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Don't Get Stuck Paying for Supplier's Warranty

LAST WEEK, A CLIENT called, pretty distraught, because an owner wouldnt release its retention until the contractor submitted a manufacturers warranty, and the manufacturer wouldnt issue the written warranty (the manufacturer said it had some doubt about the way the item had been installed, with which the contractor disagreed). After looking over all the documents the contract with the owner, the specifications,

LAST WEEK, A CLIENT called, pretty distraught, because an owner wouldn’t release its retention until the contractor submitted a manufacturer’s warranty, and the manufacturer wouldn’t issue the written warranty (the manufacturer said it had some doubt about the way the item had been installed, with which the contractor disagreed).

After looking over all the documents — the contract with the owner, the specifications, the purchase order to the manufacturer — I pointed out to the client that there already was a warranty, whether the manufacturer was willing to send out another piece of paper or not.

A warranty is a representation of fact (“I built this according to the plans and specs”) on which the recipient can rely. In this case, as in most, the owner’s requirement for a warranty is contained in the contract documents. In the project manual, which was included in the bid documents, there was a section that laid out exactly what kind of warranty the owner would accept on this equipment, and it specifically stated that the warranty would only cover equipment installed “in accordance with the manufacturer’s recommended installation procedures.” That requirement was “incorporated by reference” into the contractor’s purchase order with the manufacturer.

Thus, the warranty became part of the manufacturer’s agreement when it accepted the purchase order and shipped the goods, and the owner did not need anything more than it already had to enforce that warranty. The manufacturer did not need to limit the warranty to reflect its concerns about installation, because the warranty wouldn’t cover improper installation anyway. The contractor explained all this to the owner, who finally consented to release the funds.

Now, you have to go through some steps to keep yourself as a contractor from being caught in this squeeze:

  • Make sure that all the owner’s warranty requirements are incorporated into subcontracts and purchase orders.

    Warranties can appear in all sorts of different paragraphs in a contract or project manual, not just the paragraph entitled “warranty.” If you only specifically include one warranty in the subcontract or purchase order, you may be on the hook to honor the other warranties yourself, rather than be able to require the subcontractor or manufacturer to do so.
  • Try to get the owner to be specific about exactly what warranty it wants.

    In the case I mentioned above, my client was helped immeasurably by the fact that the contract that he passed on to the manufacturer was explicit about the warranty. This enabled him to make this a term of the purchase order, rather than something to be negotiated later.
  • Make sure that the manufacturer’s order acknowledgement or other document doesn’t exclude terms other than theirs.

    Manufacturers are generally quite good (much better than contractors, as a rule) about having lawyers draft language that limits their obligations and your remedies for breach of warranty.
  • Consider purchasing an “installation rider” for your insurance policy.

    This would give the owner comfort that there is a source of funds to fix the equipment if it fails due to your installation, rather than an inherent problem with the equipment itself.

What if the owner’s contract merely says that the contractor has to deliver a “manufacturer’s warranty”? Unfortunately, there is not much you can do if the person drafting the contract for the owner won’t tell you what the owner wants. I have seen much time and anguish spent when the owner or its engineer won’t accept the limited warranty that the manufacturer says is its “standard warranty.” If the parties can’t work this out, it could be that a judge, jury or arbitrator would have to decide what the contractor and manufacturer “should have” expected to give, generally by looking at what their competitors typically give to find a “standard in the industry.”

What if the purchase order doesn’t mention the owner’s warranty requirement? Shame on the contractor who let that get by him! Language in a purchase order or subcontract that says the work will be done “in accordance with the contract documents” or other such vague language may not be enough. Obviously, a sentence that specifically referred to the warranty requirements of the owner’s contract would be best, but the tighter the incorporation by reference clause is written, the better an argument the contractor can make later that the warranty is required of the manufacturer.

What if the owner sets out specific warranty terms, but the manufacturer won’t agree to them and will only give its own more limited warranty? If you catch the issue and specifically raise it, and the manufacturer you want to use won’t comply, it would probably be cheaper for you in the long run to use another supplier. Otherwise, you could find yourself in a position like my client was in, with an owner who refuses to release funds, or in the position of having to go out-of-pocket to repair equipment furnished by the manufacturer.

If you can’t get the manufacturer to relent, you might want to ask the owner (before bidding) if it would agree to accept less of a warranty.

I had another client whose customer specified a sole-source pump, but that manufacturer had a very limited warranty. The client was able to get the owner to agree, in writing, that the client’s only warranty obligation was to pass on what the manufacturer would agree to, and otherwise the client was not on the hook. You will have an easier time making this argument if the item is sole-sourced in the contract documents, but if you can show that none of the major manufacturers of the type of equipment required will give the broad warranty demanded, you might be able to persuade the owner or the engineer to cut the requirement back to what is typical in the industry.

Ultimately, when you sign a contract, you become responsible for all the warranties in it. To protect your company, and make sure that the manufacturer is the one responsible for fulfilling the warranty of its product, it will pay off to take the time to sweat the details.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].