Vendor Warranties and the Art of Accountability - Daniel Ross & Associates

At its heart, a contract is nothing more than a series of promises. While agreements to perform and compensate are hallmarks of a contract, other lesser-acknowledged promises, known as representations and warranties, set standards for performance and allocate risk. In this article, we will discuss the indispensable warranties you should demand in any vendor agreement.

Warranties to Include

Authority to Enter into Contract. A vendor’s promise to provide goods that it may or may not own hardly serves your interests. Always secure the vendor’s warranty that it owns the materials it will be providing.

No Liens. Along the same lines, you want to receive goods with no strings attached. Your vendor should promise to provide you with goods that are free and clear of any liens, security interests, or other clouds on ownership.

No Litigation. Just as a lien can tarnish the value of a vendor’s goods, a lawsuit that concerns the goods can also affect the value and validity of what you’ll receive. Make sure the vendor has no knowledge or notice of any such active, pending, or threatened litigation.

Quality of Materials and Workmanship. Quality can vary widely, no matter the goods involved. You should know what quality product your payment will fetch and include minimum standards for raw materials and other technical specifications in the contract. You may also want to have the right to inspect a shipment before accepting it.

Time is of the Essence. Because you will be relying on the vendor’s goods to make your own profit, you need to be sure that you’ll have stock. Keep your vendors accountable by holding them to their delivery deadlines.

Accuracy of Financial Statements. If your vendor relationship is serious you might inspect its financial records. If you do, your vendor should warrant that its financial statements fairly represent its financial condition. You want to be sure that the vendor has the stability to provide you with your goods as promised, especially in a long-term relationship.

Nondisclosure Agreement. Sometimes you’ll need to disclose sensitive or proprietary information to your vendor – a trade secret or a customer list, for example. For your sake and the sake of your customers, the vendor must be placed under a duty not to disclose that information.

Intellectual Property Ownership Statement. If your vendor will be handling any of your intellectual property (product design, branding, etc.), you need to unequivocally assert your ownership of those IP rights.

Long-Term Repair and Replacement Warranties. For warranties to repair or replace that extend more than four years, you must include specific language that the seller warrants the goods to be free from defect and suitable for use for the duration of the warranty; this is necessary to circumvent the UCC 2-725(2)’s statute of limitations for commercial goods.

Indemnification. Your seller should indemnify you for losses or damages that may be incurred because of a breach of any warranty in the contract. Also, be wary of seller-friendly “limitations on liability”: these provisions typically limit a buyer’s maximum recoverable damages to the price paid for the goods and may be disproportionate to their potential for harm if not produced, shipped, or handled correctly.

Bonus: Making Implied Warranties Explicit

Under law, certain types of contracts for the sale of goods carry implied warranties. Instead of retracing the UCC to see if your vendor contract meets the legal criteria for these implied warranties, simply write them into the contract. This way, there is no question as to the warranties’ applicability, and your vendor will have to review and consent to them when signing the agreement.

The two most prominent implied warranties that you should always include in a vendor agreement are:

Warranty of Merchantability. This warranty declares that goods are reasonably fit for the general purpose for which they are sold. By example, if you buy a bicycle its mechanics should get you from point A to point B with a bit of pedal power.

Warranty of Fitness for a Particular Purpose. Through this warranty, the seller guarantees that the goods are fit for the particular purpose for which they are purchased. If you tell your bicycle salesman (or write into your purchase agreement) that you need something that can handle mountain terrain, the model of bicycle provided must be fit to navigate that terrain.

Thank you for your readership and continuing interest in Daniel Ross & Associates. Please reach out to us or post a comment below to continue the discussion.

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