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THE CONTENTIOUS WARRANTY CLAUSE

Ask any experienced contracting professional to name one of the most contentious clauses in a negotiation and the answer usually includes the warranty provision.

(The other contentious clauses are Limitation of Liabilities and Indemnity, followed closely by who owns the IP).

Many business people assume these clauses are strictly “legal” issues. If you’ve ever attended my seminars, you know my opinion:  Even the most highly “legal” clause – such as the indemnity clause – boils down to who’s going to pay the money. In my seminars, I break down the issues and language and educate people how to make sense of and negotiate these clauses.

 

WHAT’S THE PROBLEM?

I think business people frequently view the warranty clause as a “legal” issue primarily because:

  1. i) the clause is typically written in long, difficult to read, run-on sentences, and
  2. ii) suppliers ask for warranty disclaimers similar to the following:

THE FOREGOING WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY MADE BY SUPPLIER.  SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

Business people tell me that while they’re not entirely sure what the above clause means, they know it doesn’t sound good for them. As a result, what do many people do?  They turn the entire clause/ contract over to the legal department.

What if I were to tell you that most Buyers’ lawyers will actually agree to the Seller’s inclusion of this disclaimer language?

Most lawyers will tell you that as long as you insert into your contract:

  1. i) all the Supplier’s promises about the Product/ Service and
  1. ii) all Supplier actions/ responsibilities to correct a defective Product/ Service,

then you can agree to the above disclaimer.

This Supplier disclaimer language is negating highly legal UCC warranties that may prove helpful to the Buyer if you go to court, but will be of limited value otherwise.

 

RESOLVING THE ISSUES

I have concluded that what lawyers refer to as “Warranty” are the issues that business people refer to as “Quality”.

In plain English, warranties are promises made by the Supplier about its products/ services.

More specifically, warranties deal with the following issues:

  • How specific/ detailed/ unambiguous are your specifications/ requirements/ statement of work?
  • What will the supplier do if the product/ service doesn’t meet these requirements?
  • How quickly will the corrections be made?
  • What if the supplier doesn’t make those corrections within the defined time period?
  • What if the defective product is in the field?
  • What if buyer has to recall the product?
  • Who will pay for labor charges, parts replacement, tear down?
  • What if buyer performs the warranty repair?
  • How much and when will supplier reimburse buyer?

Approaches to the limitations of liabilities issue:

  • Limitations of Liabilities is an integral issue to warranties:
    • It’s not unreasonable to agree that the Supplier will be responsible for some costs, but not for others or for all costs not to exceed a specified dollar amount.
  • One effective approach to negotiating Limitaitons of Liabilities with respect to the Warranty is to permit the supplier to limit its liabilities for certain damages (such as loss of business, profits that you’re unlikely to pursue) in exchange for the Supplier’s agreement to  make certain fixes/ do certain things.

IMPORTANT NOTES:

Your warranty will only be as good as your specs/ requirements/ SOW

  • It’s not unreasonable for the Supplier to limit its liabilities. In this litigious society, the prudent business person does so. (In fact, take a look at your company’s terms of sale.  There’s probably a limitation of monetary responsibility in there as well).
  • The goal in the warranty provision is to identify your requirements; outline the steps if the product/service doesn’t meet these requirements; and create a guideline for what happens in the “real world, worst case” scenario (In other words, what are the Buyer’s rights if the Supplier doesn’t do what they promised to do?)

I go into much more detail about warranty and many other clauses in my Legal Aspects of Purchasing and Contracts: Reading, Writing & Negotiating” seminars.

Please contact me if you have any questions.

 

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