What warranties are included in a federal contract?

The following question was asked by a contractor: Our company sells primarily to commercial buyers. Is there a difference in our potential warranty obligations when we sell to the government as compared to commercial buyers? What is our potential liability for defects in the equipment we sell to the government?

Generally, a contractor's potential liability under a standard warranty clause in a government contract is very similar to the potential liability in a purely commercial transaction. If anything, in several instances the government contractor's potential liability may be less than in a purely commercial transaction.

In a commercial setting, there are two types of warranties: express and implied. Express warranties are those specifically set forth in the contract. A party's liability under an express warranty is determined from the language of the particular warranty clause at issue.

Implied warranties, on the other hand, are warranties that exist in the general law applicable to the transaction even though the contract itself may be silent on the point. Thus, for sales of goods the Uniform Commercial Code recognizes two implied warranties: the warranty of merchantability and the warranty of fitness for a particular purpose.

In contrast, when the government accepts goods provided under a contract, in most cases it significantly limits its right to recover for defects in the contractor's work. Thus, most government contracts include as part of the Inspections clause a provision that makes the government's acceptance of delivered goods final except for "latent defects, fraud, gross mistakes amounting to fraud or as otherwise provided in the contract." See, for example, Federal Acquisition Regulation 52.246-2(k).

The final phrase, regarding other provisions of the contract, is a reference to any express warranties that might be included therein. However, implied warranties would not survive acceptance. See also FAR 46.706(b)(1)(iii) ("If express warranties are included in a contract (except contracts for commercial items), all implied warranties of merchantability and fitness for a particular purpose shall be negated by the use of specific language.").

The decision to include express-warranty provisions in a government contract is primarily within the discretion of the contracting officer. In general, the contracting officer should include warranty provisions only when the "benefits to be derived from the warranty" are "commensurate with the cost of the warranty to the government." FAR 46.702(c).

In determining whether to include a warranty provision, the contracting officer must consider the following factors: (1) the nature and use of the item, including its complexity and function, degree of development, state of the art, end use, difficulty in detecting defects before acceptance and potential harm to the government if the item is defective; (2) the potential cost, including what the contractor will charge for the warranty, and the cost to the government for "administration and enforcement" of the warranty; (3) trade practice in the relevant industry; and (4) the possibility that the inclusion of warranty provisions could reduce the need for inspection and quality-assurance provisions where the warranty can provide adequate assurance that the contractor will deliver a satisfactory product (see FAR 46.703).

At a minimum, most warranty provisions will require the contractor to correct defects discovered within a fixed period of time after acceptance, except those caused by the government. FAR 46.706(b)(1). For example, the clause at FAR 52.246-17 provides that "all supplies furnished under this contract will be free from defects in material or workmanship and will conform with all requirements of this contract."

A defect in this context is an element of the product that does not comply with the contract's specifications. If the government provides the design of the item, then the contractor must only correct defects in "material and workmanship or failure to conform to specification." FAR 46.706(b)(1)(ii). If the contractor designs the item, then "the warranty extends also to the usefulness of the design." Id.

The length of the warranty must be stated clearly. It should be based on the estimated useful life of the item, its nature, including storage or shelf life, and trade practice (FAR 46.706(b)(3)). However, "the period specified shall not extend the contractor's liability for patent defects beyond a reasonable time after acceptance by the government." Id.

In most cases, the warranty clause will include a remedies section under which the government may agree to an equitable adjustment in the contract price or require the contractor to repair or replace the defective item. Where repair or replacement is difficult, the warranty clause should provide alternate remedies, depending on the circumstances. FAR 46.706(b)(2).

To recover under a warranty clause, the government has the burden of proof on all elements of its claim. In particular, the government must be able to show that a defect existed in the product, that the defect was within the scope of the warranty clause, that the contractor was responsible for the defect and that the defect led to the failure for which the remedy is sought. See Philadelphia Biologics Center, ASBCA No. 32601, 88-3 BCA 21,147; Vistacon Inc. v. General Services Administration, GSBCA No. 12580, 94-2 BCA 26,887.

Moreover, if the government's actions caused any damage to the item, the government must show that its actions were not the cause of the failure for which it seeks a remedy under the warranty clause.

The government's potential warranty rights are very similar to those of a commercial buyer. As a practical matter, however, in many cases the government may limit its potential remedies beyond what most commercial buyers are willing to accept.

Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C.