A product or service warranty (also known as a guarantee) is an assurance of performance and reliability given to the purchaser of a product or service by the company that provides that product or service. Such 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. As the magazine Profit-Building Strategies for Business Owners noted, "consumers and business buyers alike can ask the courts to enforce warranties, whether they're express, implied, written, verbal, or given any other way. So be careful not to overstate your case. In addition to a printed warranty, watch your ads and brochures and keep tabs on your salespeople." Most warranties are covered by local, state and federal laws. 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 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:
"If you're reading to stand by those assurances," said Profit-Building Strategies for Business Owners, " 'fully guaranteed' accurately describes your conditions of sale. But if your policy falls short in any way, you can be penalized for making that claim when you're really making a 'limited warranty.' " 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 for free, but only 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.
"Express warranties arise from statements you make about a product or service, from a picture, sample, or brochure, while implied warranties arise by automatic operation of law," wrote Marc J. Lane in the Legal Handbook for Small Business. "Although the Magnuson-Moss Consumer Warranty Act supersedes state laws regarding express warranties in the sale of products, it does not supersede the Uniform Commercial Code (UCC) provisions on implied warranties or state laws applicable to express warranties in the sale of services." The provisions of the UCC, which cover all products, basically stipulate that products should look like they do in advertisements, and perform as they do in demonstrations, so express warranties vary in accordance with the nature of the advertising campaign launched on behalf of that product or service
In addition, states require that the manufacturer or seller of a product offer an implied warranty—some sort of guarantee that the product will work as advertised once it is out of the box and that it will work under ordinary circumstances in the manner that its manufacturer says it will. This implied warranty is known as the "implied warranty of merchantability." A second implied warranty—known as the "warranty of fitness for a particular purpose"—is described by Profit-Building Strategies for Business Owners as a warranty that "provides assurance that your product will do the job buyers have in mind, assuming they've explained their purposes to you…. Your degree of vulnerability to legal claims depends in part on how clearly buyers explain what they want and in part on who they are. If you're a supplier of institutional dinnerware, your customers are expected to have enough knowledge and sophistication to judge fitness of purpose for themselves. They'd need a strong case to prove you sold them the wrong dishes for their needs. But regular customers can't be expected to know much about various kinds of dinnerware, or even the right questions to ask. So with them you're more accountable." The length of time that these implied warranties are in effect varies from state to state.
DISCLAIMERS Vulnerability to express and/or implied warranties can be lessened somewhat through the use of disclaimers. "A disclaimer may wholly deny that you are making one or more express or implied warranties, or it may limit warranty coverages," wrote Lane. "In the absence of a disclaimer, a breach of warranty will usually give a purchaser of the item the right to recover the cost of the item together with any additional damages caused by that breach."
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. "But take care also to see that the buyer receives genuine protection," noted Profit-Building Strategies for Business Owners. "If your customer is left in the end without a working product, you can be sued no matter what agreement you 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.
Hollis, Aidan. "Extended Warranties, Adverse Selection, and After markets." Journal of Risk and Insurance. September 1999.
Lane, Marc J. Legal Handbook for Small Business. AMACOM, 1989.
Lewis, Jeff. "Extended Warranties Help Pay the Bill." HFN: The Weekly Newspaper for the Home Furnishing Network. April 27, 1998.
Pratt, Eddy. "Will the Digital Surge Bring Happier Times for Extended Warranties?" ER Magazine. August 2000.
"What You Promise the Buyer When You Warranty Your Product." Profit-Building Strategies for Business Owners. January 1992.