Warranties : beware of booby traps

Warranties form the bedrock of many commercial agreements; and the notion of a warranty has different meanings depending on the context.

In one context it is described as a term whose breach only gives rise to a claim for damages. In another context, as a term whose material breach gives rise to a right to cancel the contract.

It is therefore necessary where the term warranty is used to examine the terms of the contract closely to establish in what sense the parties have used it. In simple terms, a warranty can be described as a statement of material fact regarding the quality or quantity of an item sold.

Such a statement made prior to entering into a contract qualifies as a warranty if it was meant to form part, or be a term, of the contract.

Practical examples

Examples of statements which have been held to amount to warranties in our law include: a statement by a seller that the property sold has a certain number of vines; an advertisement by a seller at an auction describing his farm as ‘an excellent sugar farm’ and a statement by an employee during negotiations about his retrenchment package stating that he would not complete with his employer after leaving his employ.

Although these statements did not form part of a written contract between the parties involved, it was found that it was the common intention of the parties that what was said qualified as warranties.

Establish the background

Warranties may be used in different contexts. Warranties may appear in the context of a loan agreement where the borrower makes certain representations regarding its power and authority to enter into the loan agreement and to perform its terms. Warranties may be used in sale of business transactions where the seller is required to give warranties on aspects of the business or shares being sold.

This type of warranty protects the purchaser in the event that the undertakings made by the seller are not fulfilled; and thus, result in the value of the company being less than what the purchaser paid for it.

Breach of a warranty entitles the innocent party to cancel the contract and recover damages or to retain the item purchased and claim damages. But a person who purchases a product knowing that it has defects or waives rights to rely on defective performance - e.g. voetstoots clause - may not be able to recover damages arising from the defects.

In addition, a party to a contract may not rely on impossibility of performance or absence of fault to escape liability for breach of the warranty. In contracts with individual consumers, the Consumer Protection Act may limit the warranties the supplier can rely on.

Follow the trend line

In line with foreign trends, South African buyers and sellers of major companies and businesses have recently started safeguarding themselves from losses resulting from inaccurate warranties through the use of an insurance product known as Warranty & Indemnities Insurance (W & I Insurance).

W & I Insurance is increasingly prevalent in major acquisition transactions, and its purpose is to protect parties against breaches or inaccuracies in warranties. It also creates indemnities that a seller makes in the context of major assets or businesses being acquired and to ensure that there are funds to settle such claims.

There are two types of W & I insurance. Buy-side policies provide cover directly to the buyer for any losses suffered due to a misrepresentation or breach of a representation by a seller. Sell-side policies provide cover by enabling the seller to claim from its insurer if the seller mistakenly misrepresents or breaches a representation or warranty made in closing the deal.

Parties entering into a contract must be careful about the statements and promises they make when negotiating a contract as they may later come back to bite them. You have been warned.

1 Schmidt v Dwyer 1959 (3) SA 896 (c).
2 Milne, NO v Harilal 1961 (1) SA 799 (N).
3 Lifeguards Africa (Pty) Ltd v Raubenheimer 2006 (5) SA 364 (D).
4 Act 68 of 2008.

* Thato Seroto, Director at Norton Rose Fulbright, was the supervising principal