Tuesday, February 21, 2012

What is the difference between a warranty and a guarantee?

While some people may think they are the same, they are not and the two terms are not interchangeable. Under law, a warranty is a commitment that goes to the heart of the agreement where the breach of a warranty gives rise to the right to terminate the agreement and claim damages.

There are two types of guarantees.

One type is a financial commitment. A parent guarantee is a commitment that makes the Parent Company liable for the performance of their subsidiary. It makes the parent company a party to the transaction. If the subsidiary breaches the agreement and you terminate the agreement with the subsidiary and pursue damages that you sustained. If the subsidiary is unable to pay the amount of the damages and you have a parent guarantee you can then go against the parent company to collect the difference. Without the parent guarantee you would not have privity of contract with the parent and would be limited to only what you can collect from the subsidiary.

The second type of guarantee is used with respect to performance. In many locations a guarantee may not be considered to be at the heart of the agreement where a breach would give rise to the right to terminate. If a supplier breached a guarantee you would always have the right to claim money damages.

The only way to make a guarantee have the same standing as a warranty it to make it clear in your agreement that the guarantee goes to the heart of your agreement where the breach of the guarantee gives you the right to terminate the agreement and claim damages.

The only time a financial issue may come into play with respect to a performance guarantee that's included in the agreement would be if the parties agreed upon a specific financial remedy for the breach of the guarantee similar to a liquidated damage. Otherwise the remedy for the breach of a guarantee would be limited to the damages sustained from the breach that are allowed by the limitation of liability.