A product or service warranty (also known as guarantee) is a promise, from a manufacturer or seller, to stand behind the product or service. It is a statement about the integrity of the product and about the seller's commitment to correct problems should the product or service fail. Product and service warranties have become standard practice in most U.S. industries, although opinions vary somewhat regarding their impact on sales. But misleading language in these guarantees has the capacity to spark significant legal troubles for small businesses that run afoul, however inadvertently, of legal guidelines. Consumers can ask the courts to enforce warranties, whether they are express, implied, written, verbal, or given in any other way. Federal, state, and local government entities establish the regulatory basis upon which warranties are judged. The Federal Trade Commission (FTC) is the ultimate arbiter of warranty law in the United States. The FTC's primary tool in monitoring product and service guarantees is the Magnuson-Moss Consumer Warranty Act.
The law recognizes two basic kinds of warranties—implied warranties and express warranties.
Implied warranties are unspoken, unwritten promises, created by state law, that go from the seller or merchant to the customers. Implied warranties are based upon the common law principle of "fair value for money spent." The Uniform Commercial Code (UCC) provides for two basic types of implied warranties that occur in consumer product transactions. They are the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. The "implied warranty of merchantability" is a seller's basic promise that the goods sold will do what they are supposed to do and that there is nothing significantly wrong with them. In other words, it is an implied promise that the goods are fit to be sold. According to the law, merchants make this promise automatically every time they sell a product they are in business to sell. By contrast, the implied warranty of "fitness for a particular purpose" is a promise that a seller makes when the customer relies on the advice that a product can be used for some specific purpose. For example, suppose a woman comes to an office supply store and asks for a printer that is able to print 1,000 sheets of paper per hour. If the office supply company recommends a particular model, and the customer buys that model on the strength of this recommendation, the law says that the office supply company has made a warranty of fitness for a particular purpose. If the printer recommended proves unable to produce 1,000 pages per hour, even though it may effectively print 800 pages an hour, the implied warranty of fitness for a particular purpose is breached.
Unlike implied warranties, express warranties are not automatically a part of the sales contract based on state law; rather, they are explicitly offered warranties. They are promises and statements, made voluntarily by the seller or manufacturer, about a product or service and about the commitment to remedy defects and/or malfunctions that the customer may experience. Express warranties can take a variety of forms, ranging from advertising claims to formal certificates. An express warranty can be made either orally or in writing. While oral warranties are important, only written warranties on consumer products are covered by the Magnuson-Moss Warranty Act.
The Federal Trade Commission requires that written warranties bestowed in connection with the sale of a product or service explicitly detail the following information:
The Magnuson-Moss Act does not require businesses to provide warranties to customers. Indeed, some business owners decide that written warranties are not even necessary to enjoy success in their chosen field of endeavor. But other manufacturers and retailers are convinced that warranties help sell their products, pointing to the popularity of service contracts and the like.
Businesses that choose to provide written warranties may choose from two types: full and limited. FTC regulations concerning full warranties are considerably more stringent than those that apply to limited warranties. According to the Magnuson-Moss Act, "fully guaranteed" products or services must meet the following five criteria:
Limited warranties, which must be prominently labeled as such, limit the liability of the manufacturer or service provider. A limited warranty may offer to replace defective parts free, but only do so for a limited length of time, or require that the consumer ship the product to a manufacturer-approved service center. The distinctions between full and limited warranties and the obligations of manufacturers to honor them vary from state to state, so it is up to the consumer to carefully read the literature and understand what is covered before the purchase.
Vulnerability to express and/or implied warranties can be reduced somewhat through the use of disclaimers. A disclaimer is a means of denying that you are making one or more express or implied warranties. In the absence of a disclaimer, a breach of warranty will often give the purchaser of the faulty item the right to recover the cost of the item as well as additional damages caused by that breach of warranty.
Small business consultants note that warranties—both express and implied—can be negotiated with buyers, but they urge business owners to use specific language when adding such disclaimers to a sales contract. The term "exclusive remedy," for instance, can give a seller of products or services significant legal protection when it is used to explicitly limit a buyer's legal options in the event of complaints about product defects or workmanship. If, however, the customer is left without a working product, the seller may be sued no matter what agreement was signed, on the grounds that it's a remedy that "fails of its essential purpose." Obviously, the obligations imposed by law in the areas of warranty are extensive, so small business owners should make sure that they consult a legal expert so that they can develop the most effective disclaimer possible.
Extended warranties are somewhat controversial, but often profitable, warranty packages offered by manufacturers and service providers. Manufacturers sell these warranties, which are basically extensions of basic warranty packages, in hopes that the extended warranty will not be needed or used, thereby resulting in profits. Consumers buy them for peace of mind, reasoning that they are protecting their initial outlay of money. The controversy revolves around what the warranties cover. Some extended warranties are actually service agreements, resulting in higher charges than might be expected under a warranty. In other cases the fine print in the warranties exclude the very things that the consumer assumes would be covered.
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U.S. Department of Commerce. Federal Trade Commission. "A Businessperson's Guide to Federal Warranty Law." Available from http://www.ftc.gov/bcp/conline/pubs/buspubs/warranty.htm. Retrieved on 8 May 2006.