Representations and Warranties
A standard part of a commercial contract is a list of representations and warranties. These reflect the understanding of the parties that led them to enter the contract and, if any of them turn out to be false, may lead to litigation. It is important to understand them well before entering a contract, because litigators study them intensely once a dispute arises.
Why should you continue to read this post about representations and warranties?
You promised someone that you were going to read it.
You have a contract and want to know why there is a lengthy section that just recites obvious facts.
It’s probably more interesting than an actual representations and warranties clause.
Representations Are Promises That Certain Facts Are True
When parties decide to enter into a contract, they usually do so because they have a common understanding of a certain set of facts. For example, if I agree to buy your house, it is because we both agree that you currently own the house you are selling. But, as you may imagine, sometimes these pre-contract assumptions are false.
To give assurance to contract parties that their assumptions are correct, a contract lists the exact “representations” that one party makes to the other, upon which they can rely when making the contract.
In a sales contract, one of these representations is often that the seller really owns the property being sold and has the ability to sell it. Sellers commonly also represent that there are no undisclosed problems with the thing being sold or that financial disclosures made in connection with the sale are accurate.
Buyers often have to make representations, too. Usually these representations are about the buyer’s authority to make the purchase.
Before making these representations, a party should investigate to make sure that the statements are true. (This work is often called “due diligence”). The party receiving the representations is often relieved of that obligation since they are entitled to rely on the representations. But even so, discovering a problem before a transaction is usually a lot less painful than discovering it later and needing to litigate.
A representations and warranties clause may also include “warranties,” or promises about the future. Although the distinction between “representations” and “warranties” is academic, as they generally both refer to promises about the truth of certain facts, many regard a “warranty” as a promise about the future and a “representation” as a promise about the present. For example, a product seller may warrant that, if its product has defects, that it will repair or replace the product in the future.
Remedies For Breaches
If one of the representations is false, a plaintiff may bring a lawsuit for damages. But courts are divided about whether a plaintiff can prevail if she knew that the statements were false at the time they were made.
Many contracts have “indemnification” provisions, that state exactly what a defendant needs to do if a representation is false. For example, the provision may state that the defendant is only responsible for a certain amount of damages or that the plaintiff needs to follow a specific procedure before it can bring a lawsuit.
If a plaintiff succeeds on a breach of representation claim, she still needs to establish what damages the defendant must pay. One way that courts calculate damages to compare the value of the asset that a buyer bought with the value of the asset if the representations were true, and to award the difference to the plaintiff.
Representation Claims Differ From Fraud Claims
When a plaintiff is deceived by a defendant, she may feel as if she is a victim of a fraud. But courts are very specific about what situations are fraud and which are breaches of contract. And although a plaintiff may have both types of claims, they are technically distinct.
One key distinction is the defendant’s awareness of the falsity of the statement (also called “scienter”), A fraud claim usually arises when a defendant knowingly makes a false statement of fact upon which a plaintiff relies. In a breach of warranty case, however, a plaintiff may need only to show the representation was false, not that the defendant deliberately lied.
Despite the distinction, fraud claims and contract claims often have the same damages. But a contract claim may have limitations on damages pursuant to the contract’s own terms that may not apply to a fraud claim. And a fraud claim could involve punitive damages that are unavailable in a contract claim, but courts do not often award them in commercial cases.