And from your love I have a warranty
To unburden all my plots and purposes
How to get clear of all the debts I owe.
William Shakespeare – The Merchant of Venice, Act 1, Scene 1
We might not love reviewing them or drafting them but a contract warranty does matter. Depending on the context of the transaction and the side they are representing, lawyers will often try to either minimise the number of warranties or include pages and pages of them. The term ‘warranty’ can have different legal interpretations depending on the context in which it is used. It is therefore useful to understand what exactly a warranty is, when it should be used, and what the consequences are of using it.
Warranty under the common law
Under English common law, a ‘warranty’ is a term in a contract that is not an essential term or does not go to the heart of the contract. Breach of a common law warranty only allows the non-breaching party to sue for damages arising from the breach. On the other hand, a ‘condition’ is a core term of the contract. Breach of a condition entitles the non-breaching party to terminate and claim damages. The classification of terms in a contract was examined in England in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  2 QB 26 and more recently in Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 ALR 88
Warranty in a general commercial contract
When used in the context of a commercial contract a warranty is simply a promise by the party giving the warranty that something is true. Examples of warranties in a commercial contract include:
- a party’s capacity to grant rights under the agreement
- the quality of goods and services the party will provide
- the accuracy of statements made by the party
- an obligation on the party to do something
Form of commercial contract warranty
If a party warrants that they will do something or warrants that a certain state of affairs exists, they are contractually binding themselves to do that thing or ensure the state of affairs is the case. A practical example is when acquiring complex goods or services corporate customers will often require the contract to set out as many warranties as possible in relation to the goods or services themselves as well as the supplier’s ability to supply and maintain them. If a party breaches any of the warranties, the non-breaching party will be entitled to claim damages for the loss they have suffered which would put the innocent party in the position it would have been in if the warranty had been true.
Often warranties in information technology contracts specify some of the key contractual terms regarding service standards, descriptions and liability. What many parties fail to realise is that even though a term is expressed as a ‘warranty’, if the term actually goes to the heart of the ICT contract, it will technically be a ‘condition’ and the risk is that if the warranty is breached the innocent party will try to terminate the agreement and claim damages.
Warranty in consumer law
Somewhat confusingly, in consumer law a ‘warranty’ is often understood as a form of stand-alone protection that attaches to product that a consumer purchases. For example, a manufacturer may offer a warranty with the purchase of a new car. If the car is faulty or breaks down within 5 years or 100,000 miles and the consumer has meet all conditions of warranty cover (such as taking the car to the dealer for a check up every 6 months) the manufacturer will repair it free of charge. Effectively, this type of warranty is the contractual promise type in that the manufacturer promises that the product will operate correctly without defects for at least the stated period of the warranty.
Consumer Guarantee Warranty
In Australia there are also ‘consumer guarantees’ available under the Australian Consumer Law. These are similar to the old statutory implied warranties under the Trade Practices Act. The consumer guarantees requires every business providing goods or services to consumers in Australia, whether they are doing business in a traditional high street store or online, to provide consumers with a number of non-excludable guarantees that automatically attach to the goods and services it supplies. The guarantees set out the consumer rights to a repair, replacement or refund as well as compensation for damages and the ability to cancel a faulty service.
I often find that small business are unaware that the consumer guarantees apply automatically and are in addition to and do not replace any extra ‘contractual promise warranty’ offered by the manufacturer. No one can contract out of the consumer guarantees regime – so don’t try to.