This article is written by Sankeit Taneja, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

One of the most common clauses to be found in contracts is the Representation and warranties clause. They basically tend to provide particulars and safeties against loss if the statements made in a contract are false. A difficulty arises when a lawyer tends to ascertain the difference between both of them as very often both terms are grouped together. The very basic role of Representation and warranties clause in a contract is to display the facts of a contract as and when they are present in the contract. Representation and Warranties can be defined in a very simple manner as assurances given by one party to another. 

Representation

In General Practice, representation clause is defined as a statement made by one party to the contract towards the other party or conjoint statements made by parties to a contract towards each other. This clause lays down the facts and circumstances of a particular agreement and acts as the foundation of a particular agreement which thereby displays a guarantee to the parties to a particular agreement that both the parties shall make the agreement work. A party to a contract may claim for misrepresentation when the representation given by the other party is found to be false in nature which may result in setting aside the contract, thereby entitling the receiving party to claim for damages. Black’s Law Dictionary has defined Representation as “A presentation of fact either by words or by conduct which is made to convince someone to act by entering into a contract

Warranties

In General Practice, warranties clause can be defined as a statement of fact contained in a contract. If the statement is found to be false, then the opposite party can claim for damages but however, unlike misrepresentation, the contract is not set aside by the opposite party. Warranties in a contract can either be of express or implied nature. Express Warranties are usually written in the contract and the buyers insist on having warranties of express nature whereas Implied Warranties fall under a Uniform Commercial Code wherein the sale of a particular good implies that there should be presence of fitness for a particular reason.

In Great Atlantic & Pacific Tea Co & Walker 104 S.W.2d 627, 632, the court defined warranty as “a statement or representation made contemporaneously with or as a part of, the contract of sale having reference to character, quality or title of goods, and by which he promises or undertakes to ensure that certain facts are, or shall be as he represents them.   

Types of Contracts which require Representation & Warranties Clause

Representation & Warranties clauses are commonly found in agreements like loan agreement, employment agreement, joint venture agreement. The purpose of representation & warranties clause in a loan agreement is to involve the Borrower in a financial transaction with the Lender in order to convince the Lender to sanction Borrower’s Loan.

With respect to Mergers & Acquisition agreements, Company purchasing or acquiring another company, would want the other company to agree on certain representations and warranties in order to complete the deal which could include:

• ERISA,
• Material Contracts,
• Taxes,
• Authority,
• Compliance of Laws,
• Employment,
• Capitalization,
• Intellectual Property,
• Financial Statements.

Importance & purpose of Representation & Warranties 

Why is it important to have Representation & Warranties in a contract or agreement? It is because this clause simply acts as an assurance which one party gives to the other party at the time of entering in a contract. Though there might be differences in the actual terms and conditions in a contract, the idea is to protect parties across all forms of contract. It serves as formidable protection for the buyer.  

There are three main purpose of Representation & Warranties:

• Allowing the buyer to collect necessary information regarding buyer or   the company and make a thorough decision;
• Supporting the parties to a contract by displaying the background for penalties & consequences of misrepresentation;
• To provide protection to the buyer by giving the buyer the option to either cancel or renegotiate contract terms either before or after entering in contract.

During the period of Due Diligence, Representation & Warranties play a crucial role as it allows the person signing a contract to carry out a detailed investigation of claims before entering the contract. Indemnification is also included during the said investigation period.

Various Laws may describe Representation & Warranties differently but in loan and other agreements mentioned above Representations refers to facts made by a party and Warranties refers to securing the other party in case of misrepresentation or false representation. 

Limited Liability in context of Merger & Acquisition in India

Representation & Warranties are provided backing by an indemnity from the seller thereby making the seller accountable for an indemnity claim against the buyer in case of breach of representation & warranties. 

The seller has various means to limit the liability either through de minimis provision or by having a restriction over the indemnity amount and the claim period 

It is to be noted that the provisions of limited liability do not stand applicable in case of breach of tax representation & warranties, fraud and other specific indemnity matters.

Explanations for Consideration & Non Consideration of Representation & Warranties

Non Consideration

Parties to a contract either give an in-depth consideration or they do not consider making representation and warranties a part of the contract. While companies do not consider to include representation and warranties as it might lead to a great peril for the company being prosecuted for fraud, there are times when the person drafting a particular contract leaves the term “representation and warranties” in order to eliminate diffusion and to keep it short and brief. If the facts or information which is mentioned in a contract is referred to as representation, then it tends to reduce the obscurity in a contract while achieving the goal of the contract and thereby guarding the buyer. 

Consideration

When Representation & Warranties is considered to be placed in a contract, it thereby helps to assign risks to both the parties. It has become the foundation for securing and protecting to terminate or amend the contract. When representation turns out to be of false nature, the warranty along with it thereby grants the other person to the contract to either terminate or refuse the transaction. 

When a contract is drafted by a lawyer or a legal representative of the client, the said person has a legal obligation to protect his client against any future risks while simultaneously safeguarding benefits that the client shall gain at the time of entering into a contract.

When an intentional false representation is made by a party, the other party can claim for a tort, but in order to quality for claim of tort, the party must prove that:

• Conscious unawareness or information of what give rise to a false representation;
• Commitment to make the contracting party rely on the other;
• Reasonable Dependence.

If the above elements are not proved, the claim shall stand unsuccessful.

Inclusion & Exclusion of Representation & Warranties

Inclusion

If Representation & Warranties are included in a contract, it shall help the affected party to protect its claim in case of opposing party’s false representation.

In other countries for instance the United States of America, some courts assort to out of pocket remedies for the determination of representation or its falsity. The other out of pocket remedy assorted by American courts is to calculate damages by considering at the benefit of the bargain. This is commonly used in case of violation of representation & warranties in contract. It is calculated by the seller’s represented value minus its actual worth.

Exclusion

The problem which many people face with representation & warranties is implied warranty and its protection. If in a contract a warranty is not spelled out, then it becomes difficult to claim for representation as it is not a type of common law warranty.

Confusion over Representation & Warranties 

The term Representation & Warranties seem very synonyms and when entered in an agreement, it becomes a great amount of difficulty to differentiate between the two terms, thereby amounting to representation, warranty or both.

In order to avoid the confusion over the two terms, they must be acknowledged in a written contract, thereby stationing any pre contractual representations & warranties that are to be made at the time of entering in a contract.

Claims for Damages arising due to Representation & Warranties

A claim for damages arising due to breach of Representation & Warranties shall be made within six years from the date of the alleged breached.

The Principal for calculating damages is that the damages should be assessed in such a manner so as to put the Claimant in a position as if the contract was performed with perfection. For instance, if the warranty is true then the loss or the damage so caused shall be the difference between the price paid and the actual value of the agreement.

In Ninth Circuit Court of Appeals in Western Filter Corp v. Argan, Inc 9th Cir. 8/25/2008, the decision given by a panel consisting of three US judges who held that the most reasonable interpretation of survival clause is that it servers only to specify when a breach of representation and warranties clause may occur and not when action shall be taken. 

Conclusion

Representation & Warranties are nothing more than the underlying matter of facts when they are being presented as a part of a term of contract. When terms “Representation & Warranties” are used in a contract, they act as a blending agent, thereby bringing together the past and future together in terms of a contract. Every contract stands to be different from the other in one or the other aspect but the only common instrument which can be found in all contracts is the language used in each and every contract, simpler the language, better the understanding and the same principle applies to representation & warranties clause as a simple language is the key to defeat vagueness and contradictions.

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