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Announcement: The Common Draft contract clauses and templates, with extensive research notes and commentary, are posted (in draft). If you’d like to be notified of significant developments in the project, please subscribe to updates at right, because I’ll be posting announcements on this blog. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

Warranties and representations – a brief overview

[This page is intended to serve as commentary for several warranty-related clauses, so that I don’t have to repeat the text and slow down the download process.]

Warranties: Sort of like an insurance policy

Generally speaking, a warranty is something like an insurance policy: It’s a promise that:

  • if a particular statement of fact proves untrue,
  • and the other party shows that it incurred X dollars worth of damage as a result,
  • then the warrantor will reimburse the other party for the X dollars, that is, it will indemnify the other party.

See, e.g., CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990).

As the renowned federal appellate judge Richard Posner put it, “One can warrant a level of performance that one may not be confident of attaining, for by accepting a warranty a customer grants the seller an option to pay rather than perform.” Neuros Co., Ltd. v. KTurbo, Inc., Nos. 11-2260, 11-2375, slip op. at 5 (7th Cir. Oct. 15, 2012) (affirming in pertinent part, district court’s award of damages and punitive damages for defamation) (Posner, J.) (emphasis added).

Warranties versus representations

Contract drafters and reviewers should be cautious about using the phrase “Provider Inc. represents and warrants to Customer Co. that X is true ….” If things were to go badly, the ‘representation’ part could open the door to allegations of negligent misrepresentation or even fraud.

Suppose Customer Co. later claimed that statement  X was untrue or even just misleading. Suppose also that a judge or jury agreed, and concluded (1) that Provider Inc. either knew that statement X was misleading, or it recklessly disregarded the possibility; (2) that Provider intended for Customer to rely on statement X; and (3) that Customer was justified in so relying.

In that situation, Customer Co. might be entitled either to a damages award or to unwind (‘rescind’) the deal. Not only that, but Provider Inc. might be liable for punitive damages, which normally are not available in straight-up breach of contract cases.

For thoughts on when a drafter might want to use represents, warrants, or both, see this note; see also Tina L. Stark, Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006 (accessed Oct. 18, 2008). Update 2009-12-30: My friend Ken Adams has posted the latest manifestation of his … idiosyncratic views on this subject.

Guarantees of future performance can extend a product warranty’s liability period

A subtle change in the wording of a product warranty can add years to a customer’s right to sue the vendor for breach of warranty under the Uniform Commercial Code.

Product failure as the breach: Suppose that the vendor warranted that its product would be free from defects for X years after the delivery date. In many U.S. jurisdictions, that warranty would be treated as an explicit guarantee of the product’s future performance. If the product were to fail, the failure itself would be deemed a breach of the warranty; the customer could sue for the breach at any time up to (usually) four years after the failure.

Product delivery as the breach: On the other hand, suppose that the vendor had promised only that it would repair or replace the product if it failed during the first X years after delivery. That language does not explicitly guarantee future performance. If the product were to fail, the courts in many U.S. jurisdictions — but not all — would deem the breach to have occurred, not on the date of the failure, but on the date the product was delivered, pursuant to UCC § 2-275. In a case governed by the law of one of those jurisdictions, the customer would be forced to bring suit for breach within (usually) four years after delivery, not after the product failure. See generally the appellate court’s review of case law in Trans-Spec Truck Service, Inc. v. Caterpillar, Inc., 524 F.3d 315, part II.B (1st Cir. 2008) (affirming summary judgment dismissing breach of warranty claim under Massachusetts law).

(NOTES: [1] In such cases, the language promising to take certain actions if the product fails is deemed a limitation of remedies instead of a warranty. [2[ The analysis summarized in the previous paragraph might be different if the promissory language were deemed a separate ‘service contract,” and if the customer sued for breach of the service contract and not for breach of the product warranty. See id.)