In a previous post called Making Contracts Work for You – Part 1, I wrote about how you can make your contracts useful (to your side of the case) if you are in a dispute. I also wanted to provide you some pointers on the use of warranties, indemnity and insurance provisions.
A warranty is an agreement that the item sold, or some other subject matter related to your contract, conforms to a certain description. The effect of a warranty is a contractual allocation of financial risk if the item sold (or other subject matter of your agreement) does not conform to the specified warranty. A warranty is violated when the thing sold doesn’t satisfy the warranted condition. When this happens, the party who made the warranty is liable to the other party for the cost to repair or correct the issue — without regard to fault. Thus, warranties produce liability without fault, sometimes called “strict liability.” When a warranty is breached, it may also provide a basis for rescission and restitution — this means unwinding the contract.
Including warranties in contracts is an effective way to make sure your assumptions about what you are buying are included in the paperwork. Requesting warranties during negotiation and drafting of documents is a good way to find out whether each party has the same understanding of what is being bought and sold. Signing an agreement that contains warranties that you did not agree to make can produce bad results; likewise, failing to include warranties in an agreement to reflect what has been promised to you is also a bad idea.
Often, a seller will attempt to disclaim liability for any breach of warranties by requesting an “AS-IS” provision. The words “AS IS” and similar terms generally trigger a legally enforceable disclaimer of all express and implied warranties, except for warranties set forth elsewhere in the agreement.
Parties relying on warranties will often want a “survival clause” in the agreement to be sure that any important warranties continue in effect after close of escrow, for example.