When things break down: contract conditions versus warranty certificates

Significant projects and operations usually need something from an original equipment manufacturer (OEM) to make them work.

Whether it’s turbines for power projects or crushers for mining operations, when an OEM supplies its product it will usually offer its standard warranty certificate setting out what remedies the buyer has if the product turns out to be defective.

As a result, when an OEM and buyer negotiate a supply contract, there are often two documents in play: the general terms and conditions of supply and the standard warranty certificate.

If the parties agree to include the standard warranty certificate in the supply contract, inconsistencies between the general conditions of the contract and the terms of the standard warranty certificate can result in neither party getting what they intended.

Some Pros and Cons of Standard Warranty Certificates

From an OEM’s point of view, it is sensible to try to ensure that all buyers of its products worldwide are subject to uniform defects arrangements.  Without this uniformity, managing different arrangements with respect to hundreds or even thousands of potential defects claims may be prohibitive.

Also, defects regimes that allow an OEM to repair or replace items that it has supplied are widely recognised as providing OEMs with a benefit as well as an obligation.  This is because the OEM can most likely rectify the issues more quickly and cheaply than a third party.  It therefore makes sense that the OEM should be afforded the opportunity to efficiently rectify the defect before the buyer is entitled to do so (less efficiently) at the OEM’s expense.

From the buyer’s perspective, it would most likely prefer to have defects rectified by the OEM rather than having a third party do it.  The OEM has the know-how, tooling, proprietary information and investment in its reputation to make it best placed to fix issues with its own products.  In addition, if a buyer seeks to engage a third party to undertake repairs this may have the effect of invalidating future defects claims against the OEM.

On the other hand, standard warranty certificates pose a number of problems for buyers, including:

• they are often imprecisely drafted and are sometimes literal translations into English using non-contractual language and sometimes even referring to legal concepts not recognised in Australia;
• they place parameters around the OEM’s liability for defective products – often far more restrictive than a standard contractual defects regime;
• they may be governed by the law of, and subject to the courts of, a non-Australian jurisdiction, making them difficult and costly to enforce; and
• while purporting to deal only with defects, they often contain provisions (such as exclusions of indirect losses) that cut across the general conditions of the contract and significantly change the risk allocation between the parties.

Considerations if a Standard Warranty Certificate is included in a Procurement Contract

Parties should reflect on the following considerations when incorporating standard warranty certificates into a defects regime.

• Exclusivity of remedies – Usually, a defect is a breach of contract and gives rise to a claim for damages. For example, if an OEM has agreed that the product supplied is fit for purpose, the OEM’s liability to the buyer will likely be much wider than what is set out in the standard warranty certificate.  In these circumstances, the buyer will usually be able to bring a claim for breach of contract at any time until the claim is barred by relevant limitation legislation (typically six years after the breach).

Conversely, some contracts provide that once acceptance of a product has occurred, the buyer’s sole and exclusive remedies are those provided in the standard warranty certificate.  In these circumstances, once the relevant warranty period has elapsed, defects are at the buyer’s sole risk.

• Enforcement – Standard warranty certificates seldom contain binding timeframes within which the OEM has to rectify a defect. Parties should consider what happens if the OEM will not, or cannot, respond to a defect claim.  In particular, if the OEM is not required to continue to warrant any third party rectification works, buyers should consider if they have any effective remedy at all.

As mentioned above, the governing law and choice of forum for disputes are also relevant to how easily the warranty can be enforced.  Occasionally the unhelpful situation can arise where the general conditions of the contract are subject to the laws and courts of one jurisdiction and the standard warranty certificate subject to the laws and courts of a different jurisdiction.

• What is not covered – Typical exclusions of liability from standard warranty certificates include:
• damages for downtime;
• labour costs;
• third party components and services;
• travel costs; and
• the costs of transport to and from site.

These limitations mean the buyer will have to bear costs and losses that it would probably have been entitled to pass on to the OEM if the buyer had been able to bring a claim for breach of contract.

• Duration – OEMs will often seek to have the warranty period start as soon as delivery takes place and continue until a fixed end date or (if earlier) a specified number of usage hours being reached. This is undesirable for buyers as it means that if a project is delayed and the OEM’s product is being securely stored on site, the warranty period is nevertheless running down.

Under a typical contractual defects regime, if the contractor rectifies a defective product, a new warranty period will commence once the product has been rectified.  OEMs’ standard warranty certificates usually expressly state that the warranty period with respect to a product is not extended because a defect in that product had to be corrected.

For equipment affected by seasonal conditions, buyers usually seek a warranty period that is sufficient to ensure the equipment has operated throughout all seasons of the year.  Finally, wherever possible, buyers should benchmark warranty periods against published reliability data.

Conclusion

The contractual defect regime applicable to OEMs may be critical to a project’s success.  OEMs, fiercely protective of their reputations, often go above and beyond the strict legal requirements of their standard warranty certificates.  But it is far better to have an appropriate, negotiated and balanced defects regime.  If you need advice on these regimes as either a buyer or OEM, please contact the Thomson Geer Energy & Resources team.

Author

Jeremy Thom | Special Counsel | +61 8 9404 9132 | jthom@tglaw.com.au

‍