Warranties

What are they?

Warranties are usually included in legal agreements of a commercial nature. They are essentially a guarantee or promise made by one person to another relating to the goods, services or assets being bought and sold (e.g. a software service provider may warrant that the software service will comply with all applicable laws and regulations).

Warranties give the party receiving them the right to sue for damages if the warranty is breached and the breach causes loss or liability.

Warranties can be an effective tool to manage/allocate risk between the parties in relation to the goods, services or assets that are being exchanged. However they should be tailored to the transaction not just included as a ‘one size fits all’ solution.

Warranties can be voluntarily agreed or automatically implied by law. They will usually be implied by law where there are broader policy reasons justifying consumer protection (e.g. the Consumer Guarantees Act 1993). The focus of this article is on warranties that are voluntarily agreed.

Warranties need to be carefully considered

The warranties section of an agreement is often overlooked in the rush to get the deal over the line and it is only afterwards that the legal implications are fully appreciated. That can result in one party incurring significant legal risk.

For example:

A seller of a commercial property may give a broad warranty that the building complies with all applicable legislative requirements. Depending on how broadly the warranty is drafted it could extend to earthquake strength compliance and expose the seller to significant liability after settlement if the building is below earthquake strength standard;
A seller of a house may give a market standard warranty that all chattels are in reasonable working order. If a heat pump is not working then the purchaser will have a right to claim damages from the seller for the costs associated with fixing or replacing the heat pump;
A contractor on a commercial build may inadvertently provide a warranty (drafted by the principal) that the building works will be fit for purpose. Since a fit for purpose warranty is not typically an insurable risk in the commercial construction industry the contractor may become exposed to significant liability if the warranty is breached;
It is common for a purchaser of a business to require a warranty that the seller has disclosed all information and facts relating to the business which are or may be material for disclosure to a purchaser of a business. Failure to disclose relevant information about issues or disputes with some customers of the business may give the purchaser grounds for a claim of damages after the sale; and
A software developer may warrant that software will be available to the customer during normal business hours in New Zealand. But if the software relies on a third party web services or API (application programming interface) then there may be circumstances outside the software developer’s control when the software is not available. In that case the software developer is at risk of being sued by the customer for any loss of business the customer sustains because the software is unavailable.

As can be seen from the above examples it is important that warranties (even “market standard” warranties) are carefully considered taking into account the specific circumstances of the transaction. The greater the value of the transaction the more important this exercise becomes.

Some things to consider when giving or receiving warranties

A purchaser will want the warranties to be as broad as possible to cover off all likely risks. It is recommended that the purchaser works through which warranties need to be included in the agreement as ‘deal breakers’ and which warranties fall more into the ‘nice to have’ category and then negotiate accordingly.

A seller on the other hand will want to limit their liability. Depending on the type of transaction a seller should consider:

Qualifying the warranties so that they do not apply to:
- any particular circumstance that the seller wants to exclude from the scope of the warranty (e.g. the heat pump in the example above);
- any matter disclosed in any due diligence materials provided to the purchaser;
- any matter approved by the purchaser; or
- any matter or circumstance known to the purchaser before the date of the agreement
Qualifying the warranties so that they are given to “the best of the seller’s knowledge” rather than being expressed as absolute warranties;
Adding a time limit on claims by the purchaser so that the seller’s liability has an agreed end date (e.g. 12 months from the settlement date); or
Adding a liability cap (e.g. to an agreed percentage of the purchase price) so that the seller’s liability under the warranties is not unlimited.

Final comments

Warranties can be overlooked as part of the fine print but they can have very significant legal implications.

For the seller of goods, services or assets it may be the case that warranties need to be resisted, modified or limited. For the buyer it may be that additional warranties need to be added to address specific concerns. Either way it is important that the warranties are considered as part of an overall risk assessment balanced against the commercial aspects of the transaction.

It is recommended that all parties review any warranties to make sure that they are appropriate and make sense for the transaction. That may involve obtaining legal advice where appropriate before the agreement is signed. If you would like legal advice on warranty matters (or any other aspect of a legal agreement) our commercial team would be happy to assist you.

Disclaimer: this article is general in nature and not intended to be used as specific legal advice.

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