Representations and Warranties

Introduction

Representations and Warranties are included in every contract, one party lays underlying facts as presented to another with the intent that 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 terms in a drafting agreement, a question arises, where both terms are used independently or interchangeable or synonymous makes any difference or not. The terms “Representations,” “warranties” and “covenants” are very common in contracts that the words are likely to be ignored. They are generally grouped together as “represents and warrants” or “represents, warrants and covenants.” They are the basic building blocks of contracts and have a long history. They are the remedies for false representation, breach of warranty or violation of a covenant and differ in their meaning.

In Great Atlantic & Pacific Tea Co. vs. Walker[1]  warranty is defined as a statement or depiction made contemporaneously with and as part of the contract of sale having references to the character, quality or title of the goods by which he undertakes to insure that certain facts shall be as he represents them. The meaning of the terms representation and warranty evolved through various case laws. A representation is an assertion of past or existing facts, relation to subject matter of contract.[2]

Representations

Traditionally, representations lead and stimulate a contract, a contracting party decides whether to proceed with the contract according to representation. It is an implied statement that one party to the contract makes to the other before or at the time the contract is entered into regarding a past or existing fact.

For example, a seller of equipment represents that no notice of patent infringement had been received. It was not a traditional part of a contract, and a claim for damages due to a misrepresentation generally would not be allowed. As an alternative, a claim that a distortion induced a contract might be pursued in fraud, either to withdraw the contract or for damages. Certain times a claim might be based on tort of negligent misrepresentation.  As a part of contract representation would typically function as a “condition” or “warranty.”

Condition is a vital term going to the root of the contract, if the conditions were false the employer would be entitled to reject the contract. Dissimilarly a representation might be a “warranty,” which would be an independent promise, and if failed might lead to claim for restoration in the form of damages.[3]

Warranties

Promises appearing on the face of the contract are the warranties. Warranties are a crucial part of contracts which require strict fulfilment. Warranties are representation made on the basis of a contract or on the terms of a contract.[4] Agreement promises and representations that say the proposition of fact is true during the contract as well in future are the elements of a warranty. It is something in continuance of contract guaranteed by a contracting party, giving assurance of the product as promised.

It is assumed that in effect of a warranty if the warranting party fails to keep up the assurance it will have to reimburse the other party. They are categorized as affirmative warranties and promissory warranties. Latter are those agreements made for the future. Former are those who work on assurances that certain facts are true and have acts to be performed at the time of the contract. Both types entitle the protected party to pay damage if any breach occurs. Damages are decided by calculating the value of the contract as agreed by the parties to the value of the contract given the facts at the breach. Warranty nowadays commonly provides protection to consumer products as a topic to the Uniform Commercial Code and Federal law. “extended warranty” is the term that gives protection beyond the initial agreement between buyer and seller. It is a form of insurance regulated using state laws.[5]

Comparing Representations and Warranties

Representations and Warranties differ from each other. Representation is a statement of fact; Warranty is a promise of fact. Certainly, they look similar, yet their differences are substantial. Representation is the link between contract and tort. In contract law misrepresentation might prevent the contract to form, make it voidable, or provide grounds for reformation. An action for damages based on it is essentially a tort claim. In contrast breach of warranty has its origin in tort, it is now viewed as a contract action. As a result of which the elements of claim for misrepresentation and claim for breach or warranty are very different. Both of them require proof that the statement or promise was untrue and caused damages.

When a claim is made based on misrepresentation it requires proof that the statement was material and that the person making the misrepresentation knew that the statement was false, along with proof that the other party relied on the statement however when liability of breach warranty is made it is a strict liability and does not require any sort of proof of whether the warrantor knew that the promise was true or not nor does it require any reliability proof. Perhaps more important, Misrepresentation claim, and warranty breach are both subject to statutes limitations. Both the elements and the remedies for misrepresentation claim and breach warranty are different. Explicitly, the remedy for breach is typically some measure of expectancy damages, whereas the remedies for the tort of misrepresentation are typically rescission along with some measure of reliance or restitutive damages, along with corrective damages if it was intentional. Additionally, tort damages, along with damages for misrepresentation are economic loss doctrine.

Another distinction between representation and warranties is that the permitted substance of representation differs from the potential scope of warranty. Most specialists maintain that a representation is a statement of past and present fact and cannot be about the future fact. In contrasting terms, a warranty is about the past, present, or future. Despite important and numerous distinctions between representations and warranties, some experts of contract drafting recommend not to use representations and warrants in an agreement because no well-known cases has ever relied on the presence of both verbs.[6]

Case analysis across the globe

Morley vs. Consolidated Mfg. Co. (1907)[7]

In this Court the rule of caveat emptor was applied strictly than the hitherto. The court had to depart itself from the authorities who had dealt with exact words and phrases used by the salesman in this case. The plaintiff here purchased a machine paying half price of a new one of the same makeover, it was used as a demonstrating car, the salesman said that it was in first class condition and all right. After using it for two months the crankshaft broke and it damaged the machine materially. He then tried to recover back the purchase price relying on the assertion of the salesman. The Supreme Court denied to this right it stated that there was no express warranty. It was merely the salesman talking to make a sale of the product.

Governor of Orissa State vs. Shivaprasad Sahu (1963)[8]

In this case a forest contractor marked certain trees as sound based on its external appearance for felling, the court here held that there was no misrepresentation as the forest contractor had made a statement of facts after verifying the external appearance of the trees which sounded reasonable as per the facts laid. It was held that innocent misrepresentation does not cause avoiding a contract unless the representation is made without reasonable ground.[9]

Richardson vs. Grandy[10]

The court held that though representations describing things sold made by the vendors does not necessarily import a warranty yet where representations are made by the vendors of the quality of things sold or its fitness for particular purpose relying upon such representation they will in law constitute a contract warranty.

Potomac Steamboat Co vs. Harlan & Hollingsworth Co.[11]

This case was related to a steamboat building which was supposed to have best quality material and best workmanship. The court’s opinion was that it must not be denied that an express affirmation of quality intended to operate on the mind of the vendee as an inducement to make a purchase and so operating constituted a warranty. It is the rule of law that any affirmation of quality of the article made at the time of the sale which is intended as an assurance of the fact stated and relied on will constitute an express warranty.[12]

Conclusion

Representations and warranties are common features in M&A transactions and are derived from common law systems. The main aim is to properly divide risk between the seller and the buyer. In countries with Anglo-Saxon legal systems the statements made are explicitly elements of ex delicto liability. Representations and Warranties relate to an object of sale in a broad sense. The general law states representation as denotations of facts which induces an innocent party to enter into a contract and if it is discovered untrue gives the innocent party a remedy for misrepresentation. However, in case of warranty it is a contract statement which allows to claim damages but not entitle the innocent party to terminate the agreement.[13]

Any buyer and seller should take at most precaution in drafting the representations and warranties included within an agreement to ensure that they are accurate and correspond to the intentions of parties. The parties should however specify how any disputes regarding the same will be solved. The parties usually must engage experts after closing of a transaction and subsequent to the rise of dispute. Whereas keeping experts prior to executing any purchase agreement may help a party clarify the representations and warranties within the purchase agreement. Once a dispute arises, the party can sit together and evaluate the claim.

Questions

Q.1 How is Representations defined?

Q.2 How is Warranties defined?

Q.3 Differentiate between Representatives and Warranties.

Q.4 How are Representations and Warranties defined with case laws?

Q.5 Judgements related to Representations and Warranties.


[1]104 S.W.2d 627, 632

[2] Behn vs. Burness (1863) 3 B & S 751

[3] Sorabshah Peshtonji vs. Secretary of State of India (1927) 29 BOMLR 1535

[4] All India General Insurance vs S. P. Maheshwari AIR 1960 Mad 484

[5] Representations, Warranties and Covenants: Back to the Basics in Contracts. (n.d.). Retrieved from https://www.natlawreview.com/article/representations-warranties-and-covenants-back-to-basics-contracts

[6] Sepinuck, S. (2015). The Virtue of “Represents and Warrants”: Another View. Business Law Today, 1-2. Retrieved June 4, 2020, from www.jstor.org/stable/businesslawtoday.2015.11.07

[7] 8i N. E. 63

[8] AIR 1963 Ori 217

[9] Disclaimer. (n.d.). Retrieved from http://www.nishithdesai.com/fileadmin/user_upload/pdfs/PE_Investments_-_Lookout_for_Representations_and_Warranties.pdf

[10] 49 Vt. 22

[11] 66 Md. 42

[12] Representations and Warranties. (1907). The Yale Law Journal, 17(2), 117-119. doi:10.2307/785705

[13] Srinivas, L. N. (2010, December 14). Representations and Warranties. Retrieved from https://www.legalindia.com/representations-and-warranties/

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