Disclaimer: I am not an attorney and cannot give legal advice. This series is from a supply chain practitioner’s perspective on negotiating contracts and is simply offering my perspective on common contract clauses. Seek professional legal advice for your own contracts.
In our continuing series on contract clauses from a supply chain perspective, last week we talked about product changes and buyer’s property (like tooling or jigs). This week we talk about a clause that is often very contentious – warranty. I also have an example clause for hazardous materials (hazmat).
The example contract clauses and discussions of them below are separated by horizontal dividers to help you switch between them.
Warranty Clauses
14. WARRANTIES
14.1 Seller’s Warranties. Seller warrants that all Products supplied or delivered under this Agreement and the applicable Purchase Orders: (i) shall be free from defects in design, material and workmanship and shall, conform to applicable drawings, specifications, including defects in design and of a quality consistent with Buyer’s specifications and parts per million (PPM) quality levels; (ii) shall be merchantable; (iii) shall be new, and not refurbished or reconditioned; (iv) shall be sufficient in form, fit and function appropriate for the purpose intended for a minimum term of five (5) years from the in-service date of Buyer’s Vehicle at the end customer, unless otherwise specified in Exhibits A and B, whichever shall occur first; and (v) shall be free and clear of all liens, security interests or other encumbrances; and (vi) shall not infringe or contribute to the infringement or misappropriation of any Buyer’s or any third-party’s intellectual property rights. Seller warrants that any services performed in the provision of Products shall be rendered in a good and workmanlike manner by skilled personnel and in accordance with industry standards.
14.2 Sub-Suppliers and Subcontractors Warranties. Seller extends to Buyer any and all warranties received from Seller’s sub-suppliers and subcontractors and agrees to enforce such warranties on Buyer’s behalf.
There are multiple warranty clauses, and this first section outlines the majority of the issue. This clause starts by simply defining what the warranty covers by stating how the part should arrive (free of defects and conforming to the design drawings). It also mentions it should be merchantable/saleable and new. Note that if you have a supplier you frequently purchase refurbished or reconditioned parts from, you may need some more language or even a clause on quality standards for that material.
The really contentious part of this clause is the actual warranty term for the product. The default varies a great deal here based on the product purchased. Some examples of product types and their impact on warranties:
- Large goods with an expected life of thirty years (such as large power transformers, wind turbines or even some plant equipment and off-highway equipment) may carry a seven- or ten-year warranty. I’m always very hesitant to allow warranties less than five years for this type of equipment.
- Distributed materials such as fasteners or small goods purchased from overseas by the distributor typically pass through their manufacturer’s warranty, which might be as much as two years but as short as thirty days. There are a couple schools of thought on how to handle these depending on what your company is comfortable with: 1) Allow the distributor you are contracting with to redline this clause to pass through the warranty, knowing you may have to deal with the manufacturer directly in the case of an issue. Note also you won’t always know the warranty term until there is an issue and you have to go digging. 2) Require the distributor to carry the same warranty for all products and cover any gaps with the manufacturer. An example would be to require a two-year warranty covered by the distributor, where the company never even has to deal with the manufacturer. This is definitely a “risk you pay for” in the form of an increased markup from the distributor. If your company is willing to pay extra markup and you do not have the resources to chase warranty issues, this may be your best route over allowing the pass through warranties.
- Services or contractor work also typically carry a warranty on workmanship for at least a year. Just as with materials, it is important for a supplier to stand behind their labor and workmanship and to make it right if that workmanship causes a failure.
Story time! I once had an attorney who absolutely insisted on a two-year warranty on all products from our largest distributor. That contract took absolutely months to complete as he would not move on the requirement that they cover all products. Finally they agreed if we would raise all prices by 1%. We took this proposal to the business unit and they agreed, wanting to complete the contract. Approximately a year later, our streetlights started turning purple. Some of those lights were technically out of warranty, even though they were fairly new, and the distributor had to cover the gap and the cost of new streetlights. But because they were on the hook for that cost, they were aggressive with the manufacturer and managed to negotiate that the manufacturer cover the cost of the error for all of their customers. Even for the lights that were out of warranty. Because they distributed so many streetlights, they had far more leverage with the manufacturer than our company alone did. The added warranty saved us countless time and replacement costs even with the 1% cost increase.
If suppliers try to lower or reduce warranties, my argument is always that companies should stand behind their products. An attempt to reduce the warranty below industry standards is like saying, “My product is lower quality than my competitors and I’m not willing to stand behind it.” That being said, do your research and know both your current warranties and the industry standards.
The second clause here (14.2) simply extends the warranty to subcontractor work to maximize the warranty value for the buyer.
14.3 Breach of Warranty. If any Product is found at any time to be defective in material or workmanship, non-conforming, recalled, or otherwise in breach of the warranties set forth in this Agreement (a “Breach”), and Seller is found to be responsible, Buyer shall be reimbursed for (a) all labor costs to remove the Product and any other components damaged by the Product from Buyer’s Equipment on or within which the Product was installed and all labor costs to install new Product and other components within Buyer’s Equipment, (b) the original amount paid by Buyer for the Product and for other components damaged by the Product, and (c) twenty-five percent (25%) of the cost of the Product for shipping and handling to return Product to Seller if required by Seller. Seller can avoid the shipping and handling charge in sub-clause (c) if Seller does not require the return of the Product or allows Buyer’s distributor or customer to ship Product, freight collect, directly to Seller.
This clause outlines what happens if material under warranty is not up to the standards set in the first clause. There are frequent variations on how much is covered beyond the core cost of the product, in this case the clause starts with including 25% of the product cost to cover shipping and handling if the buyer covers those arrangements. I have also seen clauses that include the labor required to replace the product, such as when purchasing equipment with a complicated installation process. This clause should cover the full cost of the product to replace at least, but consider what else it should cover. If the labor to install the product costs more than the product itself, that labor should be covered.
14.4 Warranty Claim Procedures. All Product claims will be initially entered according to Buyer’s then current warranty practice for Seller to manage their respective Product(s). Seller shall be responsible for responding to these Product claims. Any warranty claims not settled within forty-five (45) days from date of notice by Buyer to Seller are subject to debit or setoff by Buyer against Seller’s account.
This clause simply puts some “teeth” in making sure the supplier responds to a claim promptly. This usually doesn’t prompt redlines from suppliers, although I could see the timeline changing or the “action” changing. The supplier may not allow an automatic debit or setoff and instead require the buyer to go through the process.
14.5 Survival of Warranties. The foregoing warranties of Seller shall survive any delivery, inspection, acceptance or payment of or for Products purchased by Buyer and the termination of this Agreement. Buyer’s approval of Seller’s samples or first articles shall not be construed as a waiver of specifications and/or other referenced descriptions applicable thereto or of any express or implied warranty. The warranties provided under this Agreement are cumulative and in addition to any other warranty provided by law or equity. All of Seller’s warranties shall run collectively and separately to Buyer, its successors, assigns, customers, agents and representatives. Any applicable statute of limitations runs from the date of Buyer’s discovery of the noncompliance of Products with the foregoing warranties. In the event Seller is required to replace or correct any Product pursuant to a Breach of the foregoing warranty, the running of the warranty period for the Product shall be suspended from the date Seller receives notice of the Breach of warranty until the date the Product is replaced or corrected.
This last warranty clause ensures that warranties are still in place, even if the agreement itself has ended. This ensures the buyer receives the full value of the warranty regardless of circumstances of the buyer/seller relationship.
Hazardous Material (Hazmat) Clause
15. HAZARDOUS PRODUCTS
In the event either Party becomes aware of any information that reasonably supports a conclusion that a defect may exist in any Product and the defect may cause death or bodily injury to any person or property (a “Hazard”), the Party becoming aware of this information shall immediately notify the other Party of the Hazard. In all events, notification to the other Party shall precede notice to any governmental agency, unless required by law. The Parties shall promptly exchange all relevant data and meet to review and discuss the information, tests and conclusions relating to the Hazard. At this meeting, the Parties shall discuss the basis for any action, including a recall, and the origin or causation of the Hazard. Each Party shall, on request, provide to the other Party reasonable assistance in (a) determining how best to deal with the Hazard; and (b) preparing for and making any presentation before any governmental agency which may have jurisdiction over Hazards involving Products. If the Hazard is caused by Seller, Seller shall bear all costs and expenses associated with resolving the problem. Buyer shall be a direct beneficiary of all Hazard remedies and shall have the right to enforce such remedies directly. The provisions of this Section shall survive termination of this Agreement.
This clause is not needed in all contracts, it simply happens to be in this one. Not all companies deal with hazardous materials as a matter of course, so the hazmat clause is a bit of a niche clause. For this template, we were purchasing hazardous material from overseas frequently and importing it to the US, so a lot of this is to simply bring the overseas supplier up to speed on the US requirements. It will be up to you and your legal team if a clause like this one is needed or relevant.That wraps up this week’s deep dive into contracts. Next week we will talk about two clauses with a lot of “meat” to them: training and insurance. If you’d like to talk to me about your company’s contract clauses, let’s chat.