Representations, Warranties And Remedies

Why They Matter To You

By Thomas Hall J.D.

Representations, warranties and remedies are central to the longevity of a contract. If a representation proves to be fraudulent, the agreement may be set aside ab initio – as though it had never existed. If a warranty is breached, the agreement is subject to termination. If remedies are thoughtfully constructed, however, even serious disagreements may be resolved short of termination or, perhaps worse, litigation.

Representations

In legal-speak, a representation is a statement made to induce reliance or action: “Buy the new Acme carburetor because it will deliver 100 miles per gallon of water.” If the carburetor does not live up to that statement – to that representation – you have the right to return it and get your money back.

In the consumer world, the principal is straight forward. If a product does not “work,” we are free to return it for a replacement or a refund. The analysis becomes more complicated in the commercial world:

• Consumer protection laws generally do not apply;

• The terms of the contract may exclude consideration of any representations not set forth in the written document;

• Defining the meaning of “does not work” can be problematic;

• Determining which representations were “material” - which ones were relied upon when deciding to enter into the transaction can be difficult;

• Even if the parties agree on, or the contract defines, the meaning of “work” or “does not work,” is the perceived defect “material” - is it sufficient to set aside the contract?

Consider:

Assume the carburetor delivers only 90 miles per gallon, rather than 100. Is that a material defect? Did you decide to switch to the Acme carburetor because you wanted 100 mpg or because you believed running your car on water would cost less and cause less pollution than using gasoline?

• If you did expect 100 mpg, can you prove that claim was central to your decision?

• If your decision was based on what you regarded as the advantages of water over gasoline, would you have a claim if the carburetor actually “burned” 100 gallons per mile?

• What if the carburetor only delivers the promised mileage when used with a little known and very expensive brand of imported water?

If the deal blows up, your attorney is sure to ask, or at least mutter: “If you wanted 100 mpg of tap water, why didn't you say so in the contract?”

Warranties

A warranty is generally a promise that the product or service will meet certain standards or do certain things, or the vendor will do something about it. Again the concept is familiar in the consumer world: “Try the Acme home nuclear reactor for thirty days. If you are not completely satisfied, return it for a full refund.” In the consumer world, such a solution is clean and simple, but it may not work in the commercial world:

• What if your company needs a reliable source of energy more than it needs the cash back?

• Will a simple cash refund make your company whole for the time lost testing, installing and then removing the Acme product?

• Who will bear the losses you will bear as the result of starting your search over?

• What if the Acme reactor does everything Acme promised, but you cannot connect it safely to your outdated infrastructure?

• What if the final product costs 10% more than Acme promised, and delivers only 75% of the energy you expected?

To further complicate matters, not all warranties are made the same:

• “Vendor warrants that it is duly organized and recognized in accordance with law and possesses all necessary and requisite legal and corporate authority necessary to enter into this agreement.”
  
  While that sentence sounds impressive, it is short on substance. If vendor is not a legitimately organized business, or does not have the proper authority, you could be confronted with significant difficulties, and this sentence provides no meaningful tools to resolve them.

Or

•  “Vendor warrants that the product will perform substantially in compliance with Vendor's published documentation for 120 days after delivery.”
  
  This sentence has its own challenges. What does “substantially in compliance” mean? Does vendor have the right to change the performance standards by changing the documentation? These are questions for another time. For the moment, the question of interest is “What happens if the product does not work?”
  
  If the contract contains just this one sentence, and assuming there is no dispute that the product is defective, you have two options: terminate the agreement and start over or live with the defective product.

Remedies

General contract law provides a standard set of remedies for contract disputes. These remedies are available if the contract itself does not provide any other tools. Unfortunately, these default remedies may not meet your specific situation and most require the time and expense of litigation. However, these are only default remedies; parties are, within limits, free to decide how they will resolve claims of defect, late performance or other disagreements.

For example:

• “Vendor warrants that the product will perform substantially in compliance with Vendor's published documentation for 120 days after delivery. In the event of non-compliance, Vendor will repair or replace the defective product within ten days of receipt of notice of defect.
  
  Taking the time to ask one simple question - “What if?” - and to draft one short sentence yields a concrete remedy short of termination and litigation.
   

• “Acme warrants that its home reactor will produce no less than X kilowatt hours per day, 365 days per year, in normal operation. In the event power output is less than Y% of X, Acme shall provide a refund of Z% of the purchase price.”
  
  “Pay first and get a refund if it doesn't work” is not an ideal remedy, but here it illustrates one way to resolve a potential dispute short of the courthouse. A better course would be to pay most of the money up front, and to tender the balance if and when the home reactor proves itself.

What constitutes a good warranty? It protects the customer from defects or failures that would threaten the value of the contract to the customer. It is a mechanism to help ensure that customer gets what he or she is paying for.

What makes a good remedy? It must be mutually agreed and, to be practical and effective, must protect the interests of both parties. Customers want to ensure they receive true value for their money; vendors want to ensure that they make an appropriate profit.

Summary

Two points are central:

• If certain of vendor's claims are essential to your decision to enter into the agreement, spell that out in the contract. Asserting that “He/she told me X or Y or Z” after the signatures have dried is a long, expensive and often unsuccessful exercise.
• A warranty without a matching remedy is an incomplete mechanism. Taking the time to think through, and negotiate, acceptable solutions may seem tedious and unproductive. It is, however, far faster and efficient than heading to court fill in the blanks in the contract.

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