contract.
Tips for Creating a Warranty Agreement
When preparing a warranty agreement, there are a number of best practices to consider. Be Specific in the Writing of the Warranty Agreement First, it is important that the terms of the warranty be specific. Under California law, this means that any ambiguity in the warranty provisions will likely be interpreted against the drafter of the warranty agreement. Being specific will help ensure that the warranty is enforceable. Consider the Warranty being Offered Second, consider the warranty that is being offered. What are the corrective actions that can be taken in the event of a defect? Can the defective product be repaired? Can the defective product be replaced? Can the defective product be returned for a full refund? What happens if the customer is unable to detect if the product is defective? For how long will the warranty be in place? The written warranty should be consistent with the representations and warranties being made to customers regarding the particular product or service the business is offering. Without a Warranty, Express Warranties May Be Implied If warranties are not specified, there is a real risk that express warranties will be imposed on the business by operation of law. In order to avoid unexpected and unnecessary liabilities, businesses should clearly and specifically define their warranties. Requirements Under the Magnuson-Moss Warranty Act Third, businesses should keep in mind that the Magnuson-Moss Warranty Act has very specific requirements for warranty agreements. Warranties for consumer products must: Businesses should familiarize themselves with the MMWA and consult with legal counsel if a warranty is being drafted for a consumer product.
Warranty Agreement Dispute Resolution
Dispute Resolution Mechanisms in Warranty Contracts Commonly, a warranty agreement will include a dispute resolution provision that sets out the process for resolving disputes under the contract. A court can consider and enforce most of these processes where a party is attempting to enforce a warranty or seek redress against the seller or warrantor for breaching the warranty. The common forms of dispute resolution processes include: A limitation period restriction that any claim under the warranty must be brought within a set period after the alleged breach; Arbitration – arbitration is a process where an impartial third party forms a binding decision after a hearing to a dispute. The arbitration process can be conducted privately and the parties can choose the venue, the procedures, and the decision maker; and Mediation – mediation is a dispute resolution process where an independent third party acts as a neutral mediator . The mediator assists the parties to work towards a mutually acceptable solution. The mediator cannot force a resolution and their role is non-binding. In many cases, the dispute resolution provision is well known and set out in the relevant trade practices legislation. The dispute resolution provisions may be expressed in the following manner: Consumer or Business warranties are deemed to have this clause even if not expressed. The clause effectively preserves the seller or warrantors right to litigate a dispute as opposed to being required to resolve it by arbitration or mediation. It is advisable to attempt to resolve the issue by negotiation prior to commencing proceedings, however, if no resolution is reached the terms of the clause in favour of litigation are preserved. In some claims the buyer may be required to sue in a particular court, and hence they will be bound to adopt the limitation period.