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When the term “warranty clause” comes to mind, we often picture this simple scenario:

A business offers its goods or services with a guarantee, and customers accept said goods or services, knowing they can return them if a defect occurs within a specified period.

It is supposed to be that straightforward, right? Not quite!

In reality, warranties have been subject to numerous misconceptions, and warranty clauses are often misinterpreted, thanks to poor wording by warrantors and inadequate review processes by customers.

In this guide, we’ll explain what a warranty clause really entails, debunk some common misconceptions, and provide proven best practices for effectively incorporating warranty clauses into commercial contracts.

What is a warranty clause?

A warranty clause is a contractual provision that provides assurances regarding the quality, condition, or performance of a product or service.

It outlines the seller's or service provider's promise that the item sold will function as intended for a specific period or that the service provided will meet certain standards. If the product or service fails to conform to the specified guarantees, the buyer can contact the seller for recourse.

At first glance, this seems straightforward. But in reality, warranty clauses tend to be misunderstood A LOT.

Here is why:

Every warranty clause is unique to the products or services covered in the contract and sometimes contains limitations and exclusions that aren’t obvious.

Let's say you purchased critical manufacturing equipment, and the purchase contract contains a warranty clause stating that the equipment should work without issues for four years. If any problems arise during the warranty window, the seller is obligated to ensure the equipment's repair or replacement.

This looks ideal on the surface. However, there are several considerations many buyers often overlook:

  • Notice requirements—How quickly must the buyer notify the seller of a defect to claim warranty coverage? Are there specific requirements for how the notice must be given (e.g., in writing, through dedicated phone numbers, etc.)?
  • Duration of repairs or replacement—Does the warranty clause specify a timeframe for the repairs or replacement? If this isn’t specified, the seller could take a long time to fulfill this obligation, delaying your business processes and potentially causing losses.
  • Costs—Who covers the costs of shipping the equipment to and from the seller before and after repairs or replacement?

Covering all these not-so-obvious details is crucial for ensuring a well-rounded understanding of your contract’s warranty clause, protecting your organization from oversights and unproductive disputes.

“If someone said you can only work on one section of a contract, I would always pick the section dealing with indemnification, limitation of liability and warranty.  Or, as I call them, the “Big Three.”  While usually falling in the boilerplate section of the agreement, there is little that is standard about these three clauses.  They are also typically the most heavily negotiated clauses in the entire agreement.  Why?  Because they shift and cap/uncap exposure when things go wrong under the contract.”

~
Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things:  Know It’s Only Boilerplate (But I Like It)!

Components of a robust warranty clause

A robust warranty clause contains a detailed collection of provisions that explain the rights and responsibilities of both parties regarding the quality, performance, and remedies for non-conformity of the goods or services being provided.

It typically contains the following components:

Also read: 6 essential types of contract clauses you need to know

#1 Scope of the coverage

This is the heart of the warranty. It spells out precisely what aspects of the product or service are covered. For a product, it might include specific parts, functionality, or performance standards.

For a service, it could detail the expected outcomes or quality levels.

#2 Duration of the warranty

This states how long the warranty is in effect. It might be a fixed period (e.g., one year from purchase), a period based on usage (e.g., 50,000 miles for a car), or even a lifetime warranty in some cases. This sets the timeframe within which a customer can make a claim in the event of a defect.

#3 Conditions and exclusions

Warranties often come with conditions the customer must meet for the warranty to remain valid. This could include things like proper maintenance, using the product as intended, or registering the product.

Exclusions are equally important—they spell out what the warranty doesn't cover. This could be normal wear and tear, damage caused by accidents or misuse, or issues arising from unauthorized modifications.

#4 Remedies

This section details what the warrantor will do if the product or service fails to meet the promised standards. Common remedies include repair, replacement, refund, or, in some cases, a credit towards a future purchase. The warranty should be clear about which remedy applies in which situation.

#5 Procedure for making a claim

This outlines the steps the buyer must take to invoke the warranty. It might involve notifying the seller within a specific timeframe, providing proof of purchase, and potentially sending the product back for inspection.

#6 Limitations of liability

This section often limits the warrantor's responsibility for certain types of damages. For example, a warranty might exclude consequential damages (like lost profits or business interruption) resulting from a product failure or limit the seller's liability to a certain amount (e.g., the purchase price).

Also read: Effective Contract Risk Management: Top Tips & Strategies

#7 Dispute resolution

In the event that the customer and warrantor cannot agree on a warranty claim, this section lays out how both parties will handle the dispute. It might involve mediation, arbitration, or litigation in a specific jurisdiction.

Also read: How to Resolve Contract Disputes

Benefits of having a warranty clause in commercial contracts

A comprehensive warranty clause benefits contracting parties in so many ways. Whether you’re the warrantee (the party receiving the warranty) or the warrantor (the party offering the warranty), you should never take this for granted.

Here are some benefits that come to mind:

Benefits for the warrantor

  • Enhanced reputation and credibility: As a warrantor, offering a warranty demonstrates your confidence in your product or service. This boosts your reputation as a trustworthy provider, attracting more customers and potential business partners.
  • Competitive advantage: A solid warranty can be a key differentiator in crowded markets. It gives you an edge over competitors who offer less comprehensive or no warranty at all.
  • Increased sales and customer loyalty: Consumers are often willing to pay more for products or services backed by a warranty. Making them feel more secure in their purchase usually results in higher retention and increased referrals.
  • Reduced risk of disputes: A well-defined warranty clause establishes clear expectations, reducing the likelihood of misunderstandings and costly disputes.
  • Valuable feedback mechanism: Warranty claims can provide valuable insights into potential or existing issues with products or services, helping you find areas for improvement and enhancing your offerings.

Benefits for the warrantee

  • Peace of mind and risk mitigation: You can rest easy knowing that if the product or service doesn't live up to expectations, you have options. A warranty protects you from unexpected costs due to defects or malfunctions.
  • Access to remedies: If there's a problem, you have the right to seek solutions like repairs, replacements, refunds, or credits. This ensures you get the value you paid for and aren't left stranded with a faulty product.
  • Improved customer satisfaction: A warranty can boost your confidence and satisfaction with your purchase. It shows that the seller stands behind their product and cares about your experience.
  • Leverage in negotiations: When discussing contract terms, a warranty clause gives you leverage. You can negotiate for better protection and ensure your interests are considered.
  • Legal protection: Should a dispute arise, your warranty clause acts as a legal safeguard. You have grounds to enforce your rights and potentially seek compensation for any losses.

Common misconceptions about warranties

While a warranty clause has several benefits for businesses and customers, it has been the subject of widespread misconceptions, from what a warranty really covers to the flexibility of its clauses.

Let's look at some of these misconceptions:

#1 "A warranty covers everything."

This is perhaps the most prevalent misconception. Warranties, whether express or implied, often have limitations and exclusions. They don't cover everything that could go wrong with a product or service.

For instance, a car warranty might cover the engine and transmission, but not wear-and-tear items like tires or brake pads. Similarly, a service warranty might cover the initial setup but not ongoing maintenance.

#2  "All warranties are the same"

Warranties vary significantly depending on the product, seller, and industry. Some offer comprehensive coverage, while others focus on specific parts or defects.

A warranty on a high-end appliance, for instance, might offer a longer duration or more extensive coverage than a warranty on a budget-friendly model.

Always read between the details to understand exactly what is covered and what isn't.

#3  "I can't negotiate warranty terms."

In many cases, warranty terms are negotiable, especially in business-to-business contracts. You can often discuss the duration, scope of coverage, and remedies with the seller to tailor the warranty to your specific needs.

For example, if you're purchasing a large quantity of goods, you might be able to negotiate a longer warranty period or more comprehensive coverage than what's initially offered.

"Negotiation is 90% preparation, 10% talking."

~Sterling Miller, CEO of Hilgers Graben PLLC
Ten Things: Business Skills All In-House Lawyers Should Master

#4 "A warranty is automatically validated once the product is purchased."

Some warranties require registration or activation within a specific timeframe after purchase. Failure to do so might void the warranty or limit the available remedies.

For example, a manufacturer of industrial HVAC systems might require their commercial clients to schedule a professional installation within 90 days of delivery to maintain their full warranty coverage for parts and labor.

#5 "Warranties are purely a customer service expense."

While warranties do play a role in customer satisfaction, they can also be a valuable source of data for product improvement and quality control.

For instance, if you manufacture industrial machinery, you can analyze warranty claims to identify recurring faults and improve future product designs.

This has long-term benefits for you as a warrantor, translating into better quality goods and services, higher customer satisfaction, and ultimately, an improved bottom line.

Limitations of a Warranty clause

While warranty clauses offer many advantages, they are not without limitations. Understanding these drawbacks can help you set sensible expectations and make informed decisions when negotiating or relying on a warranty.

Here are some key limitations to consider from the perspectives of both parties:

Seller’s perspective

  • Financial risk: Warranties can lead to unexpected costs if product defects or failures occur more frequently than anticipated. Depending on the nature of reported defects, satisfying warranties can impact your organization's bottom line.
  • Legal exposure: If a warranty dispute escalates to litigation, your company may face legal costs and potential damages.
Also read: Legal Risk Management: From the Playbook of 11 GCs & Leaders
  • Potential for fraudulent claims: Some customers may attempt to make fraudulent warranty claims, seeking free repairs or replacements for quality products damaged by normal wear and tear.
  • Administrative overhead: Managing warranties involves administrative tasks such as processing claims, arranging repairs or replacements, and communicating with customers. This can create an additional workload for your staff and may require hiring dedicated personnel to handle warranty-related activities.

Buyer’s perspective

  • Conditional coverage: Warranties often come with specific conditions and exclusions that limit their scope. These conditions might relate to the product's usage, maintenance, or even the duration of coverage. This means you may not be able to claim warranty coverage if the product's failure does not fall within the specified conditions.
  • Cost of claiming warranty: Even if a product is covered by a warranty, claiming it may involve costs for your organization. You might be responsible for shipping costs, diagnostic fees, or even a deductible, depending on the terms of the warranty. These additional expenses can make claiming the warranty less appealing or even financially unfeasible.
  • Burden of proof: In some cases, you may need to provide evidence to support your warranty claim, such as proof of purchase, documentation of the defect, or a demonstration of how the product was used. Gathering and presenting this evidence can be time-consuming.
  • Dispute resolution: If your warranty claim is denied or disputed, you may face a lengthy and complex resolution process. This could involve communicating with customer service representatives, escalating the issue to higher authorities, or even resorting to legal action. These processes can be stressful and drain your time and resources.
  • Limited enforceability: Even if you win a warranty dispute, enforcing the resolution can be challenging. Companies might delay fulfilling their obligations, offer inadequate remedies, or try to negotiate a less favorable outcome. You might find yourself in a prolonged battle to get the repairs, replacements, or refunds that you are rightfully entitled to.

Best practice for incorporating a warranty clause

A well-crafted warranty clause is crucial for helping contracting parties manage expectations and limit risk exposure.

But what makes a warranty clause genuinely effective, and how can you ensure yours provides enough clarity and protection for all parties involved? This section provides the answers.

Warrantor

#1 Ensure the warranty contains clear language

Ambiguity is the enemy of any contract. Vague terms like "reasonable wear and tear" or "satisfactory performance" can be interpreted differently by each party.

Instead, be precise. Define what constitutes a defect, how long the coverage lasts, and exactly what remedies the customer is entitled to.

#2 Leverage warranty data for strategic insights

Every warranty claim is a data point. Meticulously track claims, including the nature of the defect, the product's age, and the resolution. This data is invaluable.

It can help you identify trends in product failures, pinpoint areas for design improvement, and even predict future warranty costs.

#3 Regularly review and update your warranty clauses

Laws change, product designs evolve, and market expectations shift. Don't let your warranty clause become outdated. Review it periodically to ensure it complies with regulations and aligns with your evolving business goals.

Are there new exclusions you need to add? Do you want to offer extended warranty options for competitive advantage?

Keeping your warranty clause dynamic ensures it continues to serve your interests and those of your customers.

#4 Invest in quality control

The best warranty is one you rarely have to use. A robust quality control process during manufacturing or service delivery can significantly reduce warranty claims. This not only saves you money but also enhances your brand reputation.

Regularly reassess your quality control procedures, identify potential weaknesses, and implement corrective measures. Investing in quality upfront minimizes the need for warranty-related expenses in the long run.

Warrantee

#1 Thoroughly read and understand the warranty

“As an in-house lawyer, it is vital that you understand how to read contracts – they are the lifeblood of any company and working on them is, in my opinion, the highest and best use of the legal department.”

~Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC

Ten Things – How to Read a Contract

This might seem obvious, but it's crucial. Many buyers skim the warranty document, missing important details and setting themselves up for unpleasant surprises later.

Pay close attention to the fine print, as this is where you'll find the details about what's covered, what's excluded, and some of the not-so-obvious limitations that apply.

If you’re a busy professional, there are several tools you can leverage to streamline this process. Our favorite one is VerifAI, an AI-powered assistant that automates contract review processes at scale.

VerifAI can scan your documents in minutes, highlight areas of concern, suggest redlines, and even answer direct, open-ended questions about different areas of the contract (e.g., the warranty clause).

This ensures you make deliberate decisions based on a solid understanding of the warranty's terms and conditions.

Also read: The Perfect Contract Review Checklist for Commercial Contracts

#2 Don’t be afraid to negotiate the terms of the warranty

Feel free to negotiate warranty terms, especially in high-value transactions. If the standard warranty doesn't meet your needs, ask for modifications.

Using a tool like VerifAI makes this process easier. It highlights potential risk areas within your contracts, which you can renegotiate for fairness.

You might be able to negotiate a more extended warranty coverage period, more comprehensive coverage, or even a different remedy (like a refund instead of a repair).

Also read: 5 Most Negotiated Terms and Clauses in a Contract

#3 Maintain reliable records

Keep meticulous records of your purchase, including the invoice, warranty documentation, and any communication related to the product. This documentation is essential if you need to make a warranty claim.

It proves your purchase date, the product's condition at the time of purchase, and any discussions you had with the seller about the warranty. Organized records simplify the claims process and ensure you have the necessary evidence to support your claim.

#4 Research your warrantor’s reputation

A warranty is only as good as the company behind it. Before you commit to a purchase, do your homework on the warrantor. Look for reviews, ratings, and information about their track record in honoring warranty claims.

A company with a reputation for excellent customer service and standing behind its products is more likely to provide a smooth and fair warranty experience.

On the other hand, if a company is known for denying claims or offering poor customer support, you might want to reconsider your purchase or negotiate stronger warranty terms.

Key takeaway

A warranty clause is a critical component of commercial contracts. It isn’t designed to merely manage expectations but to also serve as an instrument for business growth.

This guide covered all you need to know about warranty clauses, including common misconceptions and best practices for incorporating them into commercial contracts.

We also discussed VerifAI, our supercharged AI contract review assistant designed to help you assess not only your warranty clauses but also the entire spectrum of legal agreements.

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