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Negotiating Warranty Provisions When Purchasing Capital Equipment

C apital equipment investment is expected to expand in 2016, albeit at a somewhat slower rate than previous years. But even as many equipment sectors are poised for growth, not all US buyers will fully capitalize on available opportunities due in part to a failure to negotiate favorable terms and conditions. Despite the large sums of money and considerable risk involved, many businesses rely on standard form purchase agreements when acquiring equipment, which often limit the buyer’s legal rights and remedies. Buyers should consider the following warranty obligations and remedies when negotiating an equipment purchase agreement:

Know the warrantor’s financial situation

Regardless of how well it is negotiated, a warranty is of little value to the buyer if the warrantor cannot honor the warranty. Consider demanding credit support, such as guaranties or letters of credit, when the financial strength of the supplier is in doubt or unknown.  

Ensure the warranty is assignable

A standard warranty typically benefits only the direct purchaser of the equipment. When appropriate, negotiate terms that permit the buyer to transfer the warranty to subsequent purchasers.  

Identify and address gaps in warranty coverage

Buyers should carefully evaluate each warranty to ensure there are no gaps in coverage. For example, a manufacturer’s warranty typically protects against defects in materials and workmanship during the warranty period. Warranties covering defects relating to installation or maintenance should be addressed in the agreements for those services. During negotiations, make sure applicable warranties cover the equipment during all relevant periods, while also ensuring the warranties’ terms are consistent (e.g., commencement date, scope, and duration).  

Evaluate the conditions for submitting a claim

Prior to submitting a claim to the manufacturer, product warranties routinely require compliance with certain operation and maintenance requirements. For instance, some warranties require maintenance to be performed by an authorized representative. Failure to properly comply with this requirement may result in waiver of an otherwise valid warranty claim. Likewise, any repair or replacement of the equipment without first calling on the warranty may void the warranty entirely. When negotiating the purchase agreement, pay close attention to any conditions for submitting a claim. These obligations may be managed through the operation and maintenance service agreements.

Define the standards for determining defects

Form warranties are often silent on which party determines whether the equipment is defective, the method used to determine defectiveness, and how claims are to be administered. In other instances, a warranty assigns the right to make these determinations to the manufacturer, setting the stage for potential disputes. To avoid a protracted claims process, prior to purchase, negotiate criteria for determining the existence of a defect and how a claim is to be processed.

Specify available warranty remedies

Available warranty remedies are typically determined by the purchase agreement. Typical remedies include repair of the equipment or replacement. In the event of replacement, the warranty should clearly describe the specifications for the replacement equipment. A refund is another common remedy. To avoid a potential dispute on how the value of the refund is to be determined, make clear in the warranty the preferred valuation method (e.g., depreciated value, purchase price, etc.). Another remedy is liquidated damages. Before agreeing to liquidated damages, determine the sum necessary to compensate for a defect or a performance shortfall. The goal when negotiating these terms is to ensure that the liquidated amount covers the actual cost to remedy the defect. In short, negotiate remedies that are appropriate and will make the buyer whole in the event of a defect or a design error.  

Scrutinize limitations of liability clauses

Any clause that limits damages or remedies that would otherwise be available in the event of a defect, such as a liquidated damages clause or exclusivity of warranties, should be carefully scrutinized. These clauses may limit the value of a warranty. While as a general rule these clauses are valid, negotiate warranties with as little limitation on the scope of potential recovery as possible. 

About the Author

Larry DanyAs a Partner at Sutherland Asbill & Brennan LLP, Lawrence (Larry) Dany represents clients in a wide variety of complex commercial, construction, financial services, real estate, and white-collar litigation and arbitration across the country. As part of the Sutherland Construction Industry Practice Group, he represents construction managers, general contractors, industrial contractors, specialty contractors and their surety companies in disputes related to complex construction projects, including breach of contract, change orders, schedule delays, lost productivity, mechanics’ lien issues, payment and performance bonds and insurance. Larry’s practice also involves process safety litigation, occupational health and safety litigation, and industrial and construction workplace incident response. He is a member of Sutherland’s Crisis Management Team.

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