Representations and Warranties in a Contract

January 29th, 2013 | Posted by alexander in Real Estate

Representations and Warranties in a Contract

Every contract has representations and warranties, which are basically the underlying matters or facts as they are being presented in terms of the contract.

When a contract uses the terms “representations” and “warranties” together, they blend the past, present, and future together within terms of the contract. Every contract is different, but the language is basically the same. Representations and warranties are assurances that one party gives to another party in a contract. These assurances are statements that the purchasing party can rely on as factual.

It is important, however, to define the terms “representation” and “warranty” because they often are incorrectly used as synonyms.  Black’s Law Dictionary defines a “representation” as a “presentation of fact . . . made to induce someone . . . to enter into a contract.” Black’s Law Dictionary 1327 (8th ed. 2004).  On the other hand, a “warranty” is defined in terms of contracts as “[a]n express or implied promise that something in furtherance of the contract is guaranteed by one of the contracting parties.” Black’s Law Dictionary 1618 (8th ed. 2004).

Black’s Law Dictionary states that “[a] warranty differs from a representation in four principal ways: (1) a warranty is an essential part of a contract, while a representation is usually only a collateral inducement; (2) an express warranty is usually written on the face of the contract, while a representation may be written or oral; (3) a warranty is conclusively presumed to be material, while the burden is on the party claiming breach to show that a representation was material; and (4) a warranty must be strictly complied with, while substantial truth is the only requirement for a representation.”

A warranty generally moves from the present to the future. The product that you are buying is warranted as being free of defects, and the company agrees to fix any defects for a specified amount of time into the future.

Warranties can be either expressed or implied. Expressed warranties mean they are written into the contract, and, for the most part, buyers should insist upon them.  Implied warranties fall under the Uniform Commercial Code, which in all sales of goods implies that there be a “fitness for a particular purpose.”  Legally within contracts, expressed warranties hold up better in a court of law than implied warranties.

The seminal case was CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990). In that case, Ziff-Davis “represented and warranted” the financial condition of the division it was selling to CBS.  CBS, however, as part of its due diligence, sent in its own accountants to review the division’s financial statements.  They reported that the financial condition was not as represented and warranted.  The parties closed anyway, and then CBS sued.

In New York’s highest court, the issue was whether CBS had a cause of action for breach of warranty.  Ziff-Davis argued that CBS did not because it had known about the problems with the financial statements and had not justifiably relied on the warranties.  Stated differently, Ziff-Davis argued that the standards for a cause of action for a fraudulent misrepresentation and a breach of warranty both required justifiable reliance on the truthfulness of the statement.  Ziff-Davis lost.

According to the Court, a warranty is a promise of indemnity if a statement of fact is false.  A promisee does not have to believe that the statement is true.  Indeed, the warranty’s purpose is to relieve a promisee from the obligation of determining a fact’s truthfulness.

Generally, commercial real estate Purchase and Sale Agreements contain specific representations and warranties, disclosing certain facts about the parties and the subject property.  Obviously, given the liability of either misrepresenting or failing to represent material facts, these “reps & warranties” are often subject to great scrutiny and negotiation.

Naturally, Buyers will want the Seller to paint as full of a picture as possible about the status of the property, its history and any known defects/claims.  While sellers want to say as little as possible and ensure that the buyer will perform its own investigation.

Nevertheless, while great attention often gets focused on whether a party is willing to give a particular rep, often easily overlooked are basic principles concerning the scope, survivability and timing of these representations. This can of course either be intentional or a victim of poor “legal representation.”

When we work with these agreements, we strive to address a number of considerations beyond the mere giving of any “reps”.  Some important considerations for both Buyers and Seller include: When must the representation be true? (at the time made? As of the closing? both?); requirement to update the representations or disclose changes? Investigating the representations – Is there a duty of inquiry on the part of the party giving the “rep”?  Knowledge on behalf of the person giving the rep? is the knowledge imputed to the entity as a whole? Damages (is there a cap on the overall damages from the failure of a representation? Is there exposure for consequential damages? Punitive damages?); survivability (Do these reps only matter until closing? What is the post-closing liability? How long does it last?)

Without careful consideration and drafting, these provisions can undermine the intended purpose and create more uncertainty (and liability!) than clarity.

More than just focusing on whether an agreement will include a given rep, we help buyers and sellers understand their liability and the big picture regarding the giving (or not giving) of particular representations and warranties.

For further advice and the best possible representation, please do not hesitate to contact us.

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