Warranties are common in commercial agreements, especially where businesses are sold. They can create delay, cost and friction in such situations, so a creative, clear and proportionate approach is advisable.
Contract warranties – what, why, when?
In essence, a warranty is a promise given by one party to another that a given statement or set of facts is true. For example, in a business sale contract, the buyer may only have received somewhat historical accounts and may require a warranty that the accounts position has not materially changed or that information provided is correct. Forward looking warranties are particularly problematic.
This is why it can often be better to seek another solution as an alternative to a warranty. Possible solutions can be deferred payment until certain facts or promises are proved to be accurate or for better disclosure to be made or enquiries made so as to avoid lengthy warranties in a commercial agreement which may prove difficult and expensive to enforce even if they are breached.
Express and Implies Warranties
There are two basic types of warranties; express and implied.
An express warranty, as the name suggests, is a promise expressly made by the seller to a contract. They are usually in writing and specifically incorporated into sale contracts. Express warranties can also be made orally for instance showing a customer a sample of a laptop would be an express warranty as you are assuring the customer that the laptop being sold is of the same description and quality as the sample.
An implied warranty on the other hand arises from the understanding of the buyer and the nature of the transaction itself. Nothing needs to be specially mentioned in writing or orally for an implied warranty to arise; for example if the seller knew the purpose for which the buying was purchasing an item, the buyer would assume that the item would be fit for that specific purpose.
Breach of Warranty
A warranty is breached when a statement or set of facts is untrue. Under such circumstances the only remedy available to the innocent party is monetary damages.
Claiming damages is the most commonly used remedy for breach of contract. As a warranty is a term of the contract, normal breach of contract considerations apply. Therefore a breach of a warranty will only give rise to damages if the buyer can show that:
- there was a breach which resulted in a loss; and
- they mitigated their loss or that the loss was not too remote i.e unforeseen by the parties . In the case of Hadley v Baxendale the principle was established that a loss will not be too remote if is it is direct loss ie the loss flows naturally from the breach or with indirect or consequential loss where the loss could have been reasonably contemplated as a result of the breach.
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