Pass-through Warranties

In equipment purchases, attention to warranty terms can fall down the priority list. Often, the existence of the warranty is simply a checklist item: does a warranty exist? However, attention to warranty terms, including their scope and limitations, should not be relegated to a check-box review. 

A failure to consider the actual warranty terms can prove costly. Warranties are essential pieces of a transaction and are built into the price. Unknown limits on a warranty’s scope or remedies put boundaries on its value that can raise significant financial hardships later in time. 

A warranty term that often becomes the source of unanticipated hardship is a “pass-through.” In these situations, a warranty tries to incorporate or extend a separate warranty issued by a third party. For example, manufacturers often use pass-through terms to cover components they incorporate but do not make. System suppliers use these terms to address third-party applied coatings and extrusion sources. Trades want to pass through all warranties except those relating to their labor. 

Grouping and interpreting these various warranties for purposes of determining who has responsibility to respond to the owner’s warranty claim can prove labyrinthian. 

How can company owners or managers establish clear warranty coverage? They must begin by understanding the scope of the various warranties offered and identifying those obligations they desire to pass through. Once identified, each warranty must be reviewed for the coverage granted and the remedies/limitations that might apply. Assumptions about a warranty’s terms, and expectations about coverage based on those assumptions, are dangerous starting points. And while there are warranties imposed by law, the separate scope of those legal requirements is too big to address here.

Effective pass-through warranties generally have similar characteristics:  

• First, the warranties that are being passed through permit the process. Companies must be aware of any limits on the assignability or transfer to third parties. Additionally, a careful review of the language specifying the party entitled to enforce the warranty is needed to ensure that a direct purchasing relationship with the warranty’s issuer is not required.
• Second, the warranty being provided expressly acknowledges the pass-through coverage. Obviously, this is a best-case scenario. Permissive pass-through terms within a form warranty ease the review process. However, warranties are a part of the purchase transaction and are subject to agreement and written modification by the parties. Companies must seek out an addendum or other separate agreement, signed by the proper parties, detailing the permissive nature of the pass-through obligation.
• Third, the party accepting the downstream warranty can be required to acknowledge and accept the pass-through term. In addition to dealing with upstream suppliers, effective pass-through warranties also look to the downstream purchaser. The specific written acknowledgment that portions of the product/labor/service being offered are subject to the warranty and remedies offered by another can prove a crucial step in setting expectation for relief and avoiding later legal entanglements.

In contrast to those three steps, less effective pass-through efforts also share some less-than-ideal traits:

• Problems most often arise where there is a wholesale lack of recognition as to whether any party knew or sought permission to pass through a warranty. 
• Equally problematic are general terms that expressly disclaim pass-through efforts in upstream warranties. 
• And finally, the pass-through efforts can be expressly forbidden by the underlying contract.

When faced with situations where a direct pass-through warranty cannot be accommodated, there are other options. 

• Perhaps back-to-back coverage is possible. In this situation, the owner would submit a warranty claim to the direct seller, who would arrange service with the upstream manufacturer. The obligations owed by the direct seller remain, but it can look to its immediate upstream manufacturer for relief on behalf of that owner.
• In addition, indemnity or reimbursement terms may be an option. In these situations, the manufacturer and seller agree that the manufacturer will reimburse the seller for a properly submitted and completed warranty claim undertaken on its behalf. The details underlying these arrangements can be complex and should be carefully detailed to define the boundaries of a properly reimbursable claim. With proper attention, the flexibility presented in these arrangements can make them a favorable option.
• Finally, many companies try to avoid the pass-through warranty complexity altogether by simply preparing their warranty as one offering “equivalent relief” as the warranty to which they themselves are entitled. As a general matter, this is a risky prospect that can lead to some significant disputes regarding the scope of the warranty’s entitlement.