Representations and Warranties Anatomy™
A representation is a statement of present or historical fact made by one person to another outside the bounds of a contract that induces that other person to enter a contract. By its nature, a representation is therefore not a term of the contract itself — it cannot be; it was made before the contract came about; it is an egg to the contract’s chicken — although that won’t stop Legal riddling your contract with representations and, usually, co-branding them as warranties for good measure. A false representation may entitle an innocent to claim under the Misrepresentation Act 1967 and rescind its contract, or claim damages for negligent misstatement in tort.
Being founded on the tortious action on negligent misstatement, one of the ingredients of an actionable misrepresentation is that the representer somehow fell short of her duty of care: the simple fact that the representation was false might not be not enough if she can’t cannot reasonably have known it was false. This feels a more significant distinction than it is: tort governs situations where the parties, being randoms, have not had the opportunity to document their duties to one another, so the law steps in to help. Where they have, through the medium of contract, the law says, “you don’t need my clever appeals to the judgment of prudent people on public transport in south London to work out how you must treat each other, because you have worked it out for yourselves.”
Where the parties have written down their respective duties, but they still appeal to a tortious standard — which is what they are doing by writing “representations” into a contract — they are admitting to confusion between the laws of tort and contract. Here the fellow on the Clapham omnibus would surely say that the abstract duty of care maps exactly on to what the parties have voluntarily agreed. Why would it be any different? To be “negligent” under a contract is surely to breach it; no more and no less.
Representation: A representation is a pre-contractual statement of a present fact, the failure of which entitles an innocent party to rescind a contract altogether (i.e. to put itself in the position it would have been had it never undertaken the ghastly affair in the first place)
Warranty: A warranty is a contractual statement of the truth of a present fact, the failure of falsehood entitles the innocent party to sue for damages for breach of contract (to compensate it for the value of the contract had the statement been correct). It also has a specific meaning as a guarantee of merchantability in the context of a “Manufacturer's Warranty”.
This is why so often you see that most laborious of constructions: “representations and warranties” — the combination giving the wronged party the maximum possible range of remedies.
Promise: This, in Horton Hatches the Egg terms, is what you meant when you said, and what you said when you meant. A promise, if offered, accepted and accompanied by consideration, is your legally binding obligation under a contract.
Undertaking: An undertaking, in a contractual context, is really no different from a promise (though a solicitor’s undertaking is a quite different thing). You might characterise it as a specific promise to ensure that someone else does something (rather than the person making the promise itself), but it isn’t generally used that way.
In any other context, therefore, covenants and undertakings are nothing more than fancy words for promises, and any lover of plain English should therefore seek them out and, with extreme prejudice, relieve them of their command.
What representations are not
- Law: Representations are generally not made about the law or legal status — those things are called “legal opinions” and you’ll require august counsel to give you one of those and the boredom threshold of Job if you aspire to reading it.
- The Future: Representations are generally also made about things which have already happened — “known knowns”, in the Rumsfeldian argot — and not states of affairs expected to come about in the future. A factual assertion about a future state of affairs is better known as a promise, and you will need it to be a part of your contract, not a prelude to it, if you want to hold your counterparty to it in some tribunal down the line.
Representations by agent on principal’s behalf
“But I cannot,” she might say, “for I do not know if this is true unless the principal has told me it is true. I cannot assume personal liability for my principal’s obligations. I am but an agent.”
You must answer this firmly, along the following lines:
- No-one is asking you to assume personal liability for your principal’s obligations. We are asking the principal to assume liability for them. It is the principal’s responsibility under the contract. Ordinarily, of course, we would ask the principal directly, but it didn’t show up, and sent you instead. So, we are asking you to communicate these representations on your principal’s behalf.
- Now, you might say you don’t know whether these representations are true, or that you are not sure whether you are authorised to make them on your client’s behalf. But think twice before admitting that because, really, you should have asked or, better still, explained to your client that a condition of signing master trading agreements is that you will have to make uncontroversial representations about your own capacity, authority, competence and sanity.
- If you are still not comfortable proceeding, the answer is not to do without the representations: it is to do without the master trading agreement
- So, what’s it going to be, punk?”
Representations by agents on agent’s own behalf
Where your client’s obligations under the ISDA Master Agreement are stewarded by an agent — quite common for an investment manager trading on behalf of a fund — a broker might think about having the agent represent, on its own behalf, about its role as agent. It might ask the agent to do this in the ISDA. The sound of an asset manager confirming its ongoing authority to bind its principal gladdens a broker’s heart. A full-throated assertion of its own regulatory authorisation; its continued good standing with the companies office; the continued involvement of its key persons in making investment decisions — each is sure to put a jaunt in a broker’s stride. Imaginative in-house counsel for the broker will doubtless dream up others.
But tarry a while. Firstly, your investment manager will sign as agent, for the client, not on its own behalf. For many this will be an article of profound faith: they will be at some pains, which they will willingly inflict on you, to avoid the barest hint they are speaking for themselves. “When an agent, as agent opens its mouth,” they will tell you, “it becomes its principal for all purposes that interest the law.”
And so it does. As far as the Courts of Chancery are concerned, to be an agent is to be wholly transubstantiated into the person of one’s principal. Transmogrified. It is, for all forensic intents to disappear; one’s ghostly outline may still be there, but it is a chimera: one exists only to be the earthly representation of another.
Which cast a pall over the representations you are being asked to make.
Take the one that “the principal has duly authorised the agent to act on its behalf”. For the principal to say that, through the person of the very one whose agency is in question, is some kind of Möbius loop. The very comfort you might draw from what is being said is taken away by the person who is saying it.
The exchange might go something like this:
- Agent (as agent): Why would I be authorised by the FCA? I am not advising anyone. In fact, my investment manager is advising me. Why don’t you ask her?
- Broker (rubbing its eyes and peering at the agent): But I am asking her. I mean you.
- Agent (as agent): Who?
- Broker: You! The investment manager for this blessed fund!
- Agent (as agent): Ah, but I am not me, for now, you see. I am the earthly representative of the fund. In my own personal capacity, I don’t exist.
- Broker: But you are here, aren’t you? Can’t I just quickly ask you? Can’t you just, you know, be yourself for a moment? It won’t take a mo —
- Agent (as itself): What? Here? In this ISDA? You must be joking. I told you under no circumstances will I act as principal.
- Broker (A light-bulb comes on): Aha! I've got it! All right then: can you make representations on behalf of your principal?
- Agent (as agent) (Thinks for a moment.): Why yes! Yes, I can! That’s what I’m here, as agent, to do! What would you like me to represent?
- Broker: Could you represent that your investment manager is duly authorised by the FCA?
- Agent (as agent): WELL HOW THE HELL AM I SUPPOSED TO KNOW THAT??
- Broker: What?
- Agent (as agent): Look: why don’t you ask the agent?
Assuming you can persuade your agent to represent, on its own behalf, about itself, as to these matters (whether in the master agreement itself or in a side letter):
- Due appointment, authority etc: This goes to the agent’s ostensible authority to bind its principal. If an investment manager breaches this kind or representation, then worst case the broker risks having no claim at all against the fund – if it can’t make out that there was ostensible authority.
- Now if (notwithstanding breach of this rep) the broker does still have a claim against the fund, then no harm no foul: we shouldn’t need to close out vs the fund unless/until there’s an independent failure to pay, in which case rely on that. But now we have actual knowledge of the agent’s lack of authority we may find we have a second problem: that there is no no-one with ostensible authority to bind the fund, and it is drifting rudderless towards a wall. If so, see below.
- If we don’t then our action is necessarily against the agent in its personal capacity and against its own assets, not the fund’s. It’s a claim in tort for negligent misstatement. Put yourself in the fund’s position here. Being itself a victim of the agent’s mendacity it will feel it is more sinn’d against than sinning and will not see why this should be a 3(d) representation under the ISDA Master Agreement. The fund will say “well hang on: I didn’t do anything wrong here: this asset manager is taking my name in vain without my consent – so how is it that you’re purporting to close out against me?
- Loss of manager’s regulatory status, no manager, no good standing etc: The other typical representations goes to a duly authorised manager’s continued ability to to act on the fund’s behalf: to manage positions, monitor risk tolerances and keep the ship steady. If the agent goes AWOL a [[[broker]] has some call to reduce risk against the fund. If the fund is a sports car, the broker’s ATEs are the measures it can take to prevent the car hitting a wall. As long as here is a competent agent driving the car, the broker can have some confidence the car will avoid walls by itself. If the driver is prevented from steering, the car will, eventually, hit the wall. So it is fair enough for the broker to say “okay: you are out of control: unless you name a new driver, within a given period ~ and here you may treat yourself to a fun exchange with your counterpart about how long that period should be ~ we can call this an ATE”.
- negligent misstatement
- Representations and warranties
- or you could cut to the chase and go straight to Promise
- This is why the idea of “gross negligence” is all the more abstruse.
- First spending thirty of its onionskin pages, and several thousand of your pounds sterling, clearing its throat about what it is not saying before it will (ahem) give you one.
- You might think about leaving that last line out, but 10/10 for style if you do decide to use it.
- Yes; the whys and wherefores of ostensible authority are an endless delight; but we can at least say the risk is increased.