So what is a warranty and why are they used? What are their limitations and how do they work in practice? Here’s a brief guide.

What is a warranty?

A warranty is basically an assurance or promise in a contract, the breach of which establishes a right to claim damages. Warranties are usually considered minor terms (as opposed to ‘conditions’, which are more material) and so breaches will not usually give a right to terminate unless this is expressly stated.

Typically a warranty will take the form of an assurance or promise about past or present facts (e.g. that there are no proceedings pending or threatened which would affect a party’s ability to meet its obligations); a future state of affairs (e.g. that a party will deliver something on a particular date); or a party’s state of mind (e.g. that all statements in a supplier’s tender are to the best of its knowledge, information and belief, true and accurate).

Sourcing and technology-related agreements usually contain numerous warranties. Most will come from the supplier and tend to focus on quality: the use of reasonable skill and care; that goods are of satisfactory quality and fit for purpose; that software will be free from serious defects.

Reciprocal warranties are more common in relation to things like corporate standing, solvency, and the absence of material litigation.

Where the customer is transferring assets, the supplier will usually want warranties about title, condition and the absence of breaches of leases and licenses.

What are warranties used for?

Warranties are useful because they serve to pre-define certain things which the parties agree should amount to contractual breaches. And they’re an important negotiating tool because they help flush out issues which would not otherwise be visisble – a party won’t want to give a warranty unless it can be sure of complying with it.

What are their limitations?

Warranties do have their limitations.  They don’t offer much financial protection because as minor terms establishing a right only to claim damages, they’re more difficult to claim than indemnities (which are recoverable as a debt) or liquidated damages (which are pre-determined monetary sums applying to specified failures). And warranty claims usually hinge on imprecise terms about quality, reliability or efficiency, which makes it harder to prove causation and quantifiable loss (as required by the principles under Hadley v Baxendale).

Also, in line with the general duty for making claims for breach of contract, the claimant must mitigate the effects of the breach of warranty, which may mean recovering less than the actual loss suffered.

How are warranties used in practice?

It has become common practice for warranties to be drafted so that the warranting party “represents, warrants and undertakes ... throughout the term”. This has two consequences. First, it gives the receiving party a potential claim for misrepresentation and breach of contractual undertaking in addition to breach of warranty. This may elevate what would otherwise have been only a minor term to something more akin to a condition, thereby establishing a right to terminate the contract as well as to claim damages. It also extends the warranty beyond a fixed point (e.g. the date of contract signature) so that it becomes an enduring promise for the duration of the agreement (and sometimes beyond).

On the face of it this is useful protection for customers. Suppliers, however, argue that warranties should really only have the status of minor contract terms and not be used in a way which attempts to elevate their importance or extend their reach. They also tend to the view that financial remedies are better agreed up front, in the form of service credits and delay deductions within the contractual performance provisions. By comparison, general damages (the usual remedy for breach of warranty) are intrinsically uncertain and cannot be accurately factored into pricing and risk models. It’s therefore not reasonable to expect suppliers to account for them when tendering. In any event (suppliers will say), breach of the sorts of items covered by warranties are often so serious that they’re more appropriately dealt with under remedial plan and termination provisions.

In practice, the customer will seek as a wide a range of remedies as possible up front but will expect to reduce them in the course of negotiations.