How to build an warranty clause

In this article, we have a look at some of the important aspects that must be kept in mind when drafting warranty clauses.

Most disputed terms WCC ranking: 

14

Most important terms WCC ranking: 

10

Most negotiated terms WCC ranking: 

8

What is the purpose of a warranty clause?

The purpose of a warranty clause is to make certain promises to the other Party regarding the product or services provided and to determine what happens if these promises are not met.

Building blocks of a warranty clause

building blocks of a warranty clause

Type of warranty

Type of warranty

The type of warranties to include will depend on the type of the Agreement.

Here are a couple of examples of warranties that you will find in commercial contracts:

Services warranties

Warranties for Services will be promises generally providing how the Provider must perform the Services.

For example, the parties may agree to reference industry standards or other terms that have been interpreted by case law, such as that the services are to be performed in a timely, professional, and skilful manner.

You can also include more specific Services warranties. For example, the Provider warrants that all personnel have at least 5 years of relevant experience in providing the Services.

Product warranties

Warranties for products and product deliverables should usually address requirements related to the products or product deliverables, such as quality, condition, functionality, quantity, or performance.

Software warranties

Software warranties relating to the licensing of Software differ from where Software is developed for a customer. When you licence Software, typical warranties will include warranties relating to viruses, ownership and non-infringement. When you develop Software, the typical warranties may include warranties providing that the Software will be per the Specifications and that the developed Software will not include certain types of open-source code.

SaaS warranties

With SaaS warranties, you want to include warranties that the SaaS will perform in accordance with the Documentation, there is no infringement of third party IPR rights and that it is free of viruses.

Data protection warranties

Your data protection warranties will generally refer to the obligations created under the data privacy and data security provisions.

Do not put all the warranties together under a single section. You often want to provide different remedies for different warranties, and you may also want to provide different liability caps for breaches of different warranties.

Available remedies

What happens when there is a breach of warranty?

The available remedies will differ depending on the type of warranty. For example, if there is a breach of a Product warranty, the possible remedies may be:

  • replace the product; or
  • repair the product.
 

If there are multiple available remedies, which Party decides which remedy to use?

Often the source of disputes. Make sure you clearly stipulate who may choose which remedy will be used.

Who pays for what?

For example, if the warranty relates to a Product, who must pay the costs to get the product back to the manufacturer?

What happens if it is not possible to implement the remedy?

Typically the Customer will be refunded.

Warranty period and notifications

How long is the warranty valid?

Different warranties may require different warranty periods. For example, warranty periods relating to Products may be longer than those relating to Software. 

From which date will the warranty period be calculated?

Does the period start from the delivery date or acceptance date? It is also possible to provide that the warranty period will start once the Product is fully commissioned.

Are there any notification requirements?

For example, the Customer must notify the Provider that there is a defect before the end of the warranty period.

Exclusions 

Are there any situations that need to be excluded from the warranty? For example, you provide a warranty stating that the Software will perform according to the Documentation.

You want to exclude warranty claims where the Customer modified the Software and wants to claim under the performance warranty. Generally, the wording will only exclude a warranty claim to the extent that the Software was excluded to the extent that the Customer modified it.

Disclaimers

Are there any situations that need to be excluded from the warranty? For example, you provide a warranty stating that the Software will perform according to the Documentation.

You want to exclude warranty claims where the Customer modified the Software and wants to claim under the performance warranty. Generally, the wording will only exclude a warranty claim to the extent that the Software was excluded to the extent that the Customer modified it.

Example clauses

Customer friendly

1.           SOFTWARE WARRANTY

1.1        Warranty:  The Developer warrants that:

(a)          Documentation:  the Software will materially perform in conformity with the Documentation;

(b)          Specifications:  the Software will materially perform in conformity with the Specifications;

(c)          Viruses:  it will use reasonable efforts so that no viruses are coded or introduced into the Software;

(d)          Disabling code:  it will not insert into any of the Software any code which would have the effect of disabling or otherwise shutting down all or any portion of the Software;

(e)          Copyleft licensed software:  the Software does not and will not include software subject to any legal requirement that would restrict right to distribute or otherwise provide the Software, or any modification thereof for a fee, with or without source code or source code rights;

(f)           Infringement:  the Software will be free of any claim of infringement, misappropriation, unfair competition, or violation of any third party intellectual property right; and

(g)          Originality:  the Work Product will be its own original work, without incorporation of text, images, software, or other assets created by third parties, except as consented to in writing.

1.2        Remedies for breach (Software warranty):  If there is a breach under 1.1, the Developer must, at the discretion of the Customer:

(a)          remedy the Software in accordance with the Schedule - Support and Maintenance, and if the remedy fails or is not possible, refund all amounts paid for the Software; or

(b)          replace the Software with software of substantially similar functionality and if the remedy fails or is not possible, refund all amounts paid for the Software.

Provider friendly

1.           SOFTWARE WARRANTY

1.1        Warranty:  The Developer warrants that:

(a)          Documentation:  the Software will materially perform in conformity with the Documentation;

(b)          Specifications:  the Software will materially perform in conformity with the Specifications;

(c)          Viruses:  it will use reasonable efforts so that no viruses are coded or introduced into the Software;

(d)          Disabling code:  it will not insert into any of the Software any code which would have the effect of disabling or otherwise shutting down all or any portion of the Software;

(e)          Copyleft licensed software:  the Software does not and will not include software subject to any legal requirement that would restrict right to distribute or otherwise provide the Software, or any modification thereof for a fee, with or without source code or source code rights;

(f)           Infringement:  the Software will be free of any claim of infringement, misappropriation, unfair competition, or violation of any third party intellectual property right; and

(g)          Originality:  the Work Product will be its own original work, without incorporation of text, images, software, or other assets created by third parties, except as consented to in writing.

1.2        Modification of Documentation:  The Developer may change the Documentation in their sole discretion, provided the functionality of the Software will not be materially decreased.

1.3        Remedies for breach (Software warranty):  If there is a breach under 1.1, the Developer must, at the discretion of the Developer:

(a)          remedy the Software in accordance with the Schedule - Support and Maintenance, and if the remedy fails or is not possible, refund all amounts paid for the Software; or

(b)          replace the Software with software of substantially similar functionality and if the remedy fails or is not possible, refund all amounts paid for the Software.

1.4        Sole remedy (Software warranty):  Section 1.3, in conjunction with the Customer’s right to terminate this Agreement where applicable, states the Customer’s sole remedy and the Developer’s entire liability for breach of the warranty under Section 1.1.

1.5        Exclusion of warranty cover (Software warranty):  The Developer is not obliged to remedy any Software to the extent that the defect arises from or in connection with:

(a)          modification or alteration of the Software by any person other than themselves;

(b)          a breach of the Agreement; or

(c)          the Software is used in a manner or for a purpose not reasonably contemplated by the Agreement or not authorised.

1.6        DISCLAIMER (SOFTWARE WARRANTY):  TO THE EXTENT PERMITTED BY LAW, THE DEVELOPER MAKES NO WARRANTIES, WHETHER EXPRESS OR IMPLIED, THAT THE SOFTWARE WILL PERFORM WITHOUT ERROR OR THAT IT WILL RUN WITHOUT IMMATERIAL INTERRUPTION, OR THAT ANY THIRD PARTY COMPONENTS FUNCTION AS EXPECTED OR INTENDED.

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The Author

Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries. 

He is also one of the co-founders at DocNinja and regularly advises listed companies to small and medium enterprises on how to contract better with their customers. 

Martin Kotze

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