Every contract includes Representations and Warranties and these are the underlying facts as presented by one party to another with the intent that the other party will rely on them to their detriment. Generally the party will represent and warrant as to one or more facts. But when using both the terms in a drafting agreement, a question arises, when both terms used independently or interchangeable or synonymous makes any differ or not.
For reaching this conclusion requires an analysis in different stages. The first step is how the general contract law makes distinction between the terms representation and warranties. The second one is how the courts must construe these words when used in contracts, and finally its implications in different countries namely in India, US and UK.
1.1. Definition of Representations and Warranties:
ü The Blacks Law Dictionary
- Defines Representation as ‘A presentation of fact either by words of by conduct, made to induce someone to act, esp to enter into a contract.
- Defines Warranty means “to promise or guarantee”.
ü Uniform Commercial Code
- Whereas Section 2-303 of the Uniform Commercial Code says “Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.” So under the UCC, a statement of fact can be a warranty (as is the case under common law) but so too can an obligation.
ü General definitions
a) Representation is presentation of fact – either by words or by conduct – made to induce someone to act, especially to enter into a contract. A Representation looks at the present or the past, presenting what the status is or was.
b) Warranty is generally regarded as being forward looking and providing assurance about the future.
ü Definition by court
Great Atlantic & Pacific Tea Co. v. Walker, court has defined a warranty as “a statement or representation made contemporaneously with and as a part of, the contract of sale having reference to the character, quality or title of the goods and by which he promises or undertakes to insure that certain facts are, or shall be, as he represents them.
1.2. Need of Representations and Warranties:
It places a considerable longer term loan on the seller and, is the main cause of post-closing litigation between the buyer and the seller. Sometimes it can be used as a defensible by stating that they are not as absolute but as to the “best of the sellers knowledge”.
1.3. Representations and Warranties in US:
According to the Model Stock Purchase Agreement (1995) and Model Asset Purchase Agreement (2001) both published by the American Bar Association section of Business law says that, representations are statements of past or existing facts and warranties are promises that existing or future facts are or will be true. But in Smith v. Waste Management, the court refers to “representations as about Waste Management’s future earnings”. With regard to meaning of term Warranty under common law an express warranty is a seller’s affirmation of fact to the buyer, as an inducement to sale regarding the quality or quantity of goods, title or restrictive covenants to real property.
But most of the warranty cases today arise under the Uniform Commercial Code. According to Uniform Commercial Code the term express warranty defined under section 2-203 makes clear that a statement of fact can be a warranty.
Whereas with regard to representation, a representation can underlie an action for misrepresentation, whereas an action for breach of warranty must be based on a warranty. But whereas the definition of representation is broad enough to include assertions of fact that wouldn’t support an action, for an action for breach of warranty. That’s why courts don’t use warranty terminology in cases that don’t involve sales.
1.4. Differences between US and UK relating to Representations and Warranties:
In US except in certain limited circumstances both contract and tort laws are under the state rather than US federal law. Whereas in UK it is common for the seller to oppose giving representations and warranties which leads to minimize the risk of a tortuous claim for damages under the Misrepresentation Act, 1967 and to remove the possibility that the buyer will not attempt to rescind the agreement under the said act.
With regard to court views the US courts says that a cause of action for misrepresentation does not exist just because a contract states that a party warranted a particular statement and did not represent it. But in case of UK the nature of remedies available to the buyer will depend on the extent of the buyer’s knowledge and reliance. In Chandelor v. Lopus, it was held that a seller wasn’t liable to a buyer because the seller had “affirmed” rather than “warranted” as to the product sold.
1.4.1. Caution on Non-Reliance Statement and Entire agreement Clause:
In both the US and UK generally the seller wants to include in the agreement an “Entire agreement clause” and “Non-Reliance Statement” and includes a provision to that effect that the buyer has not relied on any statement or promise not included in the written agreement, the intention behind such clause it that, they want to ensure that they cannot subsequently be found liable for representations and/or warranties that are not included in the written agreement. So a caution should be taken on such clauses in the agreement which helps if we are the sellers to limit the extension of liability and if we are the buyers to take care on future litigation.
1.5. Representations and Warranties in India:
According to the Indian context, the term “Warranty” is a stipulation collateral to the main purpose of the contract and the breach of which gives rise to claim for damages but not a right to reject the goods and treat the contract as repudiated as per the provision of Section – 12 of the Indian Sale of Goods Act, 1930. The extent of coverage of warranty differs from case to case.
Warranty may be generally express, but there are certain implied warranties under the act namely, buyer shall have a quiet possession of goods, goods are free from any charge or encumbrance, quality and fitness, merchantability of goods etc. Here the warranty should cover all the identified risks but the extent of liability and time limit for claiming losses should be set.
Whereas according to Section – 18 of the Indian Contract act, defined the term misrepresentation which includes the positive assertion which was not warranted by the information of the person making it or it is not true or made a mistake as to the substance of the thing which is subject of the agreement amounts to misrepresentation and the party who has given consent by misrepresentation can make the contract voidable.
1.6. Alternative terms in other countries:
In Spanish version and in Anglo-American contracts the words Declaraciones y Garantias are used instead of the words Representations and Warranties. The main reason for using these alternative terms is where one of the parties to a Spanish contract is an international company and the clause is deemed necessary to refer the same.
Representations and Warranties Clause in agreements
1.7.1. Representations & Warranties clause in Asset Purchase Agreement:
This type of agreement is entered between two companies which buys another company. the agreement itself defines the assets and liabilities that are sold to the buyer which includes Intellectual property, Machineries etc. the important in this type of agreement is the starting and closing date of the sale and purchase deal because the seller represents and warrants that, he has authority to sell assets, value shown for the assets sale are correct and assets are free from any legal implications, whereas the buyer also mention the same that he has authority to buy and all details about the purchase assets have been made known to him.
1.7.2. Representations & Warranties clause in M & A:
In case of M& A deals the representations are statements about the current status of the business or its operations, whereas the term warranties go further about current status because they guarantee the truth of the statement. When one company going to acquire another company the main dispute arise with the clause of Breached representations and warranties with regard to determining the breadth and scope of it..
Hence the following are the common list of representations and warranties where an acquirer will normally request a company it intends to acquire to make in the agreement, they are, organizational powers to carry on business, authority to enter into agreement, no outstanding dividends, title of properties, liens if any, condition of properties, taxes required have been filed, Intellectual property like domestic and foreign patents, registered trademarks, service marks etc which are within the knowledge of the company and used by it does not require the consent of any other person and is freely transferable., no pendency of suits etc.
1.7.3. Survival period of Representations and Warranties Clause in M&A:
In case of M&A deals the duration of the survival period of the sellers representations and warranties raises several questions. A recent decision by a US three judge panel of the Ninth Circuit Court of Appeals in Western Filter Corp v. Argan, Inc. has given an interpretation to those survival clauses and held that the most reasonable interpretation of the survival clause is that it servers only to specify when a breach of the representations and warranties may occur but not when an action must be filed. And also further held the survival clause as drafted did not shorten the limitation period to one year.
1.8. Enforcement of Warranty:
In order to claim for damages there should be direct nexus between the claim and liability under the warranty clause and there is need to prove an onus to show breach of warranty and consequential loss, but the contract cannot be repudiated by breach of warranty. Even sometimes a breach of condition may also be treated as breach of warranty under certain circumstances.
The action for misrepresentation is very different from an action for a breach of warranty in terms of the remedies available and other matters. Under the general law relating to liability for statements, the term ‘Representation’ is used to denote a statement of fact which induces an innocent party to enter into a contract and if it has been discovered untrue gives the innocent party a remedy for misrepresentation. Whereas in case of warranty it is a contractual statement, in case of untrue allows the innocent party to sue for breach of contract and allows for a claim for damages but does not entitle the innocent party to terminate the agreement.
1.10. Qualification for damages in US and UK:
In US the effected person is indemnified on a dollar for dollar basis for breach of warranties or representations subject to negotiation caps, threshold limits and deductibles.
Whereas in UK it is less common and the person will be remedied basing on the contractual claim for damages. In the same way the person has a duty to mitigate its loss and the damages must have been reasonably foreseeable.
Further if the buyer has actual knowledge prior to execution of the agreement about the facts that resulted in breach of warranty, the person may be precluded from raising a successful claim for breach of warranty. The same practice was followed in UK. Along with these some more consequences can be considered like
- Inability to recover certain elements of losses that are not reasonably foreseen by parties at the time of entering into the agreement
- Profit earning capacity of the assets warranted are affected
1.11. Precautions while drafting Representations and Warranties Clause:
- The first precaution is instead of using the term “party represent and warrant as to statements of fact”, it’s better to confine only to “the party represents that”.
- While putting a separate clause named ‘Representations and Warranties’ another issue arises, if the seller thinks that all the warranties in a given agreement are to be found in the section with the heading “Represents and Warranties”. But sometimes the court may hold that a statement of fact or obligation located elsewhere in the contract constitutes a warranty supporting an action for breach of warranty, even though the contract doesn’t refer it as a warranty. Hence this is one more area to be cautioned.
- Sometimes contract refers a provision as a warranty, but the court will treat it as a representation supporting an action for misrepresentation, where caution is needed.
- In case of sales contract the word warranties come to mind immediately rather than representations, basing on sales contract the word can be used to confine the future litigation.
 104 S.W.2d 627, 632
 407 F.3d 381, 382 (5th Cir. 2005),
 (1603) 79 ER 3
 9th Cir. 8/25/2008