n this blogpost we will explain performance warranty for professional buyers and explain what performance warranty is in relation to a supplier and a contract with a supplier. What is it, when is used and why is it used. The blogpost includes examples clauses and an illustrating case.

Performance Warranty in Supplier Contracts: Explanation, Usage, and Importance

What is a Performance Warranty?

A performance warranty is a contractual clause where the supplier guarantees that the goods or services provided will meet certain specified performance criteria or standards. This warranty obligates the supplier to ensure that their products or services function as promised and specified in the contract.

When is it Used?

Performance warranties are commonly used in contracts involving:

1. Technical Products: Machinery, equipment, software, and other technical products where performance specifications are critical.
2. Construction Projects: Building projects where the final structure must meet specific standards and regulations.
3. Service Agreements: Contracts for ongoing services such as maintenance, IT support, or outsourced operations where service levels must be maintained.
4. Supply Agreements: Agreements for the supply of goods where quality and functionality are paramount, such as raw materials for manufacturing.

Why is it Used?

Performance warranties serve several important purposes:

1. Quality Assurance: They ensure that the supplier delivers products or services that meet the agreed-upon specifications and performance standards.
2. Risk Mitigation: They protect the buyer from potential risks associated with underperforming products or services.
3. Accountability: They hold the supplier accountable for their product or service quality, fostering a commitment to maintain high standards.
4. Recourse: They provide the buyer with recourse if the supplier fails to meet the performance criteria, typically including repair, replacement, or reimbursement.

Example Clauses

Here are some example clauses that might be included in a performance warranty:

1. Performance Guarantee Clause:
   • “The Supplier warrants that the [Product/Service] will perform in accordance with the specifications set forth in Exhibit A for a period of [X] months/years from the date of delivery/installation. Should the [Product/Service] fail to meet these specifications, the Supplier agrees to promptly repair or replace the non-conforming [Product/Service] at no additional cost to the Buyer.”
2. Remedy Clause:
   • “In the event that the [Product/Service] fails to meet the performance standards specified in this Agreement, the Supplier shall, at its own expense and within [specified time period], correct any deficiencies or provide a replacement [Product/Service] that meets the specified standards. If the Supplier is unable to remedy the deficiency within the specified time period, the Buyer may, at its discretion, terminate this Agreement and receive a full refund of all amounts paid.”
3. Performance Testing Clause:
   • “Prior to acceptance, the [Product/Service] shall undergo performance testing conducted jointly by the Supplier and Buyer to verify compliance with the performance specifications. Any deficiencies identified during testing shall be rectified by the Supplier within [specified time period] at no cost to the Buyer.”

Illustrative Case

Case Scenario: A manufacturer of industrial machines enters into a contract with a supplier for a new type of high-efficiency motor.

Contract Includes Performance Warranty:

• Performance Specifications: The motor must operate at 95% efficiency under specific conditions, including operating at a temperature range of -20 to 50 degrees Celsius.
• Performance Guarantee: The supplier guarantees the motor will meet these specifications for 24 months from the date of installation.
• Remedy Clause: If the motor fails to achieve the specified efficiency, the supplier will repair or replace it within 30 days at no additional cost.

Issue Arises:

• Problem: Six months after installation, the motor’s efficiency drops to 90%, affecting the manufacturer’s production process.
• Action: The manufacturer invokes the performance warranty, notifying the supplier of the issue.

Supplier’s Response:

• Remedy: The supplier promptly sends a technician to assess the motor. Finding it defective, they replace it with a new motor that meets the 95% efficiency requirement.
• Outcome: The issue is resolved within the 30-day window, minimizing downtime for the manufacturer.

Summary Performance warranty for professional buyers

A performance warranty is a crucial element in supplier contracts that ensures products or services meet specified standards. It is used to provide quality assurance, mitigate risks, hold suppliers accountable, and offer recourse in case of non-compliance. Including clear and detailed performance warranty clauses in contracts can protect the buyer’s interests and ensure satisfactory performance from the supplier.

Learn more about contract and International Sales Law by attending International Sales Law for Procurement Professionals with Jon Kihlman. Are you a procurement manager looking to deepen your team’s knowledge of International Sales Law? Learn How to Source (LHTS) offers a comprehensive blended learning experience that combines online courses with a one-day seminar or lecture led by Jon Kihlman. Before attending the session with Jon, participants will acquire foundational knowledge through our online courses, enriching their learning experience. This course package is also available for individual users.

Jon Kihlman works with Swedish and international commercial contract law. Within that field, his practice includes drafting, reviews, legal opinions, consultations, educations, writing of books and articles as well as litigation and arbitration (as counsel or arbitrator). The purpose of public procurement is to conclude contracts. Therefore, Jon Kihlman’s practice includes public procurement. Although primarily focused on drafting of what will eventually become such contracts, his work also simplifies the procurement process as such. He represents both purchasing authorities and suppliers in court when a procurement process is challenged.

About Learn How to Source

Learn How to Source is an online platform based in Sweden, offering a range of procurement courses accessible globally. It serves as a community where procurement experts share their knowledge through online courses, designed for various experience levels from introductory to expert. Courses are concise, about 30 minutes each, and cover different aspects of procurement, tailored for different buyer roles. The courses focus on practical knowledge, presented by seasoned professionals, and include quizzes and certificates. They can be accessed from any device, emphasizing microlearning for flexibility and efficiency. More about LHTS in Swedish.

Note. Illustration to the blogpost “Performance warranty for professional buyers” was created by Chat-GPT on May 25, 2024.