Warranties: Offering Service Contracts

A service contract is an optional agreement for product service that customers sometimes buy. It provides additional protection beyond what the warranty offers on the product. Service contracts are similar to warranties in that both concern service for a product. However, there are differences between warranties and service contracts.

Warranties come with a product and are included in the purchase price. In the language of the Act, warranties are "part of the basis of the bargain" Service contracts, on the other hand, are agreements that are separate from the contract or sale of the product. They are separate either because they are made some time after the sale of the product, or because they cost the customer a fee beyond the purchase price of the product.

The Act includes very broad provisions governing service contracts that are explained in the following sections.

Statement of Terms and Conditions
If you offer a service contract, the Act requires you to list conspicuously all terms and conditions in simple and readily understood language. However, unlike warranties, service contracts are not required to be titled "full" or "limited,' or to contain the special standard disclosures. In fact, using warranty disclosures in service contracts could confuse customers about whether the agreement is a warranty or a service contract.

The company that makes the service contract is responsible for ensuring that the terms and conditions are disclosed as required by law. This is not the responsibility of the seller of the service contract, unless the seller and the maker are the same company.

Disclaimer or Limitation of Implied Warranties
Sellers of consumer products who make service contracts on their products are prohibited under the Act from disclaiming or limiting implied warranties. (Remember also that sellers who extend written warranties on consumer products cannot disclaim implied warranties, regardless of whether they make service contracts on their products.) However, sellers of consumer products that merely sell service contracts as agents of service contract companies and do not themselves extend written warranties can disclaim implied warranties on the products they sell.