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Manufacturer’s Corner: Anatomy of a Limited Warranty (Part 4)

We pick up our discussion of effective limited warranties by addressing limitations of remedies.  Astute readers will think “you covered that already in Part 2 of this series, why am I going to read it again?”  And those readers are kind of right, but not entirely.

Here’s me in Part 2 of the series:

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 fourth is what you will do if the product cannot be effectively repaired or replaced. 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.

(Footnote omitted, emphasis added).

That is sound, but incomplete information – give me a break, limitation of remedies wasn’t the point of that installment!  Here are some additional points to bear in mind, along with our now-standard disclaimer that this post assumes a non-consumer sale.

First, be sure that, regardless of the exclusive remedies you offer, you can actually perform under one of them.  That’s the beauty of including a refund of the purchase price as a backup remedy – you can pretty much always count on being able to do that if you need to.  This is important because if a court finds the exclusive remedy “fails of its essential purpose,” the limitation is of no effect, and you’re stuck dealing with a buyer who has its full range of remedies available.  That’s not what you want, but it may be what you end up with if, for example, your product can’t effectively be repaired or replaced.

Second, disclaim liability for consequential and incidental damages.  Your offer of an exclusive remedy should take care of this, but it’s best to disclaim these separately (see the discussion above about remedies failing of their essential purposes).  A couple of additional points here.  One, your disclaimer of consequential damages may be disregarded if it is unconscionable.  To this end, I suggest making your disclaimer of consequential damages expressly effective to the full extent legally permissible, which should (but may not) protect you from having it tossed entirely by a court that determines disclaiming some of your buyer’s consequential damages (but not all of them) would be unconscionable.  Two, your disclaimer should specify types of damages that are not recoverable – think of production downtime prompted by the defect, loss of use, and lost profits, for example, but your circumstances may call for listing other or additional types of damages.  This is important for a couple of reasons, not the least of which is that courts have a difficult time distinguishing between incidental and consequential damages, and if there’s a chance some of the damages might be classified as incidental and fall outside the scope of a consequential damages disclaimer, you don’t want to be left in the cold.

Third, many manufacturers fall into the trap of stating that an exclusive remedy is provided in lieu of any other warranties, express or implied.  Don’t do that![1]  It confuses two separate issues, and at least one court has found that such a provision is not “expressly” a limitation on remedy such that it would be enforceable.[2]  We can quibble over whether that’s the “correct” outcome, but the better practice is not to make the mistake in the first place.

Fourth, in addition to limiting the types of remedies available, you can also impose a cap on money damages.  Typically, the cap is the purchase price of the goods.  This can be tricky to do well, because it can create ambiguity in your terms: if you’ve imposed exclusive remedies of repair, replacement, or refund, why are you talking about caps on money damages?  But it can and should be done, because you want that safety net in case your other limitations are found unenforceable.  To this point: severability clauses are your friends.

Fifth, be sure to specify that your limitations of remedy extend not only to breaches of warranty, but also to other causes of action such as breach of contract.  Why let a creative attorney ruin your limitation by styling claims to avoid it?

One final question: does a limitation of remedies need to be conspicuous to be enforced?  The correct answer is “no,” but courts have erred on that issue in similar contexts before.  I leave it to you to decide how you will handle that issue, but I typically try to make it conspicuous unless I have a choice-of-law provision selecting the law of a state where a court has expressly ruled that a limitation of remedy need not be conspicuous.

In our next installment, we’ll turn to issues unique to the consumer sale context.  Have a great Labor Day!

[1] This will come at the cost of brevity.  As I noted in Part 2, you need to make clear that the promises you make – e.g. repair or replacement – are your only obligations under the warranty.  To clarify that they are also exclusive remedies, you’ll need to set that out separately, even though it might look duplicative at first glance.  This is okay, though, because it’s important to limit remedies in a separate paragraph anyhow.

[2] Ford Motor Co. v. Reid, 465 S.W.2d 80, 85 (Ark. 1971).