ITP Techblog

We are increasingly seeing significant gaps between suppliers and customers of SaaS contracts in relation to their expectations about the purpose and effect of contractual warranty periods.

The use of warranties and warranty periods in on-premise software licences is long-standing. Typically, a supplier would offer a period after delivery (or, if the customer was able to negotiate this, acceptance of installed software) during which if the software contained major bugs or failed to meet its specifications, the supplier was in breach of the warranty and had to fix the problem - usually entirely for free. Negotiations often centred on the issue of whether, assuming the defect/non-compliance was fixed, the supplier had any liability for losses that might be incurred in the meantime - with many suppliers insisting that the fix was the customer's sole remedy.

Warranties in relation to tangible goods have obviously been around for a long time and a short warranty period often makes a lot of sense. You might expect a product that you buy in a shop to work as promised for a relatively short period of time before normal wear and tear impacts on its operation. But these historical justifications for warranty periods arguably makes less sense for software - while software wear and tear/'software rot' may indeed occur, it tends not to happen over a short period of time.

Rather, the key objective/purpose of a warranty period in a traditional software licence could alternatively be viewed as essentially giving the customer a benefit of a period of free support/maintenance to fix any errors - in turn incentivising the supplier to make very sure, at the point of delivery or acceptance, that the software is correctly installed and in good working order.

This benefit can fast be eroded in the terms of SaaS/cloud contracts. This is because the support/maintenance services and fees are often wrapped into the subscription service and are payable from day 1 - there is no period of free support or maintenance - and supplier standard SaaS terms often provide that fixing the warranty breach is the customer's sole remedy for the breach. 

From the customer's perspective, this approach doesn't offer any additional benefit for a period after delivery/acceptance - in fact the warranty period sometimes presents more risk to the customer than the ongoing subscription term once the warranty period has expired. This is because:

• The customer may be already paying for support/maintenance in the form of a bundled subscription fee.  In such circumstances, it can be unclear whether the customer is actually getting for free (as opposed, for example, to a situation where support and maintenance is charged for on a time and materials basis but time spent on warranty fixes may not be charged)
• If the warranty fix is expressed to be the sole remedy, then the customer can't recover additional losses in the form of damages (should it wish to do so) - although of course in practice additional losses may be difficult to prove and recover
• Often the supplier will argue that the service levels don't apply during the warranty period but rather the supplier has a 'reasonable' period to fix defects in breach of warranty.  The customer can therefore end up with less certainty about when a fix must be provided than when it is in the BAU support phase after the warranty period has ended.

We've been involved in projects where:

• The customer expects the solution to be near perfect at go-live so that if there are any problems in the warranty period, the supplier should bear the full risk of these (both the cost of fixing them and any losses the customer suffers as a result) and should meet all the service levels as it does so
• The supplier expects there to be bugs and problems in the period after go-live that need to be ironed out and, so long as they act to fix these in a professional manner within a reasonable timeframe from discovery, doesn't expect to have any further liability.

Clearly these are quite different philosophies. What is a reasonable position to take will often depend on the nature of the solution, the level and structure of the fees payable, the parties' appetite for risk, and the development methodology.

In our view, there isn't actually any right or wrong answer to the question posed in this article. The 'point' of a warranty period depends very much on what the parties negotiate it to be and how any warranty terms interact with the other clauses of the contract (eg termination rights and general performance obligations) and rights and remedies which exist at law (eg the right to damages).

What is important is that contracting parties realise that warranties in IT contracts don't necessarily have any 'magical' qualities - the benefits of warranty periods may be largely illusory. It is important to:

• Understand at the outset what you are seeking to achieve by having a warranty period
• Identify whether the parties are actually on the same page about this
• Ensure that the contractual provisions (including the interaction with other rights and remedies) actually achieve the agreed objective.

 

The Buddle Findlay legal team consists of Allan Yeoman, Amy Ryburn, Philip Wood, Renee Stiles, Alex Chapman, Damien Steel-Baker, Keri Johansson Reposted with kind permission.