Tuesday, July 10, 2012

Different or unique requirements or terms

In another forum someone mentioned that a customer was asking for “unrestricted” warranties be provided them for equipment suppliers that were used by a contractor. Anytime someone asks for a term that is unique or different you should always take the time to understand what the term means and what the impact would be. When there are three parties to the equation and you are standing in the middle, you also need to consider what you are getting from the supplier versus what you are committing to the customer as any difference in those commitments become your responsibility.

I've never heard of an un-conditional warranty and my feeling is a contractor would be crazy to agree to it as manufacturers always include conditions on their warranties. Those conditions are restrictions. For example, they will always include a time limit during which their obligation to repair or replace the product at no cost will end. The reason for that is simple, the vast majority of product will not last forever and failures will occur over time and usage. The longer the usage, the higher the statistical probability the item will fail. Products are also designed to work within defined operating tolerances, so if a customer uses the product outside those operating tolerances they may either cause the product to fail or they may be accelerating wear to the product that will cause a pre-mature failure. In addition to tolerances most suppliers want to make sure that they will not be responsible for providing warranty replacement if the customer abuses, mis-uses, fails to maintain or service the product, or has performed unauthorized modifications or repairs to the product as all of those can cause the product to fail or wear out pre-maturely.

If a contractor agreed to an unrestricted warranty, they would be assuming all the risks of any difference between what they get from the supplier / manufacturer versus that unconditional commitment. The more common practices are to either simply pass through whatever warranty the manufacturer provides. An alternative is the customer needs to specify the specific warranty they require so the contractor can try to get those from the suppliers. If they can’t, the contractor has several options. One is they can seek to limit liability for those suppliers to only what they can recover from them. The second option would be to determine the risk of any difference and include a contingency for those risks into their contract price. The third option would be to walk away if you simply couldn’t manage the potential risk and costs.

Always take the time to understand what any unique or different term means and the impact it would have. Don’t just read the words, always put it into perspective with different examples as that will help identify if it works or doesn’t or whether it works in all situations. Don’t assume you know the answer.

Rights, waivers of rights and lapse of rights.

Individual contract rights are established in the contract. Some rights be subject to pre-conditions to establish them and others may be ended by a condition subsequent occurring. When it comes to contract rights, once you have them, they exist until either a condition subsequent occurs that would end the right or you waive them. You may waive a right or you may lose rights by not enforcing them. For example if you fail to exercise a right, by your inaction you may have waived that right and could be prevented from enforcing it in the future under what is called “promissory estoppel”.

A well drafted contract will include “waiver” clauses that do two things. First, they require that a wavier be made in writing. They may also require that only authorized persons may agree to waive a right. That is to protect against the failing to act constituting a waiver. Second they state that a waiver in one instance, does not waive that right in future instances. For example, if you don’t claim remedies for one late delivery, in doing so you are not giving up the right to claim remedies for future late deliveries.

An example of a condition-precedent would be if you were required to provide a notice for a potential claim for additional monies and extension of time, and the contract required that timely notice as a pre-condition for the right to make the claim. If you failed to meet the notice requirement, you failed to meet the pre-condition and you would not have established the right to make a claim. I would avoid rights being preconditioned by notices.

A good example of a condition subsequent is options included in a contract. Those options are rights. When those options have a date by which they must be exercised, if you failed to exercise them by that date, those rights no longer exist. The failure to exercise those rights by the specified date will cause them to lapse. The exercise date functions as a condition subsequent to the right causing it to end.

Everyone that has studied contract law knows that if a party has made an offer that requires it to be accepted by a specific date and acceptance has not occurred by that date, the offer will have lapsed. Legal rights may lapse. For example claims that are not filed within the applicable “statute of limitations” for that type of claim will extinguish the right to make those claims. Many laws and regulations have specific periods or dates by which something must be filed. If it hasn’t been filed by that date, then right to file it has lapsed. For example if you receive a new tax assessment on your property and have ninety days from the date of that notice to contest that assessment, if you fail to meet that requirement, your right to contest the assessment will have lapsed for that assessment.

I had someone ask men about rights to make claims for either an extension of time or a payment for extra costs? Does the failure to do those within the contract time period allowed, cause those rights to lapse or be waived? Like every question about contracts, that would all depend upon what the contract says. If you had language in the agreement that 1) established a specific time period in which the party must give notice and 2) stated that the failure to give notice within that time period constituted a waiver of their right to make a claim for that qualifying event, then failing to provide that timely notice would waive that right. If you didn't have the language that establishes the failure as a waiver, you may have breached the obligation of timely notice but that would only be a minor breach, and its unlikely the other party would have taken any action relying upon that where they could argue promissory estoppel. So the right wouldn't have been waived.

What if the contract had language that required timely notice of a claim as a pre-condition for establishing the right to make the claim? If you failed to provide the timely notice technically the condition to claiming additional monies and an extension of time hasn’t been met. Not all may be lost
if you didn’t. You would need to understand how the specific jurisdiction deals with the issue of penalties. If penalties are not allowed by law, such language could be considered a penalty as it would unjustly enrich the other party by an amount far greater any actual damage they would have sustained as a result of the failure to meet the required notice requirement.

In contracts, as a Buyer it’s always best to not have rights that would apply to you to be established on meeting a notice pre-condition. For example the right to make a claim for an extension of time or additional compensation should have the right established by several preconditions. Either the other party changed the scope of the work, or the other party or entities controlled by them failed to act within the agreed period or by the specific date. Once either of those conditions exists you have established the right to claim for additional monies or an extension of time. If the contract provides rights to the other party if you fail to act within the specified period or date, always spell out what the remedy will be if there is a failure to comply with that time period. Do not leave it open-ended. For example compare these two provisions dealing with the submission of claims for payments.

“Supplier will in no case submit invoices, corrected invoices, or other such claims for reimbursement, to Buyer more than one (1) year after the inspection, test or acceptance of Products or the satisfactory completion of Services unless specifically authorized or requested by Buyer.


Within twelve months after the acceptance of the Product or Service, Supplier shall submit all invoices, corrected invoices, or other claims for reimbursement to Buyer. Supplier understands and agrees that the failure of the Supplier to submit the invoices, corrected invoices or claims within this period shall constitute a waiver of its right to claim reimbursement.

In the first example you have told them what that can’t do, but you have not identified what the remedy would be if they breach that. In the second example you have made it clear that in failing to submit claims for payment within the specified period they are waiving their right to payment of any amounts not previously invoiced or claimed by that date. The key in the enforcement of the second one would be whether the intent was to create a penalty and provide you with unjust enrichment. A court might consider whether the time frame provided was reasonable in the determination of the intent of the clause. If they found that the period was reasonable they might not consider the language as a penalty as you have given the other party sufficient time to provide invoices or a claim. Courts are not against cutting off rights, the statute of limitations in many locations does just that irrespective of whether one party could be unjustly enriched as a result.