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Manufacturer’s Corner: Anatomy of a Limited Warranty (Part 2)

In our last installment, I introduced the importance of making your warranty terms clear.  Now, we turn to the specifics, beginning with the express warranty itself.  Here are some of the boxes you need to check when reviewing your express warranty.  (Note that, for clarity, this post assumes a non-consumer sale; issues unique to consumer sales will be addressed in the final post in this series).

Issue One: What is covered?  Many products incorporate components manufactured by others.  Sometimes, those components will be covered by another warranty by the company that manufactured or distributed them.  But even if they don’t carry their own warranty, do you really want to guarantee the performance or manufacture of products manufactured by others?  Many manufacturers don’t.[1]  If you’re one of those manufacturers, be sure to explain in your warranty that components of the product that are manufactured by others are not covered by the warranty.

Issue Two: What is your promise with respect to the product?  Rarely does one simply wish to warrant that a product will, for example, “perform satisfactorily.”  Such a promise is imbued with subjective inquiries that make for messy disputes down the road.  Instead, be specific, such as by promising that the warranted parts of the product will be free of defects in materials and workmanship.[2]  This has the added advantage of taking questions about adequacy of performance largely out of the picture, and instead focuses the inquiry on whether there was a flaw in the material composition, or whether the product was assembled incorrectly at your plant.[3]

Along these same lines, for what time period are you making promises about your product?  Many manufacturers will state that their product will be free of defects for one year following delivery (or installation, or some other objectively measurable point).  Frankly, I think this is a bit strange when the warranty is only one against defects in material or workmanship (how could a product that’s not defective in material or workmanship on Day One develop such a defect on Day Five?[4]), but I’m admittedly in the minority there.  As an alternative, consider promising that the product will leave your factory or warehouse without defects in material or workmanship, and that you will honor warranty claims for one year following delivery.[5]

Issue Three: What will you do to honor the warranty?  Say you warranted your product to be free of defects in material, but there’s a defect in material.  Then what?  This is the meat of the warranty.  One common promise is to repair or replace the defective product (or the defective component).  If you go this route, you’ll want to consider a few subsidiary issues.  The first is who will bear the cost of shipment and third-party labor (e.g., are you just supplying a new part, or are you paying for installation too?).  The second is whether you can replace defective components with used components.  The third is that you will select between repair or replacement. The fourth is what you will do if the product cannot be effectively repaired or replaced.[6]  Typically, a promise to refund the purchase price is a good backup promise.

Also, be sure to state that your express promises are your sole obligations under the warranty, and that no other promises are being made.  To this end, your warranty should say that your promises are “in substitution for” any other remedies otherwise available, and that they are the buyer’s “exclusive” remedies.

Issue Four: When does your promise not apply?  Surely when you designed your product, you had some expectation of how it would be used.  This is your opportunity to limit your warranty only to those expected uses.  This can – and should – be done in broad terms, such as by stating that the warranty is void in the event of customer misuse.  But, you shouldn’t stop at the broad discussion.  For example, if your product is intended for commercial but not industrial use, make clear that your warranty is void if the product is used in industrial applications.  If your product is intended to be used in dry environments, make clear that your warranty is void if the product is used in wet environments.[7]

Issue Five: To whom does your promise apply?   Who may assert a warranty claim?  Only your immediate buyer?  Anyone who owns the product during the warranty period?  This can be an important question depending on how your product is distributed.  Consider it carefully.

Issue Six: What must the buyer do to make a warranty claim?  The baseline is simple: the buyer must give you notice.  But when must notice be given?  How must notice be given?  Must the buyer give you an opportunity to inspect the product (or even deliver the product to you for inspection)?  There’s no right answer to this.  Just give careful consideration to what information you’ll need to evaluate a warranty claim, how you’ll get it, and how long after the sale you’re willing to entertain notice of such claims.[8]

Now that you have an idea of what to look for in the warranty part of your limited warranty, our next installment will focus on one of your seller protections: a shortened limitations period.

[1] But also, some do.  That’s not always unreasonable, especially if you have negotiated warranty or indemnity agreements with your supplier.  As I’ve written in other posts, your terms and conditions need to reflect your specific circumstances.

[2] Some manufacturers warrant against defects in design.  I don’t like that, because it brings in many of the subjective issues that a well-crafted limited warranty should avoid: an inquiry into adequacy of design necessarily requires an inquiry into how the product should perform under some set of circumstances or another.

[3] But it still may not be specific enough for your circumstances.  For instance, if you are dealing with a sophisticated customer who has provided design specifications, perhaps your warranty should state instead that the product will conform to the design specifications, or fall within certain tolerances.

[4] The distinction here – one that courts often fail to draw – is that between existence of a defect and some manifestation of the defect that puts the buyer on notice of its existence.

[5] This should also have the benefit of not being a warranty of future performance of the goods, which has important consequences for the statute of limitations for a breach of warranty action.

[6] If you fail to provide a backup, and you can’t repair or replace the product, a court may find that the warranty failed of its intended purpose.  If that happens, the buyer is entitled to its full range of ordinary remedies.

[7] This type of limitation may seem unnecessary if all you warrant is the absence of defects in material or workmanship.  I think it’s still a good idea though, because it presents a threshold question that a court could consider before turning to the harder (and more expensive for you) question of whether there’s a defect in material or workmanship.

[8] To this end, I suggest a cap on the notice period of some number of days from the earlier of (a) discovery of the problem, or, (b) one year from delivery.  (Or, you know, some other amount of time).  You want that outside boundary though.