This article has been written by Hemal Shah, pursuing the Diploma Programme in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

In layman’s terms, a warranty clause is a presentation of them specifying that something is true or the services and the products are true to the description mentioned. This clause may have more than one interpretation in contract law, and it appears to be one of the most confused. Now there’s enough confusion on the warranty and its importance in the different clauses. It is pertinent to mention here that the warranty is not only for the consumers and exclusively related to the products, but it’s also for industries relating to the Mergers and Acquisitions and Construction, it plays a large role in the energy industry as well.

A warranty is a guarantee from one party to the other party in business and legal contracts that certain facts or circumstances are valid or may happen. If the warranty is broken, the person that buys the goods is entitled to rely on the warranty to seek legal action. There is an express or implicit warranty or both. The purchaser of a particular item or property shall, in such situations, expressly guarantee the accuracy of the goods obtained. The legislation means an assurance in such cases where no explicit warranty has been made. For the purchaser, both offer legal relief. Warranties are rendered concerning real estate, insurance, and purchases and leasing of goods and services, aside from products.

Express and implied warranties 

A warranty is protected for most customer transactions, even though it is not specifically specified as such. Express and implicit guarantees are the two main forms. An express warranty is one that is either orally or in writing explicitly specified (or ‘expressed’), while an implicit warranty automatically protects certain consumer products priced more than a certain price, but instead provides customers with a specific degree of security.

Express warranty

An express warranty will take several different types, whether spoken or written and is simply a promise that a certain degree of consistency and durability will be fulfilled by the product. If the product fails in this respect, the producer shall, at no extra expense, patch or substitute the component. Many such warranties are printed or made available as an alternative on a product’s packaging.

A verbal express warranty may be as straightforward as a car dealer telling a client, “I guarantee that this engine will last another 100,000 miles.” If the vehicle fails to live up to this assertion, the buyer will take it up with the seller (although it is very difficult to prove the validity of a verbal warranty). If the car fails to live up to this claim, the buyer may take it up with the seller.

Other promises can be rendered on paper, but they do not always appear like conventional guarantees. For example, on its packaging, a light bulb manufacturer prints the words “lasts 15,000 hours” The words “guaranteed” or “warranty” do not appear, but this assertion is an express promise nevertheless.

Implied warranty 

The bulk of customer transactions are protected by an implicit merchantability warranty, implying that it is expected to operate as stated. For example, a vacuum cleaner that does not produce adequate suction to clean an average floor violates the implied merchantability warranty. 

The litmus test for the merchantability of the product:

• They shall comply with the trading requirements applicable to the distribution deal.
• They must be suitable for the uses for which such items are generally used even though they are otherwise ordered for use by the customer.
• In terms of consistency and quantities, they must be uniform under the tolerances of the contract for sale.
• They must be packed and numbered according to the sales contract.
• They must conform with the requirements on the labels of the box, even though the contract of sale does not define them in that way.

Explanation of warranty under Indian law

The contracts are such contracts relating to products or services that count as ‘Goods’ under the Sale of Goods Act, 1930 (‘SOGA’). Under its structure, the SOGA describes the term ‘warranty’. Warranties under the SOGA are defined as a provision, a promise for the main purpose of the contract, meaning that warranties are clauses that do not impact the essence of the contract and are in a certain way secondary to the main purpose of the contract.

In the case of the General Insurance Co. of All India Ltd. and Anr. v. S.P., the Madras High Court accepted the two separate terms and the disparity in the recourse for the violation of each of them. “The duty of disclosure comes under two heads, viz. I represent and (ii) warranties: representations which are made the basis of the contract and those which do not constitute the basis of the contract of insurance. “Two heads are responsible for disclosure, i.e. I representation and (ii) guarantees representations made based on the contract and those which do not form the basis of the insurance contract”

Due diligence taken by the buyer: does it dilute the warranty onus?

Interestingly, the Contract Act states that – If consent was caused by misrepresentation or by silence, fraudulent within the meaning of Section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence”

In World Sport Group (India) Pvt. Ltd vs The Board of Control for Cricket in India the Bombay High Court observed that the mere placing of a document on record of a company, society, or other such organisation does not lead to the conclusion that every officer thereof had the means of discovering the truth merely under the document being on the records. It was surmised that what constitutes ordinary diligence must depend on the facts of each case.

Further, in New Hearts Ltd v. Cosmopolitan Investments Ltd, the share purchase agreement incorporated a clause which stated that: “It is hereby agreed and acknowledged by the parties that the Warranties (. . .) are given by the Vendor subject to matters fairly disclosed (with sufficient details to identify the nature and scope of the matter disclosed) in the Disclosure Letter in respect of which matters the Vendor shall have no liability to the Purchaser.” It was held that merely providing documents that might bring the purchaser’s attention to a matter was insufficient and that the particular breach must be expressly brought to the attention of the purchaser.

Given the above, irrespective of whether a buyer has performed thorough due diligence, the awareness that matters beyond the disclosure letter can often count as assurances may well undermine the recourse of the buyer under the Contract Act.

Ideal warranty clause ingredients

• The party has the legal right to perform those activities as mentioned in the Agreement in the form of services to be provided.
• It has capabilities and all the essential licenses to perform those activities as requested.
• The products produced by the party shall be free from all the defects and shall not infringe any third-party rights for the same. (In case, if it’s a supply and manufacturing agreement)
• The services or the products shall be in line with the laws of the country and in case of any changes, will be informed to the other party at the earliest.
• In case the products are manufactured or packaged, labelled, and handled, they shall be done as per the Legal Metrology Act, 2000. 
• There is no impairment on part of the party to enter this Agreement and by entering into a part of this agreement, no infringement of the third-party rights is been taken into consideration.
• All the statutory legal formalities and procedures are duly completed and there is nothing incomplete on the part of the party for its legal obligation.

Wrongful representation and warranty: punishment

Although typically under a lawsuit brought out of wrongful induction by misrepresentation, the courts have granted damages that are purely restitutory, but in situations when the wrongful representation and warranty is related to the success of a contract, the court can grant compensation based on Section 75 of the Contract Act that requires a party to rightfully terminate a contract. Where liability is awarded, the courts shall apply the rules laid down in Section 73 of the Contract Act, which enable a party to claim immediate and indirect damages suffered during the execution of the contract. Therefore, before making any claims and warranties, promoters and sellers must be extremely vigilant since they might be liable for penalties in addition to losses that are only restorative.

Conclusion

There is not one criterion to follow for the warranties, be it express or implied, and it differs from one business to another. The parties need to comply with the given set of warranties and at the same time, it is equally important for the service receiver to read the terms and conditions carefully along with due diligence if any. Daily, we all use those implied warranties. You rely on those implicit assurances any time you eat out at a restaurant or fast food place and don’t get ill from contaminated food or buy oil for your vehicle that works to lubricate your car engine, and they are vital to the degree of faith and dependency on business transactions that is so much a part of human life that it is taken for granted.

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