Representations and warranties

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Representations and Warranties Anatomy
An objet trouvée for our times.


Representations and warranties generally | Representations | Warranties | Covenants | Acknowledgements | Representations in the ISDA | Warranties in the GMSLA | Representations in the GMRA | Waiver by estoppel | Acknowledgement Common representations: Status | Capacity | Authority | No violation | Consents | Obligations binding | Principal | Understanding | Non-reliance | No representation | Unencumbered owner | No default or potential event of default | No litigation | No fiduciary obligation |

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Representations

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.[1]

Warranties

A warranty is a statement of a present or historical fact made as a term of a contract. If a warrantor breaches its warranty the injured party might claim damages for the breach of contract and sue for damages, but cannot rescind it altogether. To set aside the contract as if it never happened — to void it, ab initio — you would need to prove a misrepresentation from someone before the contract, that induced you to enter it.

Since a warranty is creature of contract, one’s liability for its failure is absolute: if a warranty fails, you’re in the schtook: it is no defence that you could not reasonably have known that the matters warranted were not true, or that some mendacious interloper (other than the other party to the contract) has intervened to defeat your best intentions unless that kind of conditionality is written into the contract. This is the appeal of a written contract: the parties can write down with infinite, tedious precision, what they mean to say, and what they say they mean, one-hundred per cent.

It also points up the logical befuddlement behind the idea of writing representations into a contract.

Criswell” reps and warranties: as to the future

Purists would say that a warranty is no more suitable for a statement of future fact than is a representation — if, epistemologically, a “future fact” is even a thing, and those same purists would say it is not — for who knows what the future brings? The common law is no hard determinist; the golden thread of precedent looks backward, not forward; the slings and arrows of outrageous fortune may yet pin us to a different hill. If the future is a soufflé, it is not so much that it hasn’t yet risen, but that the jurists who might be eating it have not yet decided whether they’re even going to that restaurant, and nor do they know whether it even has soufflé on the menu in the first place.

But, as ever, the Americans seem to have a different, and confused, idea about what representations and warranties are. This is ably, if a little laboriously, explained by the author of A Manual of Style For the Drafting of Contracts.[2] Across the ditch they see the representation to be a statement of a past fact in a contract for which a party assumes responsibility, whereas a warranty is an equivalent statement of future fact — apparently the Americans have more truck with determinism than we do. Though apparently attested to by no less august an institution than the American Bar Association[3] this seems wrong, even in the Land of the Shining Beacon on the Hill, and certainly under English law, as a matter of common sense. Warranties and representations, surely, both address matters of existing or historical fact; assurances as to what will come about in the hereafter — which, as Criswell would tell you, are the meaty ones, for the future is where you and I are going to spend the rest of our lives — are called “promises”.

On the need for both reps and warranties

Our view is for all intents and purposes beyond ultra vires, representations and warranties boil down to warranties. The giveaway is that they appear in a contract, so are made rather too late in the day to be meaningful pre-contractual representations. For them to have any force as representations, your operating theory has to be that the contract, though executed, has been so compromised by the falsehoods from which these statements are woven as to fail for lack of consensus. In which case they are little more than a handsomely-formatted transcript of the dialogue that passed between merchants in the fog of commercial negotiation, before the contract got to the consummated point we now find it to be in.

Since both parties have signed their name to a contract, which sets out these representations for the record in triple-tempered eleven-point Helvetica, their evidential value is unimpeachable, but they are still no more than representations: assurances given as a prelude to signing the contract.

There is a further colour of logic to including representations in your contract if your counterparty is one of those rare organisations that are susceptible, in these modern time, to ultra vires. Here, a representation (as opposed to a warranty) gives you a leg to stand on should your contract turn out to have none, being void for ultra vires. Now that assurance, freed from the usual shackles of concurrent liability — since there is, Q.E.D. no contract — dangles fruitily before you as an open-and-shut action in tort for negligent misstatement. There is no ultra vires defence to a tort. But as a warranty, being part of a contract which — as you have just learned — is void ab initio as being outside the powers of your counterparty to make,[4] in this unique scenario, it is useless.

Is it such a big deal?

So, why have both? BECAUSE THE SKY MIGHT FALL IN YOUR HEAD IF YOU DON’T. Didn’t you learn anything at law school? Wouldn’t your client rather have the option to rescind the contract (if it made a bad bargain) or sue for damages (if it made a good one)?

You may wonder whether the usual rules about concurrent liability in contract and tort would have something to say about that but — and for the most part, they do — but in Casanova’s immortal words — if in doubt, stick it in. Be a lover, not a fighter. Life is short, the total entropic tedium of the commercial universe is overwhelming, and nothing is gained from arguing the toss about whether something is a representation or a warranty. Keep your eye on the ball: what matters is that the ones you make are true.

America

Still, we mention for completeness: that lone wolf of clarity on the prairie of dense American legal drafting, Kenneth A. Adams once devoted a 27-page scholarly monograph[5] to the subject — maybe a slow week in the practice — to argue the world is wrong, he is right, and the correct word is neither “represents”, nor “warrants”, but “states”.

Now the JC is the last person in the world who would take umbrage at flying one’s opinion straight into the face of global consensus but, still, we struggle with this one. The key to the problem reveals itself in the first paragraph:

The phrase “represents and warrants” is a fixture in English-language contracts. It’s used to introduce statements of fact, as are the verbs “represents” and “warrants” used separately. And the words “representation” and “warranty” are used to refer to statements of fact in a contract.

But they do a bit more than that. Mere “statements of fact” are a bit of scene-setting: “It was a dark and stormy night”. “It was bluebell time in Kent”.[6] They add colour and richness to the reading experience but, unless they saddle someone with a clear legal obligation, they have no place in a contract. To be sure, legal contracts are shot through with all kinds of horrific linguistic tics, but they are generally free of unnecessary editorialising about the weather or the local flora. So, a simple statement in a contract — “the vendor states that it is duly incorporated in the state of Vermont”, or “the Purchaser states that the moon is made of blue cheese” — doesn’t achieve anything of legal significance, unless one can infer from it that its utterer accepts responsibility for losses occasioned as a result of another party relying on that state of affairs to her detriment.

Generally, one assumes contractual responsibility for the existing state of the world by warranting that it is so, and as to its anticipated future state by promising it will be so.

“Warranty” in the sense of a consumer warranty

Consumer protection is, as you know, hardly the JC’s forté, but a warranty in a finance contract seems to me to be a different thing that a warranty on a toaster, and it is perhaps here whence the American confusion about future facts might arise.

For, as logic surely demands, one can only exercise the warranty on one’s new toaster in the future — so does that not mean a toaster warranty must be a contractual commitment about its future merchantability? Perhaps not. The laws of entropy, and fragility, being what they are, a toaster’s innate fitness for purpose can hardly improve with time, so a subsequently-revealed want of suitability, must be a function of a defect that was latent — not apparent, but yet lurking there, out of sight — at the time of purchase. Thus, we can regard that warranty, when made, as a statement of present fact: that “this here toaster is so well made that it will not, without unforeseen intervention, stop working within the warranty period.”

That it thereafter does stop working during the warranty period, you can view as rebuttable evidence that it was not made as well as claimed. After all, there are plenty of ways to invalidate the warranty on a toaster: by opening it up and poking around inside it; by using it against instructions, not wiping it regularly with a soft cloth, and so on. All these, we say, are directed at preserving the state of the toaster as sold, rather than ensuring the toaster’s ongoing merchantability against all the idiotic tribulations a consumer can put an innocent device through.

What sort of things does one represent or warrant about?

Facts: Matters of fact relating to the internal workings of one’s organisation that are not readily apparent to an outsider looking in, and which have a direct bearing on the enforceability of the contract. For example, that execution of the contract has been properly authorised by any internal procedures — this helps in a little way to give comfort that, if push came to shove, the contract could not be set aside as not having been validly entered. Unless you are trading with a municipal authority such as — cue dramatic look gopherOrange County or Hammersmith and Fulham council, this is a fanciful, chicken-lickenish fear in this day and age, but it is hardly an imposition to make this rep, so just go with it. Some matters of fact — such as your counterparty’s internal motivation or intent in entering the contract — are silly things to seek representations or warranties about, because it is impossible to gainsay them. As legal artefacts, they are completely useless. For a great example of such a useless warranty, see Para 14(e) of the 2010 GMSLA.

Not laws: Generally speaking matters of law are not appropriate for reps or warranties — if you want a legal opinion you should, well, get a legal opinion — but every rule is made to be broken and there are some practical exceptions: reps and warranties as to one’s own legal capacity to enter into a contract or the transaction contemplated by it are common and not really objectionable: this is technically a matter of law but is uncommonly specific to your own organisation, and is a legal “fact” which you really should know about and your counterparty can’t really be bagged for not knowing.

That said, if you happen to be wrong about it, this only tends to emerge at the point where your counterparty is trying to enforce your contract and finds it cannot. Hence: the difference between a representation and a warranty: as a warranty, this is useless, because, QED, the contract must be enforceable to establish a breach of warranty that the contract is enforceable. It is a mobius loop. A misrepresentation that you have the capacity to enter into the contract sounds in tort, and thus doesn't rely on the contract being valid: it is a statement to a neighbour to whom one owes a duty of care.

See also

References

  1. This is why the idea of “gross negligence” is all the more abstruse.
  2. Here, for those needing a sleeping draught.
  3. Commentary on the ABA model stock purchase agreement, 2011.
  4. These days, ultra vires has largely receded from the corporate governance frameworks in most sensible jurisdictions so only weird counterparties like municipal councils — yes, and why are they trading tranched CDOs? — pose a serious risk.
  5. Published in no less august a periodical than Transactions: The Tennessee Journal of Business Law [2015] Vol 16 at 203, if you want to read it in its original locale.
  6. Hinz v Berry [1970] 2QB 40Let me Google that for you per the great Lord Denning.