Module 4

MODULE 4

INTRODUCTION TO REPRESENTATION AND WARRANTIES

4.1. INTRODUCTION

• Every contract includes Representations and Warranties and these are
the underlying facts as presented by one party to another with the intent
that the other party will rely on them to their detriment.

• Representations and warranties contain statements made by the seller as
to the quality, condition, value or nature of the business that the buyer
is acquiring from the seller.

• These representations and warranties are generally backed by the
seller’s acknowledgment that the buyer is entering into the transaction
in reliance of such provisions which ensures that a buyer can claim
breach of acquisition agreement and seek a remedy against the seller
for its losses if the representations and warranties turn out to be not
true.

• Representation and warranties are intensely debated during negotiation
of M&A contracts.

• The term representation and warranty is not defined in the Indian
Contract
Act, 1872.

• However, through a serious of case law, the phrase “representation”
has been understood to be a statement made by way of a positive

affirmation, based upon knowledge that the facts represented either do
or will exist, or a mere declaration of belief or expectation that such
facts do or will exist.

4.2. DEFINITION OF REPRESENTATION AND WARRANTIES:

• The Black’s Law dictionary,

a) Defines Representation as ‘A presentation of fact either by words of by
conduct, made to induce someone to act, particularly to enter into a
contract.’

b) Defines Warranty as ‘warranty means to promise or guarantee’.

• General Definition:
a) Representation is presentation of fact – either by words or by
conduct – made to induce someone to act, especially to enter into a
contract. A Representation looks at the present or the past,
presenting what the status is or was.
b) Warranty is generally regarded as being forward looking and
providing assurance about the future.

• Definition by court of Law
In the case of Great Atlantic & Pacific Tea Co. v. Walker, court has
defined a warranty as “a statement or representation made
contemporaneously with and as a part of, the contract of sale having

reference to the character, quality or title of the goods and by which he
promises or undertakes to insure that certain facts are, or shall be, as he
represents them.

4.3. REPRESENTATIONS:

• Traditionally representation and warranties are referred to as a single
grouped concept wherein most tend to view them as synonymous
terms.

• However, the two terms are separate and distinct from each other
having different characteristics and hence different remedies under law.

• Understanding the differences between them and using them
appropriately is essential to ensure that the right remedies are attached
to the right terms in an agreement. And also to ensure that non-lawyers
who are involved in the negotiation and implementation of the
agreement have a clear understanding of the repercussions of these
provisions.

• Representations are statements of past or present fact or circumstance.
Essentially, a fact or circumstance that the party inducing the other
states is presently true, and/or has been true in the past, which
statement is the premise on which a contract has been entered into.

• Hence, representations are considered sanctimonious to the agreement
and a breach thereof provides the non-breaching party with multiple
contractual or legal remedies including seeking that the agreement be

held void or invoking indemnification rights for the losses incurred
pursuant to such misrepresentation etc.
• Section 18 of the Indian Contract Act, 1872 (“Act”) defines the term
misrepresentation. “Misrepresentation” means and includes—”
(1) the positive assertion, in a manner not warranted by the information
of the person making it, of that which is not true, though he believes it
to be true;
(2) any breach of duty which, without an intent to deceive, gains an
advantage of the person committing it, or any one claiming under him,
by misleading another to his prejudice, or to the prejudice of any one
claiming under him;
(3) causing, however innocently, a party to an agreement, to make a
mistake as to the substance of the thing which is the subject of the
agreement.
• Further, the Act provides for consequences in case of
misrepresentation.
• Section 19 of the Act states that in the event an agreement has been
entered into by coercion, fraud or misrepresentation, the aggrieved
party has the following remedies:
1. The contract shall be voidable at the option of the aggrieved
party.
2. The aggrieved party may require specific performance and seek
restitution for unjust enrichment by the other party.
• However, it must be noted that the power to avoid a contract is not an
unfettered right and section 19 of the Act provides for an exception to

the general rule, i.e., that if misrepresentation or fraudulent silence is
capable of being discovered by ordinary diligence by the aggrieved
party, then the contract cannot be avoided by the aggrieved party.

4.4. WARRANTIES

• Warranties are statements of current and future condition.
• It’s a contractual stipulation that a condition (quality) is, and/or will

be, true for a period of time (often the term of the agreement).
• An example of a warranty is “the software licensed hereunder conforms

in all material respect to its documentation.” This is a statement of
current and future condition.
• The statement may be true at the time the warranty is made, but may be
breached during the course of the agreement (e.g., if a maintenance
release breaks something).
• In the event of a breach of warranty, the non-breaching party may be
entitled to damages resulting from the breach, and in many cases a
contract will provide for specific remedies in connection with a breach
of warranty (e.g., commercially reasonable efforts to repair).
• However, unlike a representation, a breach of warranty does not make
the contract voidable at the option of the aggrieved party.
• In the Indian context, the term “Warranty” is a stipulation, collateral to
the main purpose of the contract and the breach of which gives rise to a
claim for damages but not a right to reject the goods and treat the

contract as repudiated as per the provision of Section – 12 of the Indian
Sale of Goods Act, 1930 (“SGA”). The extent of coverage of warranty
differs from case to case.
• Warranties may be generally express in nature, but there are certain
implied warranties under the SGA.
• For instance, that a buyer shall have a quiet possession of goods, goods
are free from any charge or encumbrance, quality and fitness,
merchantability of goods etc.
• Here the warranty should cover all the identified risks but the extent of
liability and time limit for claiming losses should be set.
• In order to enable a claim for damages a direct nexus between the claim
and liability under the warranty clause should be established.
• Further, while it is necessary to show a breach of warranty and
consequential loss to seek damages, but, as has been stated above, the
contract cannot be repudiated on the aforementioned grounds.

4.5. NEED OF REPRESENTATIONS AND WARRANTIES

It places a considerable longer term loan on the seller and, is the main cause
of post-closing litigation between the buyer and the seller. Sometimes it can
be used as a defensible by stating that they are not as absolute but as to the
“best of the sellers knowledge”.

4.6. REPRESENTATIONS AND WARRANTIES IN INDIA

• According to the Indian context, the term “Warranty” is a stipulation
collateral to the main purpose of the contract and the breach of which
gives rise to claim for damages but not a right to reject the goods and
treat the contract as repudiated as per the provision of Section – 12 of
the Indian Sale of Goods Act, 1930.

• The extent of coverage of warranty differs from case to case.
• Warranty may be generally express, but there are certain implied

warranties under the act namely, buyer shall have a quiet possession of
goods, goods are free from any charge or encumbrance, quality and
fitness, merchantability of goods etc.
• Here the warranty should cover all the identified risks but the extent of
liability and time limit for claiming losses should be set.
• Whereas according to Section – 18 of the Indian Contract act, defined
the term misrepresentation which includes the positive assertion which
was not warranted by the information of the person making it or it is
not true or made a mistake as to the substance of the thing which is
subject of the agreement amounts to misrepresentation and the party
who has given consent by misrepresentation can make the contract
voidable. Representations and Warranties Clause in agreements

4.7. REPRESENTATIONS & WARRANTIES CLAUSE IN ASSET
PURCHASE AGREEMENT

This type of agreement is entered between two companies which buys
another company. the agreement itself defines the assets and liabilities that
are sold to the buyer which includes Intellectual property, Machineries etc.
the important in this type of agreement is the starting and closing date of the
sale and purchase deal because the seller represents and warrants that, he has
authority to sell assets, value shown for the assets sale are correct and assets
are free from any legal implications, whereas the buyer also mention the
same that he has authority to buy and all details about the purchase assets
have been made known to him.

4.8. REPRESENTATIONS & WARRANTIES CLAUSE IN M & A

• In case of M& A deals the representations are statements about the
current status of the business or its operations, whereas the term
warranties go further about current status because they guarantee the
truth of the statement.

• When one company going to acquire another company the main dispute
arise with the clause of Breached representations and warranties with
regard to determining the breadth and scope of it..

• Hence the following are the common list of representations and
warranties where an acquirer will normally request a company it
intends to acquire to make in the agreement, they are, organizational
powers to carry on business, authority to enter into agreement, no
outstanding dividends, title of properties, liens if any, condition of
properties, taxes required have been filed, Intellectual property like
domestic and foreign patents, registered trademarks, service marks etc
which are within the knowledge of the company and used by it does not
require the consent of any other person and is freely transferable., no
pendency of suits etc.

4.9. SURVIVAL PERIOD OF REPRESENTATIONS AND
WARRANTIES CLAUSE IN M&A

• In case of M&A deals, the duration of the survival period of the seller’s
representations and warranties raises several questions.

• A recent decision by a US three judge panel of the Ninth Circuit Court
of Appeals in Western Filter Corp v. Argan, Inc. has given an
interpretation to those survival clauses and held that the most
reasonable interpretation of the survival clause is that it servers only to
specify when a breach of the representations and warranties may occur
but not when an action must be filed.

• And also further held the survival clause as drafted did not shorten the
limitation period to one year.

4.10. ENFORCEMENT OF WARRANTY

In order to claim for damages there should be direct nexus between the claim
and liability under the warranty clause and there is need to prove an onus to
show breach of warranty and consequential loss, but the contract cannot be
repudiated by breach of warranty. Even sometimes a breach of condition may
also be treated as breach of warranty under certain circumstances.

4.11. REMEDIES

• The action for misrepresentation is very different from an action for a
breach of warranty in terms of the remedies available and other matters.

• Under the general law relating to liability for statements, the term
‘Representation’ is used to denote a statement of fact which induces an
innocent party to enter into a contract and if it has been discovered
untrue gives the innocent party a remedy for misrepresentation.

• Whereas in case of warranty it is a contractual statement, in case of
untrue allows the innocent party to sue for breach of contract and
allows for a claim for damages but does not entitle the innocent party to
terminate the agreement.

4.12. REPRESENTATIONS AND WARRANTIES IN US

• According to the Model Stock Purchase Agreement (1995) and Model
Asset Purchase Agreement (2001) both published by the American Bar
Association section of Business law says that, representations are
statements of past or existing facts and warranties are promises that
existing or future facts are or will be true.

• But in Smith v. Waste Management, the court refers to “representations
as about Waste Management’s future earnings”.

• With regard to meaning of term Warranty under common law an
express warranty is a seller’s affirmation of fact to the buyer, as an
inducement to sale regarding the quality or quantity of goods, title or
restrictive covenants to real property.

• But most of the warranty cases today arise under the Uniform
Commercial Code. According to Uniform Commercial Code the term
express warranty defined under section 2-203 makes clear that a
statement of fact can be a warranty.

• Whereas with regard to representation, a representation can underlie an
action for misrepresentation, whereas an action for breach of warranty
must be based on a warranty.

• But whereas the definition of representation is broad enough to include
assertions of fact that wouldn’t support an action, for an action for
breach of warranty. That’s why courts don’t use warranty terminology
in cases that don’t involve sales.

4.13. DIFFERENCES BETWEEN US AND UK RELATING TO
REPRESENTATIONS AND WARRANTIES

• In US except in certain limited circumstances both contract and tort
laws are under the state rather than US federal law.

• Whereas in UK it is common for the seller to oppose giving
representations and warranties which leads to minimize the risk of a
tortuous claim for damages under the Misrepresentation Act, 1967 and
to remove the possibility that the buyer will not attempt to rescind the
agreement under the said act.

• With regard to court views the US courts says that a cause of action for
misrepresentation does not exist just because a contract states that a
party warranted a particular statement and did not represent it.

• But in case of UK the nature of remedies available to the buyer will
depend on the extent of the buyer’s knowledge and reliance.

• In Chandelor v. Lopus, it was held that a seller wasn’t liable to a buyer
because the seller had “affirmed” rather than “warranted” as to the
product sold.

4.14. CAUTION ON NON-RELIANCE STATEMENT AND ENTIRE
AGREEMENT CLAUSE

• In both the US and UK generally the seller wants to include in the
agreement an “Entire agreement clause” and “Non-Reliance Statement”
and includes a provision to that effect that the buyer has not relied on
any statement or promise not included in the written agreement, the
intention behind such clause it that, they want to ensure that they
cannot subsequently be found liable for representations and/or
warranties that are not included in the written agreement.

• So a caution should be taken on such clauses in the agreement which
helps if we are the sellers to limit the extension of liability and if we are
the buyers to take care on future litigation.

4.15. QUALIFICATION FOR DAMAGES IN US AND UK

• In US the effected person is indemnified on a dollar for dollar basis for
breach of warranties or representations subject to negotiation caps,
threshold limits and deductibles.

• Whereas in UK it is less common and the person will be remedied
basing on the contractual claim for damages. In the same way the

person has a duty to mitigate its loss and the damages must have been
reasonably foreseeable.
• Further, if the buyer has actual knowledge prior to execution of the
agreement about the facts that resulted in breach of warranty, the
person may be precluded from raising a successful claim for breach of
warranty.
• The same practice was followed in UK. Along with these some more
consequences can be considered like
• Inability to recover certain elements of losses that are not reasonably
foreseen by parties at the time of entering into the agreement
• Profit earning capacity of the assets warranted are affected

4.16. PRECAUTIONS WHILE DRAFTING REPRESENTATIONS
AND WARRANTIES CLAUSE

• The first precaution is instead of using the term “party represent and
warrant as to statements of fact”, it’s better to confine only to “the party
represents that”.

• While putting a separate clause named ‘Representations and
Warranties’ another issue arises, if the seller thinks that all the
warranties in a given agreement are to be found in the section with the
heading “Represents and Warranties”.

• But sometimes the court may hold that a statement of fact or obligation
located elsewhere in the contract constitutes a warranty supporting an
action for breach of warranty, even though the contract doesn’t refer it
as a warranty.

• Hence this is one more area to be cautioned.
• Sometimes, a contract refers a provision as a warranty, but the court

will treat it as a representation supporting an action for
misrepresentation, where caution is needed.
• In case of sales contract, the word warranties come to mind
immediately rather than representations, basing on sales contract the
word can be used to confine the future litigation.