Representations and Warranties: Everything You Need to Know
Representations and warranties in business contracts provide facts (representations) and security against loss (warranties) if the statements made are not true. 7 min read updated on September 19, 2022
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What are Representations and Warranties?
Representations and warranties in business contracts provide facts (representations) and security against loss (warranties) if the statements made are not true. Representations and warranties may also be shortened to "represents and warrants" in a contract.
If the representation in the contract is found to be false, it is called "inaccurate," while a false warranty is considered breached. Representations always refer to past information, as it is impossible for a company or individual to present future information as factual.
Every contract between two parties includes representations and warranties. For example, if you decide to go to an auto dealership to buy a car , you would enter this transaction with several representations, such as:
- The car is actually what the seller represents it to be, in terms of model and make
- The dealership is legally authorized to sell cars to consumers
- The car will actually work when used properly
The warranty made by the dealership is that all of these concepts are valid. If it turns out that one or all of these representations are not true, the contract to buy the car may be cancelled. Another warranty made by the seller might be to repair any defect that arose because of the misrepresentation.
But the warranty may not last forever. In this example, the seller or manufacturer of the car might offer a period that the unit will work without any defects. Beyond that period, the warranty is no longer in effect. However, some warranties do last for the life of the product. In this case, the buyer in the agreement can expect the seller to repair or replace the product any time it malfunctions.
Warranties help provide protection to consumers on products, and they are subject to federal laws and the Uniform Commercial Code . If the seller offers an extended warranty, it must protect the product beyond the initial agreement made between the buyer and seller. A warranty is a form of insurance and is subject to the same regulations per state laws and the parties involved.
Representations and warranties are commonly used in acquisition, joint venture , publishing, employment, and loan contracts . In a loan contract, the borrower involved in a financial transaction will provide representations and warranties to the lender as a way to convince the lender to issue a loan. But if the borrower's representation is no longer true, the lender can enforce the penalties spelled out in the contract.
In an acquisition or merger agreement, the company buying or acquiring the other company will likely want the other company to agree to a number of representations and warranties in the deal. These issues could include:
- Material contracts
- Compliance with laws
- Intellectual property
- Financial statements
- Capitalization
In an agreement of this nature, the company acquiring the other party will typically limit the contract to a few specific issues to have it "narrowly drawn."
The three main purposes of representations and warranties are:
- To allow the buyer to gather information, learn as much as possible about the seller (or other company involved in the transaction), and make an informed decision
- To support both involved parties by spelling out the framework for the penalties and course of action if the contract issuer's representations are found to be false
- To protect the buyer and give him/her options to cancel or re-negotiate the contract terms before or after signing
Representations and warranties are especially important during the due diligence period, since this is the time that allows the signers to further investigate claims made before entering into the agreement. This section of a contract will also include an indemnification , or detail the protections and options given to the buyer in the terms.
Different laws might have different definitions of representations and warranties. But in loans and other contracts, representations refer to facts made by one party and warranties refer to the security for the involved party if the representations are not actually true.
The purpose of representations and warranties is to disclose information between the two parties. Those given by the seller in a business contract tend to be more extensive because they could include information about stocks, liabilities, assets, and any target companies involved in the transaction.
There are implied warranties and expressed warranties. Implied warranties fall within the restrictions of the Uniform Commercial Code, which means that all goods sold should be "fit for a specific purpose." Expressed warranties are included in written contracts and signed by both parties. If a buyer is trying to take legal action against a seller, it is easier to prove that the seller violated the terms of an expressed warranty than an implied warranty .
Why are Representations and Warranties Important?
In a contract or business agreement, the representations and warranties act as assurances given by one party to the other. While the actual contract and terms of the agreement may differ, the ideas of representation of facts and warranty to protect the involved parties are the same across all contracts. A buyer should rely on these representations as fact unless proven otherwise. Representations and warranties used together serve as the best form of protection for a buyer.
Both buyers and sellers should note that exaggerating the good points of a product or service does not constitute a false representation. Salespeople are expected to "puff" their products or services to a certain extent to help make them more appealing. But if any of the information presented as fact is found to be an outright lie, it would constitute a false representation.
Reasons to Consider Not Using Representations and Warranties
Some companies choose to never include representations in contracts or agreements because using representations puts the company at risk of being sued for fraud. You may also find that contract drafters leave the words "representations and warranties" off the contract to keep it concise and eliminate redundancy. Simply referring to the information as representations can also reduce wordiness of a contract while accomplishing the same goal, which is to protect the buyer and seller.
Reasons to Consider Using Representations and Warranties
Including representations and warranties in a contract helps to allocate risk between both signers. Representations and warranties also become the foundation for security and protection to terminate or amend the contract. If one of the representations made is inaccurate, the warranty included outlines the action that the one signer can take against the other. In most cases when a representation is false, the warranty allows the other person involved in the contract to terminate or decline the transaction.
When a lawyer or legal representative drafts a contract, he or she has a legal obligation to protect the client against risks while securing advantages that will come from entering into the agreement. With representations and warranties included in the contract, the lawyer can feel confident that the contract fulfills both of these responsibilities.
If one party involved in a contract intentionally makes a false representation, the other party can make a common law claim of deceit, also referred to as a tort. In order to qualify as a common law of deceit, the party must prove:
- Conscious ignorance or knowledge of what makes the representation false
- Intent to make the contract signer rely on the other
- Justifiable reliance
Without proof of these elements, the claim will fail. If the contract issuer can prove that the other party knew about the falsity of the claim prior to signing, this will also cause the common law claim of deceit to fail in court.
What Could Happen When You Use Representations and Warranties?
If your contract includes representations and warranties, they will help to protect you in case any of the claims made by the seller turn out to be false. The affected party can typically rescind or void the terms of the contract, then go on to obtain funds for recovery of the time and money spent as part of the transaction.
In some states, courts will use out-of-pocket measures to determine the damages when representations are false. The first way to measure damages limits the amount returned to the buyer. The measurement takes the amount the buyer paid for the item, then deducts what the item was worth. The resulting amount is what would be owed to the buyer in damages.
The second out-of-pocket measure to calculate damages looks at the benefit of the bargain. This method is more commonly used in violations of representations and warranties written into contracts. The formula for this method takes the value of the item as represented by the seller, then deducts the actual worth of the item.
What Could Happen When You Don't Use Representations and Warranties?
One of the problems that many people face in relation to representations and warranties is implied warranties and how well those are protected. In the event that your contract or agreement doesn't include a spelled-out warranty, it's hard to claim that the representations made don't come with some type of common law warranty. If a seller is making claims about a product or service, the buyer should have protection even if the warranty isn't clearly stated.
In one example of this struggle, CBS Inc. took legal action against Ziff-Davis Publishing Co. in 1990. CBS claimed that Ziff-Davis falsely represented and warranted the financial condition of a division that it would be selling to CBS. During the due diligence period, CBS had its accountants review all financial statements of that division. The accountants reported that the financial statements did not match up with what was represented and warranted in the contract, but CBS representatives signed anyway.
In this example, which went to the highest court In New York, the issue was whether or not CBS could state a breach of the warranted claims, as those involved in the transaction had evidence that they were not true. But in this case, CBS won the fight and could end the contract without penalty.
Not using representations and warranties at all in a contract could put you at risk for signing an agreement with invalid terms. However, there is still some implied protection, which is how CBS won its case against Ziff-Davis.
Frequently Asked Questions
- I signed a contract with representations of facts that I have found to be false. What can I do?
The warranties spelled out in the contract offer protection for false representations. Read your contract carefully to determine what your options are in the event that the representation is false. Most buyers can end the contract without penalty and sue for damages to recover any time and money spent on the transaction.
- My company has an expiring contract with a big customer. Should this be included as part of the representations and warranties in a contract with another customer?
Yes, because the contract with the other customer could impact the valuation of your company. It's important to be upfront about any changes to the company or value that could occur during the terms of any contract, in order to avoid legal action based on false representations.
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Warranties vs. Representations in Contracts: Knowing the Difference
Contracts are fundamental to business transactions, providing a framework for the exchange of goods, services, and promises. Two critical components of contracts are warranties and representations . While they may seem similar, understanding their distinctions is crucial for both parties in a contractual relationship. This article delves into the nuances of warranties and representations, exploring their legal implications and the importance of distinguishing between them.
Understanding Representations
Representations are statements of fact made by one party to another before or at the time of contracting. They are designed to induce the other party into entering the contract by providing information about certain conditions or circumstances.
Characteristics of Representations
![representation and warranties Characteristics of Representations](https://legittai.com:443/blog/wp-content/uploads/2024/02/Characteristics-of-Representations.jpg)
- Fact-Based : Representations are assertions about past or existing facts.
- Inducement : They are made to persuade the other party to enter into the contract.
- Not Part of Contract Terms : Generally, representations are not a part of the contract’s terms but are pre-contractual statements.
Legal Implications
If a representation is found to be false, it can lead to a claim for misrepresentation. Depending on the nature of the misrepresentation (fraudulent, negligent, or innocent), remedies may include rescission of the contract or damages.
Understanding Warranties
Warranties are assurances or guarantees that certain facts or conditions about the subject of the contract are, or will be, true. They are part of the contract’s terms and provide a basis for the contract’s performance.
Characteristics of Warranties
![representation and warranties Characteristics of Warranties](https://legittai.com:443/blog/wp-content/uploads/2024/02/Characteristics-of-Warranties-1.jpg)
- Guarantee About the Contract : Warranties are promises that certain facts regarding the contract are true.
- Integral to Contract Terms : They form part of the contract and are enforceable as contract terms.
- Future-oriented : Warranties often pertain to the future performance or quality of the subject matter of the contract.
Breaching a warranty allows the non-breaching party to claim damages. However, it does not necessarily entitle them to terminate the contract unless the warranty is a condition, a term so essential that any breach of it justifies termination.
Differences Between Warranties and Representations
The key differences lie in their nature and the legal consequences of their breach:
- Nature : Representations are pre-contractual statements of fact, whereas warranties are promises or guarantees within the contract.
- Breach Consequences : A false representation leads to a claim for misrepresentation, while breaching a warranty leads to a breach of contract claim.
- Remedies : Misrepresentation can result in rescission or damages, while a warranty breach typically results in damages.
Why the Distinction Matters
Understanding the difference between warranties and representations is crucial for several reasons:
- Legal Remedies : The nature of the remedy available depends on whether a statement is a warranty or a representation.
- Risk Allocation : The distinction helps in allocating risk between the parties, particularly in terms of liability and the potential consequences of a breach.
- Contract Drafting : Clearly categorizing statements as representations or warranties in contract drafting avoids ambiguity and potential legal disputes.
Case Studies and Examples
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Representations and Warranties in Different Contexts
- Sales Contracts : In sales contracts, warranties might relate to the quality or condition of the goods, while representations could pertain to their history or origins.
- Service Agreements : In service agreements, representations might concern the provider’s qualifications, while warranties could relate to the standard of the service to be delivered.
International Perspectives
The treatment of warranties and representations may vary in different legal systems. In some jurisdictions, the distinction might be less pronounced, while in others, like the United States and the United Kingdom, it is more clearly defined.
Best Practices in Contract Drafting
To avoid confusion and potential legal disputes, it’s important to:
- Use Clear Language : Clearly distinguish between what is intended as a representation and what is a warranty.
- Define Terms : Explicitly define what constitutes a representation and a warranty in the contract.
- Understand the Implications : Be aware of the legal consequences of each and draft accordingly.
The Role of Legal Counsel
Seeking legal advice is essential in drafting contracts that accurately reflect the parties’ intentions and in understanding the legal implications of warranties and representations. Lawyers can provide clarity and guidance on how to structure these elements effectively.
In contract law, the distinction between warranties and representations is more than a matter of semantics; it has significant legal implications. While representations are pre-contractual statements that induce the formation of a contract, warranties are promises within the contract about the truth of certain facts. Misunderstanding or misclassifying these elements can lead to unforeseen legal consequences, emphasizing the need for clarity and precision in contract drafting. By understanding these differences and their implications, parties can better protect their interests and foster more secure and effective contractual relationships.
Did you find this Legitt article worthwhile? More engaging blogs about smart contracts on the blockchain, contract management software and electronic signatures can be found in the Legitt Blogs section. You may also contact Legitt to hire the best contract lifecycle management services and solutions.
FAQs on Warranties and Representations
What is a representation in a contract.
A representation is a statement of fact made before or at the time of contracting, intended to persuade the other party to enter the contract.
What is a warranty in a contract?
A warranty is a promise within a contract that certain facts about the contract's subject are true.
How do representations differ from warranties?
Representations are pre-contractual statements of fact, while warranties are guarantees within the contract itself.
What are the legal implications of a false representation?
A false representation can lead to a misrepresentation claim, with remedies including rescission of the contract or damages.
What happens if a warranty is breached?
Breaching a warranty leads to a breach of contract claim, typically resulting in damages.
Can a false representation lead to contract termination?
Generally, a false representation allows for rescission, which effectively terminates the contract.
Why is it important to distinguish between warranties and representations?
The distinction affects legal remedies, risk allocation, and how parties draft and interpret contracts.
Are warranties always about the future?
Warranties often pertain to future performance or quality but can also assure current facts.
Do all contracts have warranties and representations?
Most contracts include warranties and representations, but their presence and extent depend on the contract's nature and terms.
How can one avoid confusion between warranties and representations in contracts?
Use clear language to categorize statements, define terms within the contract, and understand the legal consequences of each.
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Representations and Warranties
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Major Difference Between Representations and Warranties
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This article is written by Kapil Nikam, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com . Here he discusses “Major Difference Between Representation and Warranties”.
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Introduction
Representations and warranties are important clauses in the contract. These terms are using interchangeably. It is important to analyze some provisions relating to differences between representations and warranties. Before analyzing legal provisions concerning representations and warranties we will go through one contract to understand the difference between representations and warranties and thereafter we will see legal scheme under the Indian law regarding representations and warranties. For example, we are looking at Major differences between representation and warranties in a contract; effect of non – compliance ” the contractor represents and warrants that..” due to the aforesaid clause most people feel that representations and warranties are similar. However, there are cardinal differences between representations and warranties. We will discuss in present article major differences between representations and warranties.
Most of the contracts representations and warranties clauses start with a sentence stating that “The Contractor Represents and warrants that……”. For example, we are going to analyze standard representation and warranties clause in National Highway Authorities of India’s Concession Agreement, this Concession Agreement which is available on NHAIs website readers can glance it from the said website. We are reproducing representation and warranties clauses as under:
![representation and warranties Download Now](https://blog.ipleaders.in/wp-content/uploads/2024/08/labourlaw_in_article.jpg)
Representations and Warranties of Concessionaire :
- It is duly organized and validly existing under the laws of India.
- It has the full power of and authority to execute, deliver and perform its obligations under this Agreement and carry out the transactions contemplated hereby
- It has financial standing and capacity to undertake the Project in accordance with the terms of the Agreement.
- This agreement constitutes it’s legal, valid and binding obligation, enforceable against it in accordance with the terms hereof, and its obligations under this Agreement will be legally valid, binding and enforceable obligations against it in accordance with the terms hereof
- It is subject to the laws of India, and hereby expressly and irrevocably waives any immunity in any jurisdiction in respect of this Agreement or matters arising thereunder including any obligation, liability or responsibility,
- The information furnished in the Bid and as updated on ur before the date of this Agreement is true and accurate in all respects as on the date of this Agreement;
- There are no actions, suits or investigations pending or, to its knowledge threatened against it at law or in equity before any court
- It shall at no time undertake or permit any change in ownership except in accordance with the provisions of clause 5.3 and that the Consortium not less than 51 per cent of its issued and paid-up Equity as on the date of this Agreement and that each member of the Consortium whose technical and financial capacity was evaluated for or qualifications and shortlisting in respond to the Request for Qualification shall hold at least 26 per cent of Equity during the Construction Period and two years thereafter along with its associates.
Provided further that any such requests made under Clause 7.1 (k) and/or Art 48, at the Option of the Authority, may be required to be accompanied by a suitable no objection letter from lenders.
Aforesaid are the representations and warranties clause, in the said clause, all representations and warranties are together therefore, the layman may quite confused that there is no difference between representation and warranties. However, the legal position is different representations and warranties are different. We will see the difference between representation and warranties.
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If we see the representation and warranties of NHAI point no. 1, 2, 4 and 5 are similar to the Concessionaires representation and warranties as mentioned hereinabove. However, there are separate representations and warranties such as NHAI represents that they shall have 50 per cent Right of Way available on the Appointed Date. No litigations are pending against them which are materially affect on the Project, these representations are very crucial on the part of Concessionaire since without the availability of Right of Way Concessionaire can not smoothly start the construction activities on the Project. In the event of misrepresentation, the Concessionaire can seek a legal remedy before the appropriate forum.
Difference between Representations and Warranties :
Representations are the assertion of fact true on the date of execution of the contract, it is for inducement for another party to enter into contracts. A warranty is the promise of indemnity if representation is false it is inaccurate and if the warranty is false it is breached. Representation and warranties have different meanings and different contexts but in some agreements, remedies are the same for both. In Indian Contract Act representation has not been defined however, misrepresentations have been explained under S. 18 of the Indian Contract Act.
Earlier there are very few case laws so that aggrieved party could not get damages based on misrepresentation. When anyone positively asserts something is true and based on said positive assertion other parties make a contract, positive assertion means a certain statement of fact and another party belives on the said statement of fact, sometimes misrepresentation be made, innocently fraudulently or carelessly also. Misrepresentation may be implied also or sometimes depend upon the conduct of the party. The effect of representation made before the contract is very crucial in every contract.
In India, the law pertaining to representation and misrepresentation has not developed properly. However, in case of breach of representations suffering party can sue for damages under the provisions of Section 19 of the Indian Contract Act. Recently, there are some judgments wherein the aggrieved party got remedies under the provisions of Section 19 of the Indian Contract Act. However, it is subject to evidence adduced before the Arbitration Tribunal or Court.
Warranty is defined in the Sales of Goods Act as stipulation collateral to the main purpose of the contract, the breach of which gives rise to claim for damages but not right to reject the goods and treat the contract as repudiated. The Hon’ble Madras High Court in the matter of All India General Insurance Company Vs S.P. Maheshwari stated that warranties are representation which is made the basis of the contract whereas representation is not strictly speaking a part of the contract or the essence of it, but rather something preliminary and like an inducement to it.
Recently, the Hon’ble Delhi High Court in the matter of National Highway Authority of India Vs Pune Solapur Road Development Corporation Ltd (O.M.P. (COMM) 128/2018 & I.A. No. 3857/2018 confirmed the award passed by the Arbitral Tribunal in favour of the Respondent, the Arbitral Tribunal on relying on the breach of representations and warranties clause give damages to the Respondent holding that the Petitioner had represented and warranted that it has full power and authority to deliver and perform its obligations under the Agreement and carry out the transaction contemplated therein. Under Clause 7.2 (g) the Petitioner had warranted that it had complied with the applicable laws in all material aspects. Similarly, under clause 7. 2(j) it had warranted that the Petitioner has a good and valid right to the site and has power and authority to grant a license in respect thereof to the Concessionaire. In huge Public-Private Partnership Project representation clauses need to draft carefully in view of its financial implication. Also, representation and warranties clauses in the agreement such as Share Purchase Agreement, Loan Agreements, Conveyance Deed, agreement to sale, leases relating to commercial properties are very crucial.
We have in detail discussed the representation clauses and warranties also. Now, we will discuss warranties in the Indian context. Warranties are nothing but it is the stipulation, collateral to the main purpose of the contract and the breach of which gives right to claim of damages but not to right to reject the good. However, this definition in terms of Sales of Good Act, 1930. In merges transactions, the representations and warranties clauses are very crucial.
In every merger transaction, buyer and seller want specific representation and warranties to protect their interest. The buyer wants general representation and warranties and the seller wants to dilute the same to avoid potential litigation. The role of legal consultant for drafting and vetting representation and warranties clauses are very important and one needs to carefully draft said clauses. Due diligence exercise during the acquisition transactions is very important to draft representation and warranties carefully.
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In this article, we have seen the meaning of representation and warranties, we have also seen what is the difference between representation and warranties. Though, the representation and warranties have not been defined in the Indian Contract Act. However, over the period jurisprudence pertaining to representation and warranties have been evolved. The term representation is absent in the Indian Contract Act but the misrepresentation has been defined and discussed in various case laws. To avail remedy, one needs to understand the difference between representation and warranties. Representation and warranties are protective clauses that are very useful for both parties to culminate in any type of transaction. This article is brief about the differences between representation and warranties, for better understanding, it is advisable to read legal provisions carefully.
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- Contract Law
Representations and Warranties: What’s the Difference?
Representations and warranties are a core part of the contract law module in any law student’s course timetable. That said, they remain important to the lawyer and the businessperson alike. Knowing the difference, and the consequences of breach, can help you navigate even the most complex agreements and contracts .
What is a warranty?
A warranty is a promise that a particular statement made is true at the date of the contract. That said, it can relate to current and/or future conduct and/or facts.
A good example of the former is: ‘the Supplier warrants that it has sufficient Stock to fulfil the Distributors’ Orders in connection with this Agreement’. Contracts for the sale of goods often contain additional warranties about the condition, fitness, or adherence to a given specification.
With the latter, in a services context, a frequently used or sought warranty is: ‘the Contractor will perform the Services with reasonable care and skill.’
Warranties are also used frequently in the purchase of businesses. A seller of shares would almost certainly warrant something along the lines of: ‘The Sale Share constitutes the whole of the allotted and issued share capital of the Company and is fully paid or credited as fully paid.’ It can get more complicated, depending on the contract. For example, warranties in a Share Purchase Agreement are typically broken down into warranties of quality (of the company) and warranties of reasonable care (that certain figures may not be precisely true, but care has been taken to make sure that they are). If the figures were wrong, a claimant would have to demonstrate that reasonable care was not taken in getting the correct figure and/or it was otherwise reasonable to provide that figure in the context of the sale.
A breach of warranty gives rise to a claim for breach of contract – the main remedy being an award of damages. In England, an award of damages is to compensate for loss. Therefore, a breach of a warranty asserting that a good was in proper condition, but it was not, would entitle the claimant to (potentially) replace the good or to get it fixed. Another way this can be assessed is diminishment in value.
What is a representation?
A representation, like a warranty, is a statement of fact but is one which is made during contractual negotiations in order to induce another party to enter into a contract. While representations are usually made prior to the contract they are often repeated and therefore form the basis of a contract.
Prior representations that are not incorporated into the contract are not actionable in contract law. However, the parties must themselves contract for one to bring an action in respect of a representation.
There are three types of action if a representation is untrue (discussed in more detail in our article here ):
- Fraudulent misrepresentation: occurs where a representation is made, it is false, and the representor made it knowingly and recklessly as to the truth.
- Negligent misrepresentation (pursuant to the Misrepresentation Act 1967 ): occurs where a false representation is made by a representor without care or without reasonable ground for belief in its truth.
- Innocent misrepresentation(pursuant to the Misrepresentation Act 1967 ): where a false representation is made by a representor where it had reasonable grounds for believing in its truth
So, what is the difference between representations and warranties?
The key difference between a representation and a warranty is the remedy available to the innocent party when there is a breach. If a warranty is found to be untrue, the innocent party will be entitled to damages. A breach of warranty does not allow the innocent party to rescind the contract, which would effectively set it aside and put the parties back in the position they were in before the contract was made; a an action in respect of a representation, however, may.
As a warranty is a term of the contract, normal breach of contract considerations apply as set out above.
In contrast, if a representation is found to be untrue the innocent party will be entitled to bring a claim for misrepresentation, as above.
Where a false representation is made fraudulently, the claimant can be awarded tort damages, which differ from contractual damages, in that there is no ‘remoteness’ bar (see our article on remoteness here ).
The assessment of damages, in essence, differs because the innocent party will not have to prove that their losses were in the reasonable contemplation of the parties at the time the relevant contract was entered into. Instead, the losses must be “reasonably foreseeable”, which has been held by the courts to be a less onerous test than the test associated with a breach of warranty claim.
The manner in which damages are calculated also differs for a breach of representation claim versus a claim for breach of warranty. Under a claim for breach of warranty, damages are usually assessed at the time of the breach. Under a claim for breach of representation, damages are assessed from the date the misrepresentation was made. This is usually an earlier date and so may give rise to a higher level of damages.
A successful action for fraudulent misrepresentation would also entitle the claimant to rescind the contract.
A representation made negligently would entitle the claimant to tort damages and recission, but the Courts have the power to award damages ‘in lieu’ of recession, meaning that the obligations of each party under the contract continue.
A false representation made innocently only entitles the successful claimant to recession, but the Court does have the discretion to award damages instead.
Given the potential to rescind the contract and the wider scope for damages, it is generally more advantageous for a party to be given representations rather than warranties. However, whether or not a party can insist on this will depend on the bargaining strength of both parties and the type of contract on the table.
Can warranties also be representations?
If you are familiar with contracts, you may have seen wording such as “the seller represents and warrants…”. Where the wording is clear cut, it is likely that the court will view the statement as both a representation and a warranty. However, where the wording does not expressly provide that a warranty is to take effect as a representation, an innocent party will struggle to argue that the warranty is also actionable in misrepresentation.
Take the case of Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch) as an example. In this case, the Court held that various warranties in the share purchase agreement, which were not expressed to be representations, could not be representations.
The case of Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm) further reiterated this point. Here, the Court concluded that it was not enough that the subject matter of the warranty was capable of being a representation; there was no representation because there was no express provision to that effect. The fact that the agreement contained an entire agreement clause also made it clear that any pre-contractual understandings, communications or representations had not been relied upon or had been withdrawn before completion.
Representations and Warranties – final thoughts
Representations and warranties may appear similar on the surface but the remedies available can be completely different. The question of whether a statement is a warranty, a representation, or both will depend upon the wording used and the context of the contract in question. Careful drafting of representations and warranties, as well as any exclusion clauses, is therefore key!
If you have any questions about representations and warranties, or about any other contract law issue, please contact Neil Williamson , Colin Lambertus , or the EM Law team here .
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What are Representations and Warranties?
Representations and warranties refer to the matters and facts within a contract. Representations are statements of facts that are understood to be a condition of the sale. Warranties, on the other hand, generally define the conditions of the contract at some point in the future.
Representations and Warranties Examples
Examples of what representations and warranties might cover:
- Example 1. Financial assurances
- Example 2. The company is operating lawfully
- Example 3. Company assets are owned outright
Here’s another web page about representations and warranties.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
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Representation vs. Warranty: What’s the Difference?
The main difference between representation and warranty is that representations are generally limited to the time of agreement whereas warranties may extend beyond the initial transaction and cover a specified period.
Before we move to more differences, let’s first understand Representation and Warranty:
Major differences between Representation and Warranty
Representation | Warranty |
---|---|
Representations provide information and assurances about a party’s position, condition, or compliance. | Warranties provide guarantees about the quality, performance, or characteristics of a product or service. |
Representations are meant to be true and accurate to the best of the party’s knowledge. | Warranties create a legally binding obligation for the party offering the warranty. |
A representation may be actionable if it is later found to be false or misleading, potentially resulting in legal remedies or contractual disputes. | A warranty breach can lead to claims for damages or specific performance. |
Representations are often made to induce parties to enter into a contract, ensuring the other party is properly informed. | Warranties provide ongoing assurances throughout the duration of the contract. |
Representations focus on conveying information about the present or past state of affairs. | Warranties primarily deal with future performance, quality, or condition of the subject matter. |
You can see other “differences between…” posts by clicking here .
If you have a related query, kindly feel free to let me know in the comments below.
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What's the difference between a "representation" and a "representation and warranty?"
From what I understand, a "representation" is a statement of fact that underpins e.g., a contract.
My understanding is that a "warranty" is a promise that if something isn't true, it will be "made true" during the course of the warranty's life. E.g. "If your widget doesn't work within the first year of sale, we'll give you another one that works."
Within the above context, I am confused by the dual term "representation and warranty" or "represents and warrants" in a contract. What exactly does it mean? Put another way, how can something be both a statement of fact and a promise? Or does a term that draws on two other terms have a "third" meaning?
- united-states
- contract-law
5 Answers 5
English law answer:
There are three types of contractual terms: conditions, warranties, and innominate terms.
Condition: a term which, if broken, allows the disappointed party to sue for damages and cancel the contract
Warranty: a term which, if broken, allows the disappointed party to sue for damages, but they cannot cancel the contract
Innominate term: a term which, if broken, allows the disappointed party to sue for damages, and, depending on the gravity of the breach, may allow them to cancel the contract.
In most written contracts clauses stipulate whether they are a condition or warranty.
Representations:
A representation is any statement of fact made by one party during the course of making an offer. (This car here can go 100 km an hour, its never been driven before, this horse is healthy etc)
In the UK, if a person agrees to enter a contract, and one of the reasons for entering the contract is because of the representation, then if the representation turns out not to be true, you may sue for damages, and/or, depending on the breach, cancel the contract
For more information on the topic covered by this answer see: http://www.e-lawresources.co.uk/Conditions%2C-warranties-and-innominate-terms.php
This link contains case references for those who like to see authorities.
What is a representation and why are they put in contracts?
From a practical perspective, a contractual representation is a statement of fact in a signed writing made at an easily provable time that, if false, will support a claim for fraud upon showing the other elements of a claim for fraud that are not also included elsewhere in the contract (e.g. knowledge of falsity, the other party's lack of knowledge of falsity and damages). Some other elements of a common law fraud claim (e.g. publication of the statement to the other party, justifiable reliance, and materiality) are often also established on the face of contract that contains representations identified as such.
In a close case, the classification of a statement as a "representation" may also tip the scales if the status of a statement as a statement of a presently existing fact (which a representation must be to be actionable in a fraud action) is disputed.
If a representation concerning a key fact foundational to the contract is not true, that might provide a basis to rescind the contract based upon mutual mistake (even if it doesn't amount to fraud).
Proof that a false representation was intentionally false may give rise to claims for punitive damages and a right to rescind the contract in addition to a claim for compensatory damages.
Representations in a contract also simplify the proof of preliminary facts like the place of incorporation of the signing party, the addresses of the parties, the authority of the person signing it to do so, the fact that someone is not in military service, etc., in a lawsuit arising from the contract on any theory.
Sometimes a representation will "estop" a party from asserting something contrary to that representation in litigation. For example, if the seller represents that the transaction is a consumer transaction, and then tries to say that a consumer protection act claim does not apply because it is not a consumer transaction later on in court, when a dispute arises from the transaction, this argument contrary to the representation in the contract is likely to be summarily dismissed based upon that representation.
As another example, a party might represent that they agree that $500 an hour is a reasonable fee to pay an attorney in the event that a dispute arises under the contract and a prevailing party in litigation becomes entitled to attorneys' fees, which might reduce litigation over whether a party's attorneys are charging reasonable rates in that context.
Similarly, a contractual representation concerning authority to sign is binding on the party for which the signature is made, even if that person doesn't actually have the authority to do so under what is known as the "apparent authority" doctrine in agency law.
And, representations often provide context for the transaction that make it easier to interpret other provisions of the contract that would otherwise be ambiguous. For example, a representation that a transaction is being entered into solely for economic business purposes may help a court decide what other representations and disputes are and are not material to the parties, and might cause a court to decide that non-economic damages (i.e. emotional distress) should not be allowed even with respect to fraud claims arising from a misrepresentation (since non-economic damages are as a default rule allowed in connection with fraud claims in many jurisdictions).
What are warranties and covenants and why are they put in the contracts?
A warranty or covenant is a promise that something will be the case for which there is a remedy if it is not true, without regard to fault on a strict liability basis. Relief for a breach of warranty is generally limited to compensatory damages if breached, and would not generally provide a ground to rescind a contract, but a breach of warranty claim much easier to prove in court because it often doesn't require nearly as much evidence to prove in court as a fraud claim. The evidence beyond the contract itself in a breach of warranty claims is usually in the possession of the aggrieved party prior to bringing a lawsuit.
In a fraud claim based upon a representation, in contrast, some of the facts that must be proved to prevail in court (e.g. the knowledge of the person making the statement at the time that the statement was false) can usually only be obtained from testimony or out of court statements from an opposing party, or made to an opposing party.
Why call something both a representation and a warranty?
One both represents and warrants something in a contract so that both sets of remedies are available if the statement proves to be incorrect.
There is an easy to litigate remedy of money damages if the statement is not true, and harder to litigate fraud remedies if the statement meets the additional conditions.
Other Fine Points
N.B. There are other kinds of contract terms in addition to representations and warranties, such as conditions precedent. But, they are beyond the scope of the question and usually don't appear in a representations and warranties (a.k.a. "reps and warranties") section.
A slightly less common phrase is "represents, warrants and covenants", with the notion being that a warranty usually concerns something that you are promising is true at the time that the contract is signed, while a covenant is something that you promise will be true in the future or on an ongoing basis (sometimes running with the land when real estate is concerned).
So, you might "warrant" in a sale of real estate contract that the house you sold someone is free from defects and "covenant" that you will forever refrain from building any other building in a subdivision that impairs its view of the mountains. Or, you might warrant in a corporate bond contract that no more than 5% of a borrower's accounts receivable are currently overdue, and covenant that you will never let more than 10% of the borrow's accounts receivable enter overdue status.
But, in modern American English legal writing, the distinction between a warranty and a covenant has largely collapsed and even many sophisticated big business contract lawyers no longer use "represents, warrants and covenants" language in their contracts.
When used together "Representations and Warranties" the section of the contract may consist of one or more parties stating facts (representations) and promising to be held financially liable (warranties) to the extent the "facts" turn out to be incorrect.For example - I represent that the product I am licensing to a manufacture does not infringe any U.S. patents and I warrant that representation by committing to pay for their defense if they are sued due to patent infringement.
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Note that "warranty" has two meanings.
Poole, Shaw-Mellors. Contract Law Concentrate (4 ed 2019) . p A8 at the back.
Representation: A representation is a statement which induces the contract but which generally does not involve any binding promise as to truth. If a representation turns out to be false it may be an actionable misrepresentation. Warranty: [1.] A warranty is a less important term of the contract (not going to the root of the contract) so that if it is breached the injured party would be adequately compensated by the payment of damages. If this term is broken, it is not therefore a repudiatory breach. [2.] The word warranty is also sometimes used in a more general sense to mean ‘a term’.
Richard and Damian Taylor. Contract Law Directions (2019 7 ed) . p 118
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5.1.2 How to distinguish a term from a representation The test used to distinguish a term from a representation is based on the parties’ objective intentions. As the parties are not normally conscious of the distinction when they make their contracts it is unlikely that a particular statement will be labelled as ‘term’ or ‘representation’. You should bear this in mind when tackling a problem question in an examination and realize that you cannot recognize a term from a representation merely by looking at the words used. It is necessary to look at the circumstances and ask what a reasonable person would think of a particular statement in its overall context. In Oscar Chess Ltd v Williams (1957), Mr Williams sold a car to the dealers, Oscar Chess Ltd. Mr Williams said that the car was a 1948 model because this is what the registration book stated. The car was in fact a 1939 model (worth much less). The dealers were obviously aggrieved because they had bought a ‘lemon’ and they claimed the difference in value between a 1948 model and a 1939 model as damages for breach of contract. Denning LJ explained very clearly the different ways in which the word ‘warranty’ is used [I embolded.] (you should read his judgment; as usual he explains complex issues in a simple, easy-to-read manner). warranty (first sense) A warranty is a term of the contract, as opposed to a representation which is not part of the contract. A warranty constitutes a promise or guarantee which, if broken, automatically entitles the other party to damages to make good the promise.
warranty (second sense) The word warranty is also used to describe a term of a contract that is not a condition and gives the right to damages but not termination upon breach of the warranty.
What's the difference between a “representation” and a “representation and warranty?”
From Black's Law Dictionary:
A warranty differs from a representation in that a warranty must always be given contemporaneously with, and as part of, the contract; whereas a representation precedes and induces to the contract. [...] [U]pon breach of warranty, the contract remains binding, and damages only are recoverable for the breach; whereas, upon a false representation, the defrauded party may elect to avoid the contract, and recover the entire price paid.
(emphasis added)
how can something be both a statement of fact and a promise?
Representation and warranty pertain to different aspects: awareness toward inducement, and effectiveness.
A representation relates to the quality of entering a contract knowingly , that is, with awareness of something which induced the contract. But something that is true today might not necessarily be true, relevant, or effective in the future. Hence, the warranty pursues the effectiveness of what " is or shall be as it is stated or promised to be ".
![representation and warranties Iñaki Viggers's user avatar](https://i.sstatic.net/1QcT3.jpg?s=64)
- 1 The "precedes" part which you have placed in bold is not really accurate. Contractual representations in a "reps and warranties" section of a contract are routinely made contemporaneously with execution of the contract, although they do induce someone to sign it in the same way that the consideration provided by the warranties does. – ohwilleke Commented Aug 28, 2019 at 22:46
- @ohwilleke " The "precedes" part which you have placed in bold is not really accurate ". This was taken verbatim from the legal dict. and I see nothing illogical about that excerpt. Being " routinely made contemporaneously with the execution " does not imply that execution is the 1st time the representation is made. In order for a representation to induce the formation of a contract, the former has to be known by the induced party. That knowledge necessarily happens prior to entering the contract. Any other sequence would reflect that the representation was not material to the induced party. – Iñaki Viggers Commented Aug 29, 2019 at 10:06
- Legal dictionaries are often less than accurate, or have definitions that are not applicable to all circumstances. They are the choice of last resort when citing legal authority in court. – ohwilleke Commented Aug 30, 2019 at 20:04
- @ohwilleke " They are the choice of last resort when citing legal authority in court ". Let's not mislead the audience with that. Counterexample: Lakin v. Rund , 896 N.W.2d 76, 82 (2016) retrieves the definition of moral turpitude from Black's Law Dictionary, and right thereafter points out (with case law) that Michigan and " [o]ther jurisdictions have given similar definitions to moral turpitude ". If a legal dictionary were of last resort, courts would not bother consulting/citing it when plenty of case law on the matter is available. – Iñaki Viggers Commented Aug 30, 2019 at 20:45
- 1 The point is that when you cite to a case it is in the context that your are talking about or you don't cite to it, while a legal dictionary often doesn't have every sense of a word in which it is used. And seriously, citing to a legal dictionary is viewed as a sign of desperation or lack of any research and isn't used unless you have no other choice. An appellate court opinion, in contrast, doesn't have to prove anything to anyone, so the persuasiveness of its citations to authority are less important (and often they cite to a dictionary for a dubious or ill established proposition). – ohwilleke Commented Aug 31, 2019 at 1:42
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What Is a Warranties and Representations Clause?
A warranties and representations clause is a contractual provision that provides assurance to parties involved in a transaction that certain facts or circumstances are true or will occur. This fosters contractual trust, enabling parties to make informed decisions and allocate risks more effectively. The clause provides a foundation for a reliable contractual environment, allowing parties to rely on the accuracy of the information provided. By understanding the purpose, types, and key elements of this clause, parties can effectively negotiate and draft contracts that allocate risks and liabilities, ultimately leading to more equitable agreements and a clearer understanding of their obligations.
Table of Contents
Purpose of Warranties and Representations
Serving as a cornerstone of contractual agreements, warranties and representations provide assurance to parties involved in a transaction that certain facts or circumstances are true or will occur. This assurance fosters contractual trust, which is vital for business confidence in commercial transactions. By including warranties and representations in a contract, parties can rely on the accuracy of the information provided, thereby reducing uncertainty and potential disputes. This, in turn, enables them to make informed decisions and allocate risks more effectively. Fundamentally, warranties and representations facilitate a more transparent and reliable contractual environment, which is critical for building and maintaining business relationships. By providing a clear understanding of the transaction's underlying circumstances, these provisions promote a higher level of contractual trust, ultimately contributing to increased business confidence and more successful outcomes.
Types of Warranties and Representations
Warranties and representations can be broadly categorized into two primary types: fundamental warranties and representations, which are vital to the transaction's core, and non-fundamental warranties and representations, which provide additional assurances. Fundamental warranties and representations typically relate to the ownership, condition, and quality of the subject matter, such as a company or asset. These warranties are pivotal to the transaction, and any breach could have significant consequences. Non-fundamental warranties and representations, on the other hand, provide additional comfort and assurance to the buyer. These may include warranties regarding Implied Conditions, such as compliance with laws and regulations, or the absence of Hidden Defects. The distinction between fundamental and non-fundamental warranties and representations is key, as it determines the level of liability and remedies available in the event of a breach. Understanding the types of warranties and representations is vital for negotiating and drafting a thorough warranties and representations clause.
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Key Elements of the Clause
The Key Elements of the Clause are crucial in establishing the foundation of a Warranties and Representations Clause. Two primary components comprise these elements: the Scope of Promises, which outlines the specific assurances provided, and the Types of Assurances, which define the nature of the warranties and representations made. Understanding these elements is essential to crafting an effective and enforceable Warranties and Representations Clause.
Scope of Promises
Defining the scope of commitments is crucial, as it delimits the boundaries of the warranties and representations made by the parties involved. This scope outlines the specific verbal commitments and obligation boundaries that are being made, guaranteeing that all parties are aware of their obligations and responsibilities. A well-defined scope prevents misunderstandings and potential disputes by clarifying the extent of the warranties and representations. It is imperative to establish clear and concise language to avoid ambiguity and confirm that all parties are on the same page. The scope of undertakings should address key aspects, such as the duration, geographic scope, and specific obligations of the warranties and representations. By establishing a clear scope, parties can confirm that their commitments are reasonable, achievable, and aligned with their business objectives. A well-crafted scope of undertakings provides a solid foundation for a thorough warranties and representations clause, enabling parties to navigate complex transactions with confidence.
Types of Assurances
Fundamental to the warranties and representations clause are two primary types of assurances: affirmative and negative assurances, which collectively establish the framework for the commitments and obligations undertaken by the parties involved.
Affirmative assurances are explicit statements that confirm the existence of a particular fact or circumstance, providing a level of certainty and confidence in the transaction. In contrast, negative assurances imply the absence of a particular fact or circumstance, offering a degree of protection against unforeseen risks or liabilities.
The following assurance models are commonly employed in warranties and representations clauses:
- Fact-based assurances : Center on verifiable facts and circumstances, providing a high level of certainty and confidence in the transaction.
- Compliance-based assurances : Emphasize adherence to regulatory requirements, industry standards, or internal policies, solidifying a robust compliance framework.
- Liability-based assurances : Allocate risk and liability between parties, addressing potential breaches or non-compliance with warranties and representations.
Importance in Contract Negotiation
During contract negotiations, the warranties and representations clause assumes significant importance as it enables parties to allocate risks and negotiate critical obligations. Effective negotiation of this clause can provide valuable leverage points, allowing parties to clarify their contractual obligations and mitigate potential liabilities. By carefully negotiating this clause, parties can establish a clear understanding of their respective responsibilities and foster a more equitable agreement.
Risk Allocation Strategy
In any contract negotiation, a well-crafted risk allocation strategy is vital as it enables parties to identify, assess, and allocate potential risks and liabilities, thereby mitigating the likelihood of disputes and financial losses. This strategy is a critical component of effective risk management, allowing parties to make informed decisions and prioritize their interests.
A well-planned risk allocation strategy involves:
- Risk Identification : Identifying potential risks and liabilities associated with the contract, including operational, financial, and reputational risks.
- Risk Assessment : Evaluating the likelihood and potential impact of each identified risk, enabling parties to prioritize and allocate resources accordingly.
- Risk Allocation : Allocating risks and liabilities between parties, providing that each party is responsible for managing risks that are within their control.
Negotiation Leverage Points
Effective risk allocation strategies often provide a foundation for negotiation leverage points, as parties with a clear understanding of the risks and liabilities can negotiate from a position of strength. In contract negotiations, having a thorough warranties and representations clause can serve as a significant bargaining chip, granting contract power to the party that wields it. This clause can be a key negotiation leverage point, as it allocates risk and liability between parties, influencing the overall terms of the agreement. A well-crafted warranties and representations clause can provide a party with substantial contract power, enabling them to dictate the terms of the contract and secure more favorable conditions. Conversely, a party without a robust warranties and representations clause may find themselves at a disadvantage, forced to accept unfavorable terms. By recognizing the importance of this clause, parties can strategically employ it as a bargaining chip to negotiate more effectively and achieve a more balanced agreement.
Contractual Obligations Clarified
By clarifying contractual obligations, parties can mitigate misunderstandings and confirm that each party's responsibilities are definitively outlined, thereby facilitating a more streamlined negotiation process. This contractual clarity enables parties to identify potential areas of dispute and address them proactively, reducing the likelihood of future disagreements.
Incorporating a warranties and representations clause into a contract can significantly contribute to contractual clarity. This clause outlines the specific assurances and guarantees made by each party, providing a clear understanding of their obligations and responsibilities.
The importance of contractual clarity in contract negotiation cannot be overstated. It enables parties to:
- Establish clear expectations : Ensure that each party's responsibilities are explicitly outlined, minimizing the risk of misunderstandings.
- Facilitate dispute resolution : Provide a clear framework for resolving disputes, reducing the likelihood of protracted and costly litigation .
- Streamline the negotiation process : By clarifying contractual obligations, parties can focus on the key terms of the agreement, expediting the negotiation process.
Consequences of Breach or Inaccuracy
Breach or inaccuracy of warranties and representations can trigger a cascade of consequences, including damages, termination, and indemnification, which can have a profound impact on the contractual relationship. The Legal Ramifications of such a breach can be severe, leading to litigation, arbitration, or other forms of dispute resolution. In addition to the legal fallout, there are significant Financial Implications to ponder. A breach or inaccuracy can lead to financial losses, including compensatory damages, consequential damages, and punitive damages. Moreover, the breaching party may be liable for indemnification, which can lead to a substantial financial burden. The consequences of a breach or inaccuracy can also lead to termination of the contract, yielding the loss of business opportunities and revenue. In extreme cases, a breach or inaccuracy can damage the reputation of the breaching party, leading to long-term consequences for their business. It is vital for parties to comprehend the consequences of a breach or inaccuracy to take the necessary steps to comply with the warranties and representations clause.
Limiting Liability and Risk
To mitigate the potentially devastating consequences of a breach or inaccuracy, parties may employ various strategies to limit liability and risk, thereby protecting their interests and minimizing potential losses. Effective risk management is vital in warranties and representations clauses, as it enables parties to allocate risk and manage potential liabilities.
To achieve this, parties may consider the following strategies:
- Liability Caps : Imposing a maximum amount of liability in the event of a breach or inaccuracy, thereby limiting the potential losses.
- Exclusions of Indirect Damages : Excluding liability for indirect, consequential, or punitive damages, which can be unpredictable and potentially devastating.
- Dispute Resolution Mechanisms : Establishing clear and efficient dispute resolution mechanisms to quickly resolve disputes and minimize the risk of protracted litigation.
Effective risk management is essential in warranties and representations clauses, as it enables parties to allocate risk and manage potential liabilities.
Best Practices for Drafting
When drafting warranties and representations clauses, precision and clarity are paramount, as any ambiguity or vagueness can lead to costly disputes and unintended liabilities. To avoid drafting pitfalls, it is crucial to prioritize clarity fundamentals, guaranteeing that the language used is concise, unambiguous, and free from unnecessary complexity.
Define Key Terms | Clearly define key terms and concepts to avoid ambiguity and maintain consistency throughout the agreement. |
Specify Representations | Clearly specify the representations being made, including the scope, duration, and limitations. |
| Establish Remedies | Establish clear remedies for breaches, including the process for notification, cure periods, and consequences of non-compliance.
Frequently Asked Questions
Can warranties and representations be waived or disclaimed?.
In contractual agreements, warranties and representations can be waived or disclaimed, but doing so may have significant legal implications. A waiver may limit liability, but it can also lead to waiver consequences, such as limiting recourse for misrepresentation.
How Do Warranties and Representations Differ From Covenants?
In contractual agreements, warranties and representations differ from covenants in their legal implications, with warranties and representations centering on statements of fact, whereas covenants entail specific contractual obligations, highlighting nuanced legal distinctions in contractual obligations.
Are Warranties and Representations Only Used in Business Contracts?
While commonly associated with business contracts, warranties and representations can also appear in personal agreements, such as prenuptial agreements, and even in everyday transactions, like purchasing a used vehicle from a private seller.
Can Warranties and Representations Be Used in International Contracts?
In international contracts, warranties and representations can be employed, but their enforcement across borders poses complexities, necessitating careful consideration of cross-border implications and international enforcement mechanisms to facilitate effective dispute resolution.
Do Warranties and Representations Have a Statute of Limitations?
In contractual agreements, warranties and representations are typically subject to time limitations, with claims expiring after a specified period, often coinciding with the contract duration, thereby limiting the window for filing disputes or claims.
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Representations vs. Warranty in Commercial Contracts: Understanding the Key Differences
This article on ‘Representation vs. Warranty in Commercial Contracts: Understanding the Key Differences’ was written by Amruta Patil , an intern at Legal Upanishad.
Introduction
A contract is an agreement that is enforceable by law as defined under Section 2(h). A contract has numerous terms, clauses, conditions and warranties which are involved in the making of it. A few key clauses are the Representation and Warranty Clauses which are often part of various kinds of contracts such as commercial contracts, Loan agreements and others.
The terms Representation and Warranty are often seen to be part of the contract and are often used interchangeably. But both the terms not only have independent definitions but are also remedied differently in case of a breach which is different from case to case. The same clauses are elaborated below in the article.
Commercial Contract: Meaning and Concept
A commercial contract can be defined as a contract that helps in regulating the business equations between businesses or individuals which would include a range of clauses defining the purpose of the business and a dispute resolution mechanism in case of a breach of the terms and conditions. Representation and Warranty are often part of commercial contracts, which are placed in contracts that indemnify the parties concerned in case of a breach on the part of either of the parties. Under the Indian law of contracts, it indemnifies the seller by placing greater responsibility on the buyer through the principle of Caveat Emptor which means let the buyer be aware.
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What is a representation clause in a contract?
Representation means a presentation of facts that are true to the date of execution. In a commercial contract, the party asserts that the facts which are mentioned in the contract are true to nature. It can be implied which is through the conduct of the party or is explicit in nature which would induce the other party to enter into the contract. Representation is not defined under the Indian Contract Act, 1872. However, the Act does define Misrepresentation which means a false statement of facts which are made to induce the other party to enter into the contract.
Misrepresentation is of two kinds:
- Right to claim damages- the innocent party can claim for the damages which have been incurred due to the fraudulent misrepresentation leading to acting upon the contract.
- Right to repudiate the contract- is when the party either through his actions or by words does not intend to perform the obligations set out in the contract.
- Innocent Misrepresentation- when one party makes a statement to another party to induce them into entering into the contract without knowing whether the statement made is correct or false.
What is a warranty clause in a contract?
A warranty is a statement or assurance made by the party about the facts or conditions in a contract. A warranty can be implied or expressed. A warranty is made concerning incidents that can occur either in the present or in future. A warranty is usually used in contracts of sale. Not all representations form as part of the contract but the ones which do are called stipulations. An example would be this Mobile will receive software updates for the next three years. In this case, if the device as promised does not receive the updates then the device company can be sued by the user.
Role of warranty and representation in a commercial contract
In a commercial contract clauses such as representation and warranty play a very crucial part in the contract. They both act as protective clauses or measures which are enclosed in a contract in case a breach occurs, it safeguards the buyer in a contract. Both the clauses are often used together in the realm of commercial contracts while execution of these clauses does not share the same process.
These clauses help in reducing the risk often arising due to the breach of contract. While the seller would prefer the clause to be such that it minimizes the damage incurred by the seller if the buyer decides to sue. On the other hand, the buyer would prefer the interpretation of the clauses in broader terms which would indemnify the buyer from all possible damages that could be incurred by him.
Are the two defined under the ICA?
The Indian Contract Act 1872, does not define Representation and Warranty in the act. As mentioned above, the Act defines Misrepresentation and provides remedies for the same.
The Warranty is however defined in Section 12 of the Sales of Goods Act,1930 (SOGA). the act defines a Warranty as stipulation collateral to the main purpose of the contract, a breach which gives rise to a claim for damages but to a right to reject the goods and treat the contract as repudiated.
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How are the Representation and Warranty Clause different?
In All India General Insurance Co v. S P Maheshwari (AIR 1960 Mad 484), the Hon. Madras High Court discussed the distinction between representations and warranties-
Warranties are representations which are made the basis of the contract whereas a representation is not strictly speaking a part of the contract or the essence of it, but rather something preliminary and like an inducement to it.”
The Indian Contract Act is very much based on the principles of English Common law, hence both the terms are well elaborated in the English Law as opposed to the Indian Contract Act.
As often being drafted together in commercial contracts can easily give an illusion that they both are the same. But when looked at closely one can see that both the clauses are different and breaches of either of the clauses have different remedies.
While on the one hand Representation is the way the statement of facts is in the present situation or has been in the past. A warranty is a promise about the present or the future.
The common thing which is between the two clauses is that in case there is a breach of either of the conditions it would result in damage to the parties involved. The quantum of the damage and remedy would be based on the kind of contract and the applicability of the laws of the land where the breach occurs.
Things to be kept in mind while drafting warranties and representation clauses in the contract
There are a few steps that can be followed when drafting Representation and Warranty Clauses in the contract. They are as follows-
- Set it out separately- when a contract is formed it would be a prudent move to set the representation and warranty clauses separately to avoid future confusion during the issue of a breach of the contract. As the former deals with the facts concerning the present or that which has taken place in the past, the latter deals with events that are promised in the present or have the possibility of happening in the future.
- Disclosure of the business- the buyer must have complete knowledge about the seller’s business to the buyer. Also, the buyer needs to run a thorough check as to whether the facts being presented are true or not.
- The method of resolution – both the representation and warranty clause are defined separately and in case of a breach are also to be dealt with in the same manner. By mentioning the method of resolution when the facts are misrepresented or the warranty of the object of the contract is not fulfilled it would be helpful to determine the damages if the method of resolution is already mentioned in the contract.
Representation and Warranty often appear to be two sides of the same coin. But in reality, both these clauses are very different, while one is a statement of fact, the other is a promise of the future. These clauses aim to bring the experience of the past with the possibility of the future in terms of the contract. Often clubbing these clauses together creates difficulty in interpretation, it would be best that the two clauses are drafted in simpler language along with interpreting them independently.
List of References
- Ashima Obhan and Vrinda Patodia, Revisiting Representation And Warranty Clauses, MOndaq, 19 June 2020, available at: https://www.mondaq.com/india/contracts-and-commercial-law/955660/revisiting-representation-and-warranty-clauses
- Representations and Warranties, Thomson Reuters, available at: https://uk.practicallaw.thomsonreuters.com/8-382-3760?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=A%20representation%20is%20an%20assertion,if%20the%20assertion%20is%20false .
- Sankeit Taneja, Representation and warranties in a contract and the effect of non-compliance, iPleaders Blog, 14 July 2020, available at: https://blog.ipleaders.in/representation-warranties-contract-effect-non-compliance/
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Understanding the Difference between Representation and Warranty in Contracts
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In contract law, the terms "representation" and "warranty" are often used interchangeably, leading to confusion about their meanings and legal implications. This article aims to clarify the distinction between the two concepts and provide a legal overview of warranties in contracts.
Black's Law Dictionary defines "warranty" as "an express or implied promise by one of the contracting parties to guarantee something in furtherance of the contract, especially a seller's promise that the thing being sold is as represented or promised." Black's Law Dictionary 1618 (8th ed. 2004). In contrast, Black’s defines “representation” to be: “A presentation of fact – either by words or by conduct – made to induce someone to act, especially to enter into a contract; especially, the manifestation to another that a fact, including a state of mind, exists.” Black's Law Dictionary 1327 (8th ed. 2004).
In the context of the sale of goods, an express warranty is usually written on the face of the contract, while a representation may be written or oral. A warranty is conclusively presumed to be material, whereas the burden is on the party claiming breach to show that a representation is material. Moreover, a warranty must be strictly complied with, while substantial truth is the only requirement for a representation.
Case law in Texas has held that a "warranty" is an expressed or implied statement of something that a party undertakes to be part of a contract but that is collateral to the expressed object of it. Great Atlantic & Pacific Tea Co. v. Walker , 104 S.W.2d 627, 632 (Tex. Civ. App.— Eastland 1938), rev’d , 112 S.W.2d 170 (Tex. 1938). In a sale of goods, a "warranty" signifies an independent, subsidiary promise collateral to the main object of the contract, a breach of which gives rise to a claim for damages. Whiddon v. General Mills, Inc. , 347 S.W.2d 7, 10 (Tex. Civ. App.—Fort Worth 1961, no writ).
Furthermore, an expressed warranty is a definitive affirmation of fact or promise that becomes part of the basis of the bargain, and upon which the parties rely. The test of whether a salesman's statements constituted these "affirmations of fact" going to the very "basis of the bargain," so as to create an expressed warranty, is whether the salesman was asserting a fact of which the buyer was ignorant, or whether the salesman was merely declaring his belief with reference to a matter of which he had no special knowledge and of which the buyer might also have been expected to have an opinion. Valley Datsun v. Martinez , 578 S.W.2d 485, 490 (Tex. Civ. App.—Corpus Christi 1979, no writ) (construing TEX. BUS. & COM. CODE ANN. §§2.313 and 17.50(a)(2)).
In conclusion, understanding the difference between representation and warranty is critical in contract law. A warranty is a guarantee of a product's quality or condition, while a representation is a statement of fact or opinion that may induce a party to enter into a contract. When drafting contracts, it is important to be clear about the warranties and representations made to avoid confusion and potential litigation down the line.
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Representations and warranties: The same thing only different
You'll often see the words 'represents and warrants' or 'representations and warranties' in standard form contracts. Drew Hasselback explains what they mean and why they're used together.
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Lawyers love redundancy. They also love saying the same thing twice.
You’ll see duplication in many documents prepared by lawyers. You can “give and bequeath” your estate, you can “say and declare” something in an affidavit, or if you run with the wrong crowd, you can “aid and abet” a fugitive from justice. There is usually some historic reason for such duplication. More often than not, that rationale is lost in the mists of time.
Representations and warranties: The same thing only different Back to video
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There’s a common pairing you’ll see in a lot of contracts: “represents and warrants” (when used as verbs) or “representations and warranties” (when used as nouns). In fact, you’ll see those words so often in contracts and legal agreements that I thought I’d try to explain what those words mean and why they’re used.
Simply and crudely put, they provide butt cover. Representations and warranties are a series of statements inserted into the contract that list the basic facts that inspired each side to agree to the deal. The idea is for one side to put the other side on notice that it is relying on certain facts, both past and present, and that it expects those facts to survive into the future.
Technically speaking, representations and warranties are distinct legal concepts. Each gives rise to a different legal remedy if a deal goes sour and winds up in court.
Representations are past and present facts that spell out why each side was brought into the deal. A misrepresentation claim, if proved, gives rise to damages and a remedy called rescission, which is the unwinding or undoing of the deal. Warranties are inserted to protect a party if losses arise because the future doesn’t unfold in the way that was represented by those facts. A breach of warranty gives rise to damages. So separate concepts, separate sets of remedies.
Yet the real world is rarely so clean. Indeed, modern legal logic tends to take these two historical or traditional legal concepts and toss them in a blender. The result is a legal smoothie that’s rooted more in common sense than ancient tradition.
You can see this in the case law. An example is an Ontario Court of Appeal case from 1999 called Fea Investments . Both parties had signed a contract in which they agreed rescission would be the sole remedy for a breach of warranty. Yet in a trial decision that was upheld by the court of appeal, the judge found that by breaching the warranties in the contract, the defendant had also in effect made some misrepresentations. The successful plaintiff was therefore entitled to cash damages, even though the written contract had originally limited the remedy to rescission. So what started out as separate concepts with separate remedies ultimately got mashed together by the court.
Some lawyers debate whether representations and warranties are synonyms. I’ve seen some U.S. writers argue that modern contracts should just use the word “represents.” There may be fine arguments for that approach, but I think it’s just easier to stick with the tradition of using “represents and warrants.” That’s why you’ll see these words used together so often. Why get in a technical debate over legal semantics when you can simply stick those two words together? Using both ensures you have access to both basic remedies of damages and rescission.
Drew Hasselback is Legal Editor of the Financial Post. He is a lawyer called to the Bar of Ontario.
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Representations and Warranties
Practical law canada glossary 5-575-1583 (approx. 3 pages).
- Share Purchase Agreement (Pro-Purchaser Long Form) .
- Share Purchase Agreement (Pro-Vendor Long Form) .
- Asset Purchase Agreement (Pro-Purchaser Long Form) .
- Asset Purchase Agreement (Pro-Vendor Long Form) .
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Intro to M&A Representations and Warranties
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The primary transaction agreement in every M&A deal contains representations and warranties, colloquially referred to as “reps and warranties” or simply “reps,” from each party to the other. These are statements of past, present and sometimes future fact relating to the status, business, assets, liabilities, properties, condition, operating results, operations and prospects of the party making the statements, one or more companies under the party’s control or a group of assets and liabilities. Reps and warranties as a whole can be quite lengthy, often comprising from 15 to 30 pages of a transaction agreement and more still when you include the text incorporated by reference from the agreement’s Definitions section. A substantial amount of the time and energy involved in papering and negotiating the deal is usually devoted to reps and warranties.
Why do representations and warranties get so much attention?
Reps serve four primary functions.
First, they provide important disclosures from one party with an informational advantage to the other about the disclosing party and, in the case of the seller, the target company or assets. As you might expect, except in the relatively rare circumstance in which a portion of the purchase price is paid in buyer stock, most of this information relates to the target company or assets and flows from the seller to the buyer.
Reps and warranties may thus be thought of as an extension of the due diligence process—they ameliorate informational asymmetries between the parties. Frequently, parties will make meaningful discoveries through the process of drafting reps and warranties (and the associated disclosure schedules ) that may materially alter the deal’s value proposition.
Walk rights
Second, representations and warranties may form the basis of a party’s right to terminate the deal prior to closing. Assuming a deal has a gap period between signing and closing, as most do, the principal transaction agreement will include conditions precedent that must be satisfied or waived before each party will be required to consummate the transaction. Among other things, these will generally require that the other party’s representations and warranties will have been true when made and remain true at closing . Otherwise, the non-breaching party will usually have the right to terminate the transaction agreements and walk from the deal. Thus, reps and warranties effectively enable a party to continue its due diligence during the gap period and also protect a buyer (or a seller receiving shares as consideration) from many intervening events or conditions that adversely impact the other party or the target.
Risk-shifting
Third, together with the parties’ indemnification rights , representations and warranties serve as a risk-shifting mechanism—inaccuracies may entitle the other party to monetary compensation for associated losses. (This applies only in private, rather than public , M&A transactions, where post-closing indemnities are exceedingly rare.) In many respects, this is the primary purpose of representations and warranties in private deals, as the buyer’s expectation that the seller, and not the buyer, will bear much if not most or all of the risk of losses resulting from false statements provides a great deal of comfort and increased certainty for the buyer, enabling it to price the deal more accurately and plan for post-closing operations.
Parties are well-served to remember this risk-shifting function during negotiations. It is not uncommon for one party to voice an objection to a proposed representation or warranty on the basis that “it just isn’t true,” “we can’t confirm this” or words to that effect, to which a well-trained M&A lawyer may quickly retort, “So what? My client shouldn’t bear this risk.” After all, the reasoning goes, reps and warranties are not only about what is and is not. They reflect the parties’ understanding of which party will bear the burden of losses that arise from certain events or circumstances.
The final key function of M&A representations and warranties is derivative of the prior two. The possibility that a counterparty may terminate the transaction or seek compensation from the disclosing party for breaches strongly incentivizes the party giving the reps to make sure they are in fact true (or will be when deemed made). By way of example, this means a party providing representations as to good standing, due authorization and absence of conflicts will in endeavor to ensure it or the target company is in good standing, has the authority to enter into the transaction and is not a party to any conflicting contracts. Thus, the desire to avoid the costs associated with a broken deal or breached reps often has salutary effects on the underlying substance of the deal.
What do representations and warranties say?
Reps and warranties may address a broad variety of subjects, from the target’s legal existence, good standing and financial statements to the buyer’s ability to finance the transaction and comply with its obligations under the agreement.
Here’s an example of a typical seller “absence of conflicts” rep:
“Assuming that all consents, approvals, authorizations and other actions described in Section 3.07 have been obtained, the execution, delivery and performance of this Agreement by Seller do not and will not (a) violate, conflict with or result in the breach of any provision of the Organizational Documents of Seller or the Company, (b) conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any Law or Governmental Order applicable to Seller, the Company or any of their respective assets, properties or businesses, or (c) except as set forth in Section 3.06(c) of the Disclosure Schedule, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Shares or any of the Assets pursuant to, any Contract to which the Company is a party or by which any of the Shares or any of the Assets is bound or affected.”
Other reps like this one you may encounter in a typical private company stock purchase agreement would address all or some combination of the following subjects:
- organization and good standing
- authority and enforceability
- capitalization and ownership
- subsidiaries
- financial statements
- books and records
- accounts receivable and accounts payable
- inventories
- absence of undisclosed liabilities
- absence of certain changes and events
- real property
- intellectual property
- material contracts
- tax matters
- employee benefits
- employment and labor
- environmental, health and safety
- compliance with law
- legal proceedings
- customers and suppliers
- product warranties
- product liability
- related-party transactions
- brokers and finders fees and
- full disclosure.
The transaction agreement usually contains reciprocal representations and warranties from the buyer to the seller. If the buyer is issuing shares as all or part of the purchase price, then its representations and warranties will mirror those of the seller fairly closely because the seller in that case would effectively be making an investment in buyer securities. More often, though, the buyer is paying cash and its representations and warranties are consequently significantly more limited in scope. After all, cash is cash.
Accordingly, in deals without stock consideration, buyer representations and warranties usually address some combination of the following topics:
- absence of conflicts
- governmental consents
- investment intent
- independent investigation.
What determines which representations and warranties are given in a deal
The precise configuration of representations and warranties in a particular deal is a function of a number of factors in addition to whether part of the purchase price will be paid in buyer shares. These include:
- transaction structure – each transaction structure requires some differences in reps (e.g., valid issuance in stock purchases and sufficiency of assets in asset deals) ,
- whether the transaction is a public or private deal – public deals usually involve representations about a company’s Securities and Exchange Commission filings and afford buyers some additional comfort stemming from the requirements imposed on public companies by the federal securities laws and stock exchange listing standards ,
- how thoroughly each party is able to conduct due diligence – generally, there is an inverse relationship between the amount of due diligence a party conducts and the scope of reps and warranties it will demand from the other side ,
- specific issues identified during due diligence – if problems are discovered during diligence, such as a third party intellectual property infringement claim or an environmental hazard, enhanced representations in that area may be sought ,
- the target company’s industry – areas of focus differ based on industry (e.g., technology deals are IP-centric and chemicals transactions require more environmental coverage) ,
- current market practice – norms evolve over time; what was standard 10 years ago may be unusual today ,
- past practices of the parties and their lawyers – occasionally, a party can obtain example transaction agreements from prior deals and see what concessions may have been made in the past ,
- the parties’ (and their lawyers’) respective preferences and priorities as informed by their past experience with other transactions – as with individuals, company preferences vary, especially if a party has suffered losses in prior deals ,
- the parties’ desired allocation of post-closing risk in light of the expected impact of indemnification rights – indemnification rights may be more or less protective, depending on applicable baskets, caps, materiality scrapes, survival periods, credit-worthiness, guarantees, holdback, escrow, earnouts, rights of offset and other terms, and the greater a party’s exposure is to a potential indemnification claim the more likely the party is to resist broad representations ,
- whether the parties will be obtaining representations and warranties insurance – such insurance can shift risk from parties to insurance providers, and insurance providers may themselves comment on the contents of representations and warranties ,
- a buyer’s interest in maintaining optionality on the deal – more fulsome seller representations and warranties make it easier for a buyer to exercise walk rights ,
- the parties’ relative bargaining power – where competition is high for a particular target, sellers usually enjoy greater success in resisting rigorous reps ,
- definitions of pervasive qualifiers – terms like “knowledge,” “material” and “Material Adverse Effect” are used throughout representations and warranties to limit them, and how they are defined will determine where and how frequently each is used ,
- the parties’ receptiveness to additional complexity and cost – longer representations and warranties generally require more time and legal fees to draft and negotiate ,
- whether the seller has agreed to any broad “catch-all” type representations, such as so-called “full disclosure” or “10b-5” reps or open-ended compliance with law or absence of changes representations – if a seller has agreed to include broad representations that may form the basis of a variety of different claims, buyers will often be less insistent on other, more specific representations , and
- whether the buyer’s or the seller’s M&A lawyer prepares the first draft of the agreement – usually, a buyer-prepared first draft will have more extensive seller representations and warranties than a seller-prepared draft .
* * *
In subsequent posts on The M&A Lawyer Blog, we’ll examine some of these topics more closely, including discussing the actual language of key representations and warranties, the definitions of pervasive qualifiers, the interplay with disclosure schedules, the significance of sandbagging and more.
Erik Lopez is the M&A lawyer responsible for this blog. Feel free to contact Erik at [email protected] or +1-214-601-1887 .
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Partner at Jasso Lopez PLLC
Erik is an M&A lawyer with over 23 years of domestic and cross-border, public and private M&A experience. He has successfully closed hundreds of deals totaling tens of billions of dollars in value for a global client-base. He is a graduate of the University of Chicago and New York University School of Law. You can reach Erik at [email protected].
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Guide to Representations & Warranties Insurance 2023 Edition
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As representations and warranties (R&W) insurance becomes increasingly mainstream, get this comprehensive look at this facet of coverage.
Over the past decade, representations and warranties insurance (RWI or R&W) has become an established tool in the merger and acquisition (M&A) toolbox for both private equity and strategic buyers . In fact, RWI is used in an estimated 75% of private equity transactions and 64% of larger strategic acquisitions.
We have good news for buyers: Broad coverage and competitive pricing are the keywords for RWI in 2023.
Learn more in Woodruff Sawyer’s updated Guide for this evolving coverage.
Read the full Guide to R&W Insurance
What Is Reps & Warranties Insurance?
R&W insurance is a breach-of-contract coverage designed to enhance or replace the indemnification given by the seller to the buyer. In short, R&W covers loss caused by any breaches of the seller’s representations, whether it involves issues with their customer contracts, employment agreements, or the secret recipe of their product (i.e., intellectual property or IP).
The indemnity package is usually the most contentious part of any merger or acquisition negotiation. R&W steps in to eliminate contention and provide everyone with a cleaner, faster, and safer deal.
The RWI Underwriting Market Has Grown Significantly
The RWI underwriting market has grown substantially in the last two years. It was not too long ago that there were only three or four markets writing this type of risk. By mid-2023, there were 26 markets, with one new market already this year and two new markets last year. We believe this growth will level off, but there is certainly a thriving and competitive marketplace.
Changes in Premiums From 2022 to 2023
The changes we saw at the end of last year are eroding further as 2023 progresses. As of June, standard rates are now running 2%–3% of the limit bought. (For analysis, read our blog post, M&A Insurance: 2023 First Quarter Roundup .)
![representation and warranties average rate as % of limit by inception quarter](https://woodruffsawyer.com/sites/default/files/wp-content/2023/06/average-rate-as-of-limit-by-inception-quarter.jpg)
We see this trend as very good news for our clients and those needing RWI. The average number of quotes went through the roof, and the premium prices are on par with the beginning of 2018, if not slightly more competitive.
The lowest quote we have seen so far this year is 2%, a return to 2018 in terms of pricing.
How Does Reps & Warranties Insurance Work?
The typical policyholder.
While either buyer or seller can be insured, 97% of the policies placed are buy-side, protecting the buyer from any breaches of the seller’s representations. Here are five buy-side details:
- Buy-side policies have additional fraud coverage that sell-side policies can’t provide.
- The insured buyer can pick a coverage limit and survival period (i.e., the period for which the policy is in place) beyond what the seller is willing to give.
- With this coverage, the buyer can avoid suing their newly acquired management team. If any breaches or misrepresentations come up, they can go directly to the carrier.
- Buy-side policies allow the buyer to offer lower escrows or more competitive terms in an auction.
- The insurance can replace distressed company indemnification with A+ rated indemnification.
How Underwriters Assess M&A Risk
When drawing up the R&W policy, underwriters evaluate:
- The nature of the sale purchase agreement (SPA) terms and conditions
- The nature of the specific warranties being given in the context of the transaction
- The quality of the due diligence
While the insurance is designed to cover all warranties, certain exclusions are standard:
- Forward-looking warranties (sales projections, etc.)
- Purchase price adjustments
- The availability or usability of net operating losses or R&D tax credits
- Areas of coverage that are difficult to get, such as Foreign Corrupt Practices Act (FCPA) violations, union activity, underfunding of pensions, wage and hour violations, etc.
- Known issues
Placement Process and Timing
Placing R&W coverage is a two-part process:
- The initial non-binding indication occurs one week after receiving the target financials, draft sale and purchase agreement, and any information memorandum that has been prepared by the seller. Underwriters provide initial indications on premium, retention, areas of concern, or heightened risk. This costs nothing.
- Underwriting requires a $30,000–$45,000 up-front “diligence fee.” Underwriters and their counsel are granted access to the data room and begin reviewing the diligence reports and the disclosure schedules. It involves a two- to three-hour diligence call with underwriters, deal team members, and third-party diligence providers. Twenty-four hours after the call, underwriters provide a draft policy and follow-up questions, if any.
How Pricing Is Determined
The policy retention or deductible is expressed as a percentage of overall transaction size. The minimum for mid-size deals is 0.75% of the transaction.
For larger deals above $500 million in enterprise value (EV), it’s more common to see a 0.5% retention, which can be in the form of a seller’s escrow, the buyer’s deductible, or a combination of the two. A 0.75% retention drops down to 0.5% after 12 months, regardless of the size of the transaction. Those starting at 0.5% may not see a further drop.
![representation and warranties Retentions have decreased to .75%-.5% for all deal sizes.](https://woodruffsawyer.com/sites/default/files/wp-content/2023/06/retentions-have-increased.jpg)
Premium is expressed as a percentage of the limit of coverage bought and is not related to transaction size. As of June, premiums range from 2%–3% of the limitation of coverage. It’s worth noting that minimum premiums are running around $100,000 for ordinary deals with $3–$5 million of limits requested.
Claims Trends
Halfway through 2023, we've found the rate of claims has been relatively consistent with previous years, while the number of claims has increased. This increase is largely attributable to the surge of M&A activity in 2021. However, we have seen interesting shifts in claims, including:
- Claims are being noticed later than usual, between 12 and 18 months post-close.
- First-party, or indemnification, claims (where the insured brings a claim directly to the carrier) remain more common than third-party claims. However, third-party claims are on the rise for 2023 and will likely continue to uptick.
- Data security/privacy breach is a top RWI claim. Carriers are increasingly concerned about the adequacy of cyber coverage, and buyers should expect this to be an area of heightened diligence.
![representation and warranties types of breaches reported](https://woodruffsawyer.com/sites/default/files/wp-content/2023/06/types-of-breaches-reported-in-RWI-claims.jpg)
Find out more about RWI claims trends in an upcoming blog.
Choosing a Specialty Broker
R&W insurance is a complex and fast-growing marketplace. It requires a dedicated insurance broker who understands this type of coverage and is backed by the resources to handle all insurance lines and questions that come out of a transaction.
Woodruff Sawyer believes that clients are best served by a team dedicated to reps and warranties insurance, with access to broader resources that can review all your organization’s insurance needs and present a holistic solution.
Read the full guide for additional details about retentions, exclusions, program structure, and limits.
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Emily Maier
Senior Vice President, Head of Transactional Insurance
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Managing Transactional Risk in 2024: A Strategy Guide
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The Impact of Underlying Insurance Policy Types on Reps and Warranties Insurance and M&A
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SEC Finally Finalizes the SPAC Rules
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Reps and Warranties Claim Trends: A 2023 Review
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- Reps & Warranties Insurance: Our 2024 Guide
The use of representations and warranties insurance (RWI or R&W) has become increasingly mainstream. An estimated 75% of private equity transactions and 64% of larger strategic acquirers use it. Woodruff Sawyer’s R&W team presents this comprehensive look at this facet of coverage.
RWI is a well-established tool in the merger and acquisition (M&A) toolbox for both private equity and strategic buyers. Broad coverage and competitive pricing have been the theme for 2024. RWI has been widely adopted because it can be used to: 1. Use Profit from a Sale More Quickly: R&W insurance can reduce or remove escrow for an M&A transaction, which allows the seller to either reinvest, realize, or more quickly distribute the proceeds they receive. It also allows the buyer to offer a quicker, cleaner process, which matters a great deal in a seller’s market. Now that it is more established, R&W insurance has become a requirement for many sellers who are backed by private equity or venture capital.
Please see full publication below for more information.
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IMAGES
COMMENTS
Learn what representations and warranties are in business contracts, how they provide facts and security, and why they are important. See examples of representations and warranties in different types of agreements, such as loans, acquisitions, and employment.
Learn how to distinguish between warranties and representations in contracts, and why it matters for legal remedies, risk allocation, and contract drafting. See examples, case studies, and best practices for different contexts and legal systems.
A warranty is a promise of indemnity if the assertion is false. The terms "representation" and "warranty" are often used together in practice. If a representation is not true it is "inaccurate." If a warranty is not true it is "breached." In financing documents (such as loan agreements) representations and warranties are given by the borrower ...
Representations are the assertion of fact true on the date of execution of the contract, it is for inducement for another party to enter into contracts. A warranty is the promise of indemnity if representation is false it is inaccurate and if the warranty is false it is breached. Representation and warranties have different meanings and ...
Learn the key differences between representations and warranties in contract law, and the consequences of breach. Find out how to distinguish between fraudulent, negligent and innocent misrepresentations, and when to rescind or claim damages.
A Practice Note discussing the interplay between representations, warranties, covenants, rights, and conditions in commercial contracts. This Note describes the principal ways in which these key contractual building blocks work together to form principal operative and remedial provisions, focusing on indemnification and related remedial clauses.
Learn what representations and warranties are in a contract and see some examples of common topics they cover. Find lawyers on ContractsCounsel who can help you with your contract needs.
Major differences between Representation and Warranty. Representations provide information and assurances about a party's position, condition, or compliance. Warranties provide guarantees about the quality, performance, or characteristics of a product or service. Representations are meant to be true and accurate to the best of the party's ...
Representation and warranty pertain to different aspects: awareness toward inducement, and effectiveness. A representation relates to the quality of entering a contract knowingly, that is, with awareness of something which induced the contract. But something that is true today might not necessarily be true, relevant, or effective in the future.
Representations and warranties are different. A representation is a statement of fact; a warranty is a promise of fact. Admittedly, they can look very similar. Language such as "I am a licensed contractor" could be a representation, a warranty, or both. But despite similarity in appearance, and the occasional difficulty in distinguishing ...
A warranties and representations clause is a contractual provision that provides assurance to parties involved in a transaction that certain facts or circumstances are true or will occur. This fosters contractual trust, enabling parties to make informed decisions and allocate risks more effectively. The clause provides a foundation for a ...
The seller's representations and warranties (reps) are a series of declarative statements made by the seller in a purchase agreement. Note that (depending on the terms of the agreement negotiated between the parties) references to "the seller" in a purchase agreement can refer to the company; the company's board, management, employees, or other ...
At closing of the transaction. "The representations and warranties in this Agreement were true and correct as of the date of this Agreement and are true and correct today.". Requiring the representations to be re-made at closing protects the buyer against changes in the seller's business occurring between signing and closing.
This article on 'Representation vs. Warranty in Commercial Contracts: Understanding the Key Differences' was written by Amruta Patil, an intern at Legal Upanishad.. Introduction. A contract is an agreement that is enforceable by law as defined under Section 2(h). A contract has numerous terms, clauses, conditions and warranties which are involved in the making of it.
A warranty is a guarantee of a product's quality or condition, while a representation is a statement of fact or opinion that may induce a party to enter into a contract. When drafting contracts, it is important to be clear about the warranties and representations made to avoid confusion and potential litigation down the line.
The use of representations and warranties insurance (RWI or R&W) has become increasingly mainstream; it is used in an estimated 75% of private equity transactions and 64% of the time by larger strategic acquirers. Woodruf Sawyer's R&W team presents this comprehensive look at this facet of coverage. 9 Reasons to Use Representations & Warranties.
Representations and warranties are a series of statements inserted into the contract that list the basic facts that inspired each side to agree to the deal. The idea is for one side to put the other side on notice that it is relying on certain facts, both past and present, and that it expects those facts to survive into the future. ...
The Timeframe Rationale. The clearest articulation of the timeframe rationale for using represents, warrants, or both is that offered by the Section of Business Law of the American Bar Association in the ABA's Model Stock Purchase Agreement with Commentary (2d ed. 2011), which uses the phrase represents and warrants.At page 77, it says, "Representations are statements of past or existing ...
The representations and warranties allocate risk between the parties and serve as the foundation for an indemnification claim in case of a breach or inaccuracy. A breach or inaccuracy of a representation or warranty can also provide the other party with a right to terminate or refuse to close the transaction. For some examples of ...
The draft contract states that the supplier "represents and warrants" that the parts meet certain regulatory requirements. The supplier, espousing Tina's approach, wants to use "represents" instead, as it doesn't want to offer any warranties beyond its standard warranties. My correspondent, weighing Tina's approach and mine, was ...
This note discusses representations and warranties only. A representation is a statement regarding a fact or circumstance, usually made to induce reliance and action by the other party, such as entering into a contract or closing a business transaction. (See, e.g., Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979.)
Sample language: "Representations and warranties made by Seller shall survive 18 months past closing, except [exceptions or exclusions]." Baskets, or minimums, are the number of claims a buyer must accept before indemnification. Like an insurance deductible, baskets protect the seller by forcing the buyer to bear some disputes' costs.
The primary transaction agreement in every M&A deal contains representations and warranties, colloquially referred to as "reps and warranties" or simply "reps," from each party to the other. These are statements of past, present and sometimes future fact relating to the status, business, assets, liabilities, properties, condition, operating results, operations and prospects of the ...
Over the past decade, representations and warranties insurance (RWI or R&W) has become an established tool in the merger and acquisition (M&A) toolbox for both private equity and strategic buyers. In fact, RWI is used in an estimated 75% of private equity transactions and 64% of larger strategic acquisitions.
The use of representations and warranties insurance (RWI or R&W) has become increasingly mainstream. An estimated 75% of private equity transactions and 64% of larger strategic acquirers use it.