Contract negotiation:     How to analyze and negotiate warranties

As a business professional, there will no doubt be occasions in your career when superiors or internal clients come to you with their “hair on fire” because something went “wrong” with equipment or services purchased in connection with a contract you were involved in negotiating or managing.

Often, the question will involve an issue regarding the scope and applicability of the warranty provisions. There are traps to avoid when negotiating or dealing with warranties. When analyzing warranties, asking yourself the right questions will keep you on track and help you avoid career altering mistakes. 

When negotiating warranties always bear in mind the adequacy of the warranty in terms of what is going to be purchased. For example, there can be situations where mere repair or replacement is simply inadequate. In addition, the schedule on which warranty work is to be performed can be critical. Likewise, “in and out costs” and access to the defective items can be huge factors in the scope of the warranty particularly when a relatively inexpensive part is buried deep inside a structure or other piece of equipment. 

Note that it may be appropriate to include a warranty of “integration” so to speak with existing or connecting systems. Essentially, you want what you are purchasing to work seamlessly when integrated into other existing or connecting systems. The duration of the warranty is likewise key and you may wish to have reperformed work or repairs re-warranted for an appropriate period. Note the importance of the schedule on which warranty work is to be performed and the possibility of a self-help remedy permitted to the purchaser under certain circumstances. Also, bear in mind that warranties typically begin upon delivery. If this is not well understood, you can set yourself up for the inventory “time bomb” since by the time goods are installed or used after sitting in the warehouse they could be outside the warranty time period.

When making warranty claims, there are of course standard basic questions to be asked. These include what is the scope of the warranty, its duration, whether notice requirements were complied with, the timing of any remedy and how it could affect the cost/schedule of other work and whether “self-help” is appropriate. Having a well thought out and organized approach for addressing warranty issues that may arise in the course of managing the transaction is basic to sound contract management. 

The practice and protocol for enforcing warranty rights should be a part of every company’s Contract Management Plan. It is obvious that once signed a contract should not simply be “filed and forgotten”, but instead managed through to completion with rights and remedies appropriately exercised in a timely manner. Such a plan is known as a Contract Management Plan (“CMP”). The CMP should include protocols for writing and saving letters as well as taking other necessary steps to monitor compliance with warranty provisions and enforce them as necessary. 

When it comes to what constitutes a good Contract Management Plan in the context of warranty claims, it is always important to ask the right questions in correct order within proper timing. The nature of those questions may well vary slightly with the nature of the transaction. However, the following list might be a good start on which to build the ultimate list as part of the Contract Management Plan as regards warranty provisions. 

Key Considerations

When analyzing or negotiating warranties, or warranty claims, ask yourself: 

1. What is the warranty’s scope?

As noted above, warranties are often limited to “repair or replacement” of a particular part or “re-performance” of work or services. Such warranties may or may not be appropriate given their very limited nature. Of course, we must be mindful that warranties are essentially an assumption of risk that something will fail or go wrong. Generally speaking, the broader the warranty the greater the assumption of risk and presumably the higher the price. You don’t want to “gold plate” a warranty but the balance is to ensure an appropriate remedy.

2. When does the warranty expire?

Understanding when a warranty expires means understanding when it begins. Typically, agreements provide that warranties begin to run when the goods are delivered or services are performed. Of course, this is a matter of contracting draftsmanship and you can generally write warranties any way you want. Note that if goods are to be stored in inventory, the warranty usually runs during that period unless other arrangements have been made.

3. Was there a breach of warranty?

As noted above, depending on how your warranty was written there may not have been a breach just because something went wrong. Bear in mind that a warranty is not a promise that nothing will go wrong, but instead a promise that if something does go wrong it will be fixed in accordance with the terms of the warranty.

4. Was notice provided as required?

Providing prompt and proper notice of breach is very important with some courts holding that without notice, no remedy is available.

5. When does the remedy need to take place and be completed?

The timing of any warranty work can be critical and should take into consideration the operating needs of the business. This is something to address in the contract documents.

6. What remedy applies to repaired or re-performed work?

Many agreements provide that repairs or re-performed work is likewise warranted for a certain period of time. Again, this is something to address in the context of the original agreement.

7. How will the remedy affect cost and schedule or other work?

Business operations cannot stop simply because of warranty work and there are ways to integrate repairs, replacements or re-performance that minimize costs or schedule disruption. This is where “self-help” as a remedy is often useful.

8. What is the value of the warranty work to be performed?

There are circumstances where the value of the warranty may be such that it is not worth pursuing simply to assert a warranty claim. This may be because the situation has changed or the original warranty is not a cost-effective remedy.

9. Were all important discussions and decisions properly documented?

Documenting decisions and discussions is important but needs to be done properly. Prematurely making absolute statements of fact without all the information can come back and haunt an organization in the context of making warranty claims, particularly if litigation ensues.

• Were subject matter experts and management kept apprised?

Of course, many incidents or failures have technical, insurance or legal aspects and the right individuals need to be consulted and kept in the loop.

The above list is not necessarily a complete list, but a good starting point for thinking about the issue of warranties and how the needs of individual contracts may affect the warranty language needed. For example, if as part of “resource recovery” efforts your firm sells or donates used equipment or machinery, your firm could be incurring product or other liability. Such sales should be properly covered by appropriate contract language limiting or disclaiming warranty and other liability.

Don’t Be Seduced

As a buyer, you have every right, and indeed the obligation, to negotiate the best possible warranties. Remember the golden rule: “He who owns the gold, rules”. Of course, warranties are in effect a price term. But don’t be seduce into agreeing into ineffective or meaningless warranties by statements like: “We don’t need to write this down”, “We don’t need to have the lawyers review this”, “This is standard industry language”, “We have to use our form of contract”, “You have my word”, “We can work out the warranty details later”, “Our contract doesn’t really mean what it says”, “Don’t worry about that clause, we never enforce it”, or the like. The slang term “gaslighting” comes to mind.

I once had the pleasure of helping a company with the contractual aspects of an SAP conversion. I recall the executive in charge being so pleased with the salesman’s promises, glossy brochures and PowerPoint presentations. According to the executive, this huge transaction was going to be “so easy”. The executive was subsequently so hurt to learn just how very different the seller’s form of contract was from all the fancy promises and puffery. Executives are often prisoners of what they are told or want to hear when it relates to contracts. Anyone, and especially any executive, who is asked to sign a contract should, at a minimum, be aware of how the warranty provisions work and at least know enough to ask the right questions.

It is tempting to assume that nothing will ever go wrong. People seek consistency and will strive at all costs to reinforce existing beliefs. Psychologists have given this phenomenon a complicated sounding diagnosis, namely “cognitive dissonance”. The bias for one’s own information is a mental defense mechanism against uncomfortable thoughts and subconsciously creeps into most peoples’ thinking. The more information you provide that is inconsistent with a person’s preexisting belief, the more likely that person will engage in “motivated reasoning”. They will work hard to develop reasons not to change their mind. Thus, the so-called “backfire effect” whereby instead of adapting or modifying their opinions to reflect new information, people will find a rationale to support their original belief. Guard against cognitive dissonance and work hard to get the best possible warranties you can.

How to Analyze and Negotiate Warranties for Goods and Services is available at: https://www.amazon.com/dp/1973846713/ref=sr_1_1?s=books&ie=UTF8&qid=1505848925&sr=1-1&keywords=warranties+humbert

About the Author

1. Paul Humbert, Esq. is President and Managing Director of The Humbert Group, LLC.
   The Humbert Group, LLC provides consulting services to global clients with particular emphasis on complex negotiations, strategic alliances, process improvement, risk management techniques, project management assistance, training and executive coaching, as well as post-execution contract management including claims and dispute resolution. Paul holds degrees in both business and law and has extensive experience in these matters.

In addition to his full-time work as a consultant for both public and private clients, Paul has a long history of teaching at the college, law school, and graduate school level and is a frequent guest speaker. Paul currently lectures at the Rutgers Graduate School of Business on what MBA candidates with a concentration in supply chain management need to know about structuring and managing complex commercial transactions. Paul is the co-author of three other books dealing with supply chain and contract management optimization: namely, Contract and Risk Management for Supply Management Professionals; Model Contract Terms and Conditions with Annotations and Case Summaries; and Playbook for Managing Supply Chain Transactions. These books have been well received by both the business and academic community.

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