Concept and Definition of Warranty
Introduction to the Concept of Warranty
The term Warranty originates from the English-speaking legal system and denotes a contractually assured legal guarantee or warranty. While “Warranty” is widespread in American and international legal practice, the concept differs in substance and structure from the German understanding of warranty and guarantee. Essentially, a warranty encompasses the obligation of a party to vouch for the quality, existence, or absence of certain characteristics of a contractual object.
Differentiation from Related Terms
In German law, there is often uncertainty regarding the translation and application of the terms “Gewährleistung” (warranty), “Garantie” (guarantee), and “Warranty”. A warranty partially corresponds to the German guarantee (§ 443 BGB) and also constitutes independent contractual promises that are treated as autonomous guarantees. In Anglo-American law, a distinction is made between “warranty”, “representation”, and “indemnity”, as each of these undertakings leads to different conditions, legal consequences, and liability mechanisms.
Legal Classification of Warranty
Warranty in Anglo-American Law
Under common law, especially in English and US contract law, the warranty is a central concept. Here, a warranty refers to a clause that guarantees a particular quality or condition of the contractual object. This usually constitutes a secondary contractual obligation, where a breach typically results only in claims for damages, not the right to withdraw from or contest the contract.
Warranties are especially common in the context of business acquisition agreements (“Share Purchase Agreement”, “Asset Purchase Agreement”), where sellers make extensive assurances regarding the company. Warranties may cover material and legal defects, but also a wide range of other circumstances (e.g., tax, employment, or environmental matters).
Difference from Representations and Indemnities
Under common law, a strict distinction is drawn between “representations”, “warranties”, and “indemnities”:
- Representations are statements of fact whose inaccuracy may, in individual cases, lead to rescission of the contract or contestation on grounds of misrepresentation.
- Warranties are independent contractual assurances; a breach generally gives rise only to claims for damages.
- Indemnities are promises to assume damages or losses that may arise from certain events.
Implementation in German Law
A warranty assured in the contract is generally qualified under German law as an independent guarantee promise (§ 311(1) BGB in conjunction with § 280 BGB). Depending on its specific design, warranties can also be considered as quality agreements (§ 434(1) sentence 1 BGB), product liability promises (§ 443 BGB), or independent guarantees.
Especially in international transactions with a connection to Germany, “warranty clauses” based on the English model are increasingly found in contracts. It must be examined on a case-by-case basis which legal consequences and remedies are possible under German law.
Content and Structuring of Warranties
Typical Areas of Application
Warranties are regularly used in the following types of contracts:
- Company acquisition agreements (M&A, share/asset deals)
- Supply and service agreements
- Purchase contracts for movable and immovable goods
- License and software agreements
In particular, in the context of M&A transactions, the warranty plays a pivotal role, as the buyer often lacks complete knowledge about the company to be acquired and its risks.
Options for Drafting Contents
Warranties may be individually agreed and tailored to the needs of the contracting parties. A warranty clause frequently includes assurances such as:
- Ownership structure and authority of disposal
- Completeness and accuracy of financial statements
- Number and status of employment relationships and pension obligations
- Existence and effectiveness of key contracts (particularly lease, license, or supply agreements)
- Tax situation and any arrears
- Environmental law compliance
By agreeing to warranties, the seller is obligated to ensure the accuracy and completeness of the assured circumstances.
Liability in Case of Breach of a Warranty
Breach of a warranty generally leads to claims for damages. Depending on the design and the specific legal system, a distinction can be made between direct liability (in the case of established inaccuracy) and recourse claims. Under German law, liability arises from positive breach of contract (§§ 280 et seq. BGB) or from guarantee (§§ 443, 444 BGB). The buyer is generally required to prove the damage as well as to demonstrate causality and quantify the claim.
Contracts may contain limitations of liability (e.g., de minimis, basket, or cap clauses) and obligations for asserting claims (e.g., notice period, exclusion periods).
Warranty in an International Context
Conflict of Law Considerations
The treatment of warranties in cross-border contracts strongly depends on the applicable law. Private international law determines which law applies and thereby sets the scope and enforceability of the assured warranty. The parties must make clear which law is to govern and which court will have jurisdiction in the event of a dispute.
Harmonization through International Model Contracts
International organizations such as the International Chamber of Commerce (ICC) or the International Bar Association (IBA) provide sample clauses and guidelines to facilitate the use of warranties, especially in M&A transactions, and to harmonize national differences. Nevertheless, the concrete legal effect always depends on the respective applicable law.
Practical Relevance and Importance of the Warranty Clause
Importance for the Contractual Parties
Warranties essentially serve to balance risk between the contracting parties, especially regarding information asymmetries. For the buyer of a company or an asset, warranties mean an increased level of security and protection, as certain risks can be shifted to the seller. Conversely, for the seller, there is a significant liability potential, making careful drafting and disclosure of essential circumstances indispensable.
Relationship to Due Diligence and Disclosure Letter
During due diligence, relevant information is provided to and reviewed by the buyer. A so-called disclosure letter then contains key exceptions to the given warranty assurances. As an integral part of the contract, the disclosure letter offers crucial liability protection for the seller and modifies existing warranties.
Literature and Further Resources
- Prölss, M. “Das Recht der Garantie und der Gewährleistung im nationalen und internationalen Rechtsverkehr.”
- von Westphalen, F.-J. (ed.): “Handbuch Vertragsrecht”, Chapter 8: Guarantees and Warranties
- Lappen, H. “Warranty und Indemnity im Unternehmenskaufvertrag.”
- International Bar Association (IBA): Model Sale and Purchase Agreement (M&A Transactions)
This article provides a comprehensive legal analysis of the term “warranty”, its classification in international and German law, as well as its practical contractual design and significance.
Frequently Asked Questions
How long does a warranty typically last under German law?
The duration of a warranty (statutory warranty) is governed by legal provisions. According to § 438(1) No. 3 BGB, the standard limitation period for claims based on material and legal defects in movable goods is generally two years from delivery. For used items, this period can be contractually reduced to one year, although this requires explicit agreement and is only possible to a limited extent in standard business terms with consumers. For buildings, a five-year period applies. For producer-related damages, a longer period may apply, e.g., according to the Product Liability Act. Statutory warranty must be distinguished from the voluntary guarantee (warranty in the narrower sense), whose scope and duration are determined by the guarantor.
What rights does the buyer have in case of a defect during the warranty period?
As part of the statutory warranty, the buyer can initially demand supplementary performance (§ 439 BGB). This includes the choice between remedying the defect (repair) and delivery of a defect-free item (replacement), whereby the seller can refuse the chosen type of supplementary performance under certain conditions, such as if it would only be possible at disproportionate cost. If supplementary performance fails or is refused due to unreasonableness, the buyer has further rights: reduction of the purchase price, withdrawal from the contract, and if applicable, damages (§§ 440, 441, 323, 280 BGB). However, a claim for damages generally requires fault on the part of the seller.
Can the warranty be excluded by contract in B2B settings, and under what conditions is this permissible?
In B2B contracts, i.e., between businesses, the exclusion or limitation of warranty is generally permissible (§ 444 BGB), provided the exclusion is not made fraudulently or does not relate to a guarantee of characteristics. However, a complete exclusion of liability for gross negligence or intent, as well as for bodily injuries, is not allowed. In consumer sales (B2C), there are significant restrictions on liability limitations (§ 475 BGB). The validity of a warranty exclusion in particular depends on clear and transparent wording in the contract.
What are the differences between statutory warranty and voluntary guarantee?
The statutory warranty is based on mandatory law and grants the buyer rights against the seller in the event of defects in the purchased goods. The duration, content, and scope of these rights are regulated by law. In contrast, a (manufacturer’s) guarantee is a voluntary undertaking, usually by the manufacturer or seller, which goes beyond the statutory provisions. The conditions (duration, scope, guarantee services) are freely determined by the guarantor. A guarantee can grant additional rights but does not limit statutory rights (§ 443 BGB). In case of doubt, both claims exist in parallel.
What role do rules of burden of proof play in connection with warranty?
The burden of proof in the context of warranty is of central importance. Within the first six months after delivery of the purchased item, the law presumes that a defect already existed at the time of transfer of risk (§ 477 BGB). During this period, the seller must prove that the defect had not yet arisen. After this period, the burden of proof reverses: the buyer must then demonstrate that the defect was already present at the time of delivery. For used items and outside of consumer sales, the rules on burden of proof may differ.
What obligations does the buyer have when making a warranty claim?
If the buyer claims warranty, they are obliged to notify the seller of the defect without undue delay (§ 377 HGB in the case of mutual commercial sales or within a reasonable period under the BGB). If the buyer fails to provide timely notice, they may lose their warranty rights. The buyer is also required to cooperate, for example by making the defective item available for inspection or repair. If necessary, the buyer must give the seller an opportunity to provide supplementary performance before exercising further rights such as withdrawal or reduction.
Are there any limitations or exclusions of liability in relation to warranty through general terms and conditions (GTC)?
Limitations or exclusions of liability in connection with warranty are only permissible to a limited extent in general terms and conditions (GTC). In B2C transactions, exclusions of warranty are fundamentally ineffective (§ 309 No. 7 BGB, § 475 BGB), insofar as they concern claims for supplementary performance, replacement delivery, price reduction, withdrawal, or damages due to gross negligence or injury to life, body, or health. In business transactions (B2B), further restrictions are generally possible but remain subject to GTC control (§§ 305 et seq. BGB), in particular the requirements of transparency and the prohibition of surprising clauses.
