Significant projects and operations usually need something from an original equipment manufacturer (OEM) to make them work.
Whether it’s turbines for power projects or crushers for mining operations, when an OEM supplies its product it will usually offer its standard warranty certificate setting out what remedies the buyer has if the product turns out to be defective.
As a result, when an OEM and buyer negotiate a supply contract, there are often two documents in play: the general terms and conditions of supply and the standard warranty certificate.
If the parties agree to include the standard warranty certificate in the supply contract, inconsistencies between the general conditions of the contract and the terms of the standard warranty certificate can result in neither party getting what they intended.
Some Pros and Cons of Standard Warranty Certificates
From an OEM’s point of view, it is sensible to try to ensure that all buyers of its products worldwide are subject to uniform defects arrangements. Without this uniformity, managing different arrangements with respect to hundreds or even thousands of potential defects claims may be prohibitive.
Also, defects regimes that allow an OEM to repair or replace items that it has supplied are widely recognised as providing OEMs with a benefit as well as an obligation. This is because the OEM can most likely rectify the issues more quickly and cheaply than a third party. It therefore makes sense that the OEM should be afforded the opportunity to efficiently rectify the defect before the buyer is entitled to do so (less efficiently) at the OEM’s expense.
From the buyer’s perspective, it would most likely prefer to have defects rectified by the OEM rather than having a third party do it. The OEM has the know-how, tooling, proprietary information and investment in its reputation to make it best placed to fix issues with its own products. In addition, if a buyer seeks to engage a third party to undertake repairs this may have the effect of invalidating future defects claims against the OEM.
On the other hand, standard warranty certificates pose a number of problems for buyers, including:
Considerations if a Standard Warranty Certificate is included in a Procurement Contract
Parties should reflect on the following considerations when incorporating standard warranty certificates into a defects regime.
Conversely, some contracts provide that once acceptance of a product has occurred, the buyer’s sole and exclusive remedies are those provided in the standard warranty certificate. In these circumstances, once the relevant warranty period has elapsed, defects are at the buyer’s sole risk.
As mentioned above, the governing law and choice of forum for disputes are also relevant to how easily the warranty can be enforced. Occasionally the unhelpful situation can arise where the general conditions of the contract are subject to the laws and courts of one jurisdiction and the standard warranty certificate subject to the laws and courts of a different jurisdiction.
These limitations mean the buyer will have to bear costs and losses that it would probably have been entitled to pass on to the OEM if the buyer had been able to bring a claim for breach of contract.
Under a typical contractual defects regime, if the contractor rectifies a defective product, a new warranty period will commence once the product has been rectified. OEMs’ standard warranty certificates usually expressly state that the warranty period with respect to a product is not extended because a defect in that product had to be corrected.
For equipment affected by seasonal conditions, buyers usually seek a warranty period that is sufficient to ensure the equipment has operated throughout all seasons of the year. Finally, wherever possible, buyers should benchmark warranty periods against published reliability data.
The contractual defect regime applicable to OEMs may be critical to a project’s success. OEMs, fiercely protective of their reputations, often go above and beyond the strict legal requirements of their standard warranty certificates. But it is far better to have an appropriate, negotiated and balanced defects regime. If you need advice on these regimes as either a buyer or OEM, please contact the Thomson Geer Energy & Resources team.
Jeremy Thom | Special Counsel | +61 8 9404 9132 | email@example.com