a high pressure warranty 2
please read the attached file and answer the question below accordingly. no references required. only use the attached file information to answer.
1. Well, you know well by now that the original warranty and the proposed insurance-like scheme are two different, though somewhat intertwined things. You have correctly dentified the main covenants which serve as the basis for the warranties made by Pumps, Inc., chiefly:
To deliver the pumps according to their:
a. technical specs.
b. materials specs; and that the pumps be
c. of good workmanship.
Additionally, we know Pumps Inc. is ready to further warrant that the pumps will: (i) be energy efficient; and (ii) work practically all the time during 25 years; but we have also pinned down that these warranties are connected to (a) materials and (b) good workmanship. In other words, if pumps cease to be as energy efficient as specified, but for a reason other than their materials or their workmanship (e.g. due to sand havng entered the system, perhaps) then the warranty shouldn’t apply. Same thing works for up-time, of course. If up-time is not achieved due to a general power failure, then the warraty will not cover the fact.
Now, knowing as you know too that the structure for a contractual security is WARRANTY + CONDITION + COVENANT (REMEDY), and seeing how you have quite successfully pinned down the frst element of the equation, put together the CONDITIONS that would have to be met in order for the remedies to kick in.
A HIGH-PRESSURE WARRANTY
A few months ago, you were hired as in-house counsel for Pumps Inc., a company manufacturing all sorts of high-tech pumps. You have been studying hard to get to know everything there is to know about the different products that Pumps Inc. makes, and so you know well that the HPP270 (a high-pressure pump that is usually installed in heavy-duty installations) is the big star of the portfolio.
You have learnt so far that HPP270 units have a final retail price of USD 280,000 and although the essential mechanics of a pump are relatively simple, the way HPP270s are assembled and the special materials with which they are made (some even formulated by Pumps Inc.) make them the top product in the market for heavy duty installations such as petrol platforms or even nuclear plants. Their top features are: (i) their reliability; and (ii) their efficiency.
Reliability is important because if the pump ever stops, the whole industrial process needs to be stopped too. This leads to great damages, since production is altogether stopped in the facility. Efficiency is important because the energy cost necessary to manage the flow is extremely elevated and electricity costs are a very high percentage of the installation’s overall fixed costs. HPP270 outperforms all other pumps in the market by a great margin, which makes them very attractive in the market.
The CEO comes into your office and tells you that the Japanese oil Titan, Sakamoto Oil Inc., is interested in buying an array of ten units of the HPP270 for their new petrol platform off the Russian shore. Engineers have already established that the pumps are adequate for all technical specifications with the Russian platform, but Shinosuke Hashimoto, Sakamoto’s CEO, has requested that Pumps Inc. grant a 25-year warranty for the ten pumps. Mr. Hashimoto has heard that some HPP270 units installed in the Persian Gulf have been up and running uninterruptedly for 28 years, and this has led him to make the choice to buy your product.
The 25-year warranty is not just any warranty: they want Pump Inc. to warrant: (i) up-time (the time during which the pump is working (down-time is the time the pump is NOT in working condition)); and (ii) efficiency. The up-time warranty should say that, where any given pump stops working for more than three consecutive days in any one year period, Pumps Inc. will not only have to repair the pump, but also pay for the extra costs generated by the down-time . Also, if any given down-time were to last more than 15 days, compensation for damages would be increased by an additional 50%. The efficiency warranty should say that when the average energy efficiency of the array of ten pumps for any given week were to be less than 98.75% of the secified efficiency figures, Pumps Inc. would pay for the extra energy cost.
Needless to say, in order for the warranty to be applicable, Sakamoto would at all times have to operate the pumps according to Pumps Inc.’s instructions.
You tell your CEO that a warranty such as that one is suicidal, and you propose that it should behave like some kind of insurance deal. Under your scheme of things, Sakamoto would pay a fee (a premium) to be calculated by the CFO’s team in relation to the nature of the risks at stake and their likelihood. Payment of the fee would entitle Sakamoto to the warranty conditions established above. Your CEO likes the idea, and proposes it to Mr. Hashimoto, who thinks it is a fine scheme as long as: (i) the fee is financially reasonable; and (ii) this warranty/insurance does not displace the ordinary repair-or-replace warranty for materials and workmanship that Pumps Inc. usually grants for all sales, and which covers, in full, the cost of repair or replacement of any malfunctioning pump within the first two years. You argue that this is acceptable, as long as Sakamoto contracts the insurance now, and not in two years’ time. Negotiations are tough, but the deal is finally closed. Congratulations on the negotiation. Your CEO is delighted and taps you on the shoulder. “Good work”, he says. “Now write this thing up and make it bulletproof. Big money is at stake. Now all our big clients will want to adhere to this warranty plan”.
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