I frequently hear dealers use service contracts and warranties interchangeably. This is dangerous as each term is defined differently and creates a different list of obligations for the dealer. It is important to consult with a contract lawyer to iron about the discrepancies. A “warranty” (A) any written affirmation or promise made in connection with the sale of a vehicle by a dealer to a consumer which relates to the nature of the material or workmanship and affirms or promises that such material or workmanship is defect free or will met a specified level of performance over a specified period of time or (B) any undertaking in writing in connection with the sale by a dealer of a vehicle to refund, repair, replace, or take other remedial action with respect such product in the event that such product failed to meet the specifications set forth in the undertaking, which written affirmation, promise, or undertaking becomes part of the basis of the margin between a supplier and buyer for purposes other than resale of the product. A “Service Contract” is a writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of the vehicle.
With a warranty, the dealer is essentially telling the customer the vehicle will not break, but if it does here is how we will fix it. Under a service contract, the dealer is not making any representation about the current or future condition of the car. The service contract states if X happens, you will not have to pay full price to have it fixed.
The bigger difference between a service contract and warranty is who pays for the product. Warranties are included in the price of the vehicle and cannot be part of the bargain. A service contract is paid for by the consumer in addition to the price of the vehicle and can be negotiated as to how extensive the coverage and how much it costs. Often times dealers will sell a warranty, but in fact the dealer is selling a service contract. If you include repair coverage for free with each vehicle, you are offering a warranty. If you offer repair coverage for a fee in the F&I office, it is a service contract.
This is an important distinction, especially if the matter is ever litigated. A breach of warranty claim may allow for the recovery of more damages, including attorney’s fees, where a breach of contract will be limited to the customers actual damages. Taking the time to consult with a contract lawyer could save your business from accruing immense penalties in the long run.
If you are offering either a warranty or a service contract, you must have written agreement beyond the Buyer’s Guide. The Buyer’s Guide is meant to be a disclosure, not a warranty or service contract.
Under federal law, a written warranty shall include the following information: (a) name and address of warrantor(s), (b) party/parties whom the warranty is extended, (c) parts covered, (d) statement of what warrantor will do in the event of a defect and how long they have to do it, (e) a statement of what expense, if any, the consumer must bear, (f) exceptions and exclusions from coverage, (g) dispute settlement procedure and general description of remedies available, (h) period of time the warranty is valid, and (i) period of time which warrantor will perform warranty obligations. Federal law does not provide requirements of a service contract, but the service contract should have similar terms disclosed as the warranty.
Written by Attorney Allison Harrison
Please note that the information contained in this article is intended for general informational purposes only and not as specific legal advice. The facts of your situation may differ from this general information. It is not intended to and does not in any way establish an attorney-client relationship.