CONTRACTS: CONTRACTUAL WARRANTIES
Study Unit
CONTRACTS: CONTRACTUAL WARRANTIES ~24 min
(A) WHAT IS A WARRANTY? A warranty in a commercial contract is a statement of fact. Warranties are used by the parties to provide assurances to each other about certain things that are secondary to the main purpose of the contract. For example, a party purchasing shares, as well as imposing certain primary obligations on the seller, will probably ask the seller to warrant that he or she paid all taxes due on those shares. The purchaser may also ask for a warranty that no third party has any legal interest (right of ownership) in the shares. If the seller is not prepared to provide these statements of fact, then the buyer is made aware that there may be trouble ahead. The buyer may then decide to offer a reduced price for the shares or even pull out of the negotiations altogether. In short, warranties flush out vital information. If there is a breach of a warranty contract law will provide the injured party with a remedy.
(B) WARRANTIES IN SALE AND PURCHASE AGREEMENTS The principle of ‘caveat emptor’ (‘let the buyer beware’) applies under English law, meaning that the buyer is responsible for checking the quality or fitness for purpose of assets such as goods or shares before a purchase is made. A buyer will therefore be advised by his or her lawyers to obtain as much detailed, factual information as possible from the seller about the condition or status of what he or she is buying before taking the risk of entering into a contract. This information is set out in the warranties of the contract. If it does not appear in the warranties then it may appear in a disclosure letter, the contents of which would be included as part of the agreement. If a warranty proves to be incorrect or misleading after the contract is signed, it means that the buyer need not fear the caveat emptor principle and can now prove to a court that the seller is in breach of a warranty.
(C) TO WARRANT OR TO GUARANTEE? A warranty is not the same thing as a guarantee. A guarantee is a statement that someone or something can be relied upon 100%. A warranty is a more realistic statement because it is an opportunity for the seller to give details about the true, perhaps less than 100% reliable condition of the asset, so that the buyer can decide whether to take the risk of going ahead. For example, I am a retailer buying wholesale goods that use photographic images, and the seller discloses to me that he or she does not have copyright in those images and has failed to get a licence from the person who does have copyright in them. If I have this knowledge and go ahead and buy the goods anyway, I will not be able to sue the seller if I end up in dispute with the copyright holder. This is why lawyers say that warranties are often ‘heavily negotiated’. Naturally, buyers are looking for as much reassurance as possible. However, lawyers acting for a seller are usually very careful to limit the extent of a warranty in order to protect the client from a claim for breach.
For example, let’s say that a party named Blue Frog Tech (BFT), which has created new technology, enters into a licensing agreement with a telecoms company (TC) which allows TC to use that new technology for a term of two years. The lawyers for TC will require BFT to warrant that the new technology is definitely the property of BFT and that TC will not face claims from any third party that its intellectual property rights have been infringed. However, lawyers acting for BFT will warn their client that it is dangerous to guarantee that any new technology is genuinely, 100% ‘new’ and that someone on the other side of the world may have simultaneously created the same thing. They will therefore probably advise their client to warrant rather than guarantee that there is no infringement and then limit the warranty as far as they can. The wording of the clause may be as follows:
‘The Licensor warrants that to the best of the Licensor’s knowledge and belief, the Licenced Technology does not in any way infringe or make any unauthorised use of the intellectual property rights of any third party’.
The licensee’s lawyers may not be satisfied with this warranty, and so the negotiation continues.
Read A opposite and match the following questions with the answers provided in the list below.
1. What is a warranty? 4. Is there another name for an injured party? 2. What does to have ‘a legal interest’ in 5. What is the opposite of an injured party?
something mean?
3. What does it mean if a lawyer ‘flushes out’
6. What does ‘provide a remedy’ mean?
information?
(a) It means to force facts that were previously hidden into a place where they can be seen. (b) It is something that one party declares to the other, which does not create an obligation,but instead reveals important information that allows the other party to calculate the risks involved in entering into the contract. (c) The party in breach or ‘the breaching party’. (d) It means to have some right of ownership in or possession of that thing. (e) It means to provide a solution or a ‘cure’ for a breach of contract, which is often a payment of money, but other solutions are sometimes possible. (f) Yes. If there is a breach of contract this party is sometimes also known as ‘the non-breaching party’.
Read B opposite, which is about warranties in sale and purchase agreements, and complete the following warranty, which concerns the ownership of goods, with a word from the box below.
(a) free (c) thereof (e) property (g) shall (b) infringe (d) therein (f) transferred (h) interest WARRANTY OF TITLE The Seller warrants that it has all right, title and interest in the Goods and all such right, title and interest (1) ….. be (2) ….. to the Buyer (3) ….. of any third party claim and that no third party has any legal (4) ….. whatsoever in the Goods. The Seller further warrants that the Goods and the delivery, use and/or sale (5) ….., will not (6) ….. or misappropriate any patent, trademark, copyright, trade secret or other intellectual (7) ….. or similar right of any third party, including without limitation, patent rights covering the design of any or all of the Goods and the materials contained (8) ….. .
Read C opposite, which is about the limitations that lawyers place on warranties, then complete the following information with a word from the list below.
(a) wary (c) grounds (e) prudent (g) uncertainty (b) completion (d) akin (f) qualify (h) awareness Very often a seller will attempt to (1) ….. a statement of fact provided in a warranty. A qualified statement contains a level of (2) ….. about its own accuracy and is less strong than an unqualified statement. However, lawyers are (3) ….. of giving unqualified statements in contracts because they are (4) ….. to providing a guarantee. It is therefore common to qualify a warranty on the basis of the seller’s level of (5) ….. that what he or she is saying is factually correct. In the 1994 case of William Sindall plc v Cambridgeshire County Council, which concerned the sale of land, the court examined the effect in a warranty of the phrase “so far as the seller is aware there are no easements on the land”. After (6) ….. of the contract an easement was discovered, and the court considered the definition of ‘awareness’ or ‘knowledge’ in warranties of this kind. The court concluded that “knowledge may go beyond what is in somebody’s head, that it requires a solicitor to read his file and to read it properly and to make a reasonable and (7) ….. investigation of the (8) ….. upon which the belief is based”.
Speaking & Writing for this topic
Two short tasks scored against TOEFL rubrics. The prompt is generated for this topic — use the vocabulary you have just studied.