You are a person who wants to buy a watch. It is an expensive watch of a luxury brand. You go to the showroom. You ask the showroom representative about the details of the watch. She tells you that the watch is indeed made of gold and platinum metal, and it is indeed of the brand that you want. Being an animal lover, you need to be sure that the watch is cruelty-free. She assures you that it is cruelty-free. You ask her how the showroom would help you in case the watch stops working. She tells you that the watch comes with a 2 year warranty period in case the watch is found faulty. This story is an oversimplified depiction of what role the “Representations and Warranties” clause performs in a contract. The representations and warranties clause in a contract is perhaps one of the most deliberated clauses during the negotiations of the contract. It is categorised as an “operative clause”. Negotiations between parties can be seriously impacted if the representations and warranties are not mutually agreed upon. Although it is a standard practice to write the “representations” and “warranties” in a single clause, both hold different connotations. In this article, we shall try to analyse this clause and determine the implications it may have on the result of the negotiations. We shall also examine the consequences in case of breach of the clause.
Representations are often defined as the assertion of past or present facts relating to the party in question. The representations are put forth by the parties as ‘facts of the matter’. Representations are not defined under the Indian Contract Act, 1872 (although ‘Misrepresentation’ has been defined). These representations are presented to the other party to gain their confidence and convince them to enter into the contract. Representations can be an immensely helpful element when carrying out due-diligence exercises on the party in question. When the party (or parties) wants to establish its credibility pertaining to the truthfulness of its claims, including those claims as representations would be a logical step towards the success of its negotiations.
WHAT CAN REPRESENTATION INCLUDE?
Representations might have specific statements as part of a representations and warranties clause or the clause may simply state that any other statements or claims made throughout the agreement should be implied as representations and should be held.
Representations can include (but is not limited to) the following facets:
- Organisation: The Representations relating to the organisation will have the information on the governing law under which it was set up.
- Licences: The licences or permits that are conferred by any regulatory authority on the organisation.
- Documentation: Any documents as duly required for the commencement of the contract.
- Financial statements: Perhaps the single most important representation while carrying out a M&A exercise or loan agreements or investment agreements.
- Taxes: To ensure that any taxation liabilities have been fulfilled by the party in question and that there are no pending dues.
- Disputes: If any outstanding litigation or dispute is pending against the party, which may have a direct or indirect impact on the outcome of the enforceability of the agreement.
Warranties are a promise that the assertions made by the parties are indeed true. Warranties invite indemnities. Where representations are seen as the past and present assertions, warranties act as the surety of the present and future conditionality. Warranties further establish the credibility of the service or product being provided by the party. At the same time, warranties put modalities in place in case the service or product is not found up to the mark. As is the case with representations, the warranty has also not been defined in the Indian Contract Act.
Warranties can be made with regard to the following aspects:
- Assurance of quality of service or product.
- Execution or performance of service or product.
- Non-infringement of a third party’s intellectual property.
The party making the warrants would want to limit their risks by:
- Limiting the time frame within which the warranties can be claimed.
- Limiting the instances or occasions where a claim might arise.
- Limiting the payable amount.
Warranties and indemnities clauses can be read together when determining the extent of damages to be paid by the party making the warrants.
IMPLICATIONS OF REPRESENTATIONS AND WARRANTIES CLAUSE
Representations and warranties provide assurances to the contracting parties. When considering Representations, the party making the Representations will try to minimise the scope of such Representations to reduce the risk of a potential breach. Whereas, the party that is being made Representations would want a broad range of assurances to secure their transaction. In case of warranties, again, the party warranting the claims would want to limit the scope of such warrants. As such, the party would try to specify the period, circumstances, conditionality, modus-operandi etc to tighten the margins. On the other hand, the party that is being made warrants would want more elbow room to make themselves more secure in case of a breach. Contentions might arise in the case of ‘implied’ Warranties, which is why the parties would preferably choose to have expressed warranties. Expressed warranties are easier to enforce compared to implied warranties. Typically, most big deals (like Mergers and Acquisitions) might like to have a separate Schedule on Representations and Warranties rather than a clause for an uncomplicated transaction.
BREACH OF REPRESENTATIONS AND WARRANTIES CLAUSE
As a standard form of practice, the representations and warranties are clubbed together to be written as “the party represents and warrants to…”, but there will be different repercussions in case of a breach of either of the parts. Under Section 19 of the Indian Contract Act, 1872, in case of breach of Representations (Misrepresentation), the contract can be voidable at the option of the party whose consent was caused by misrepresentation. The party can also exercise its option to insist that the contract should be performed and that the party should be put in a position in which they would have been if the Representations had been true. Warranties, when breached, can simply cause the party to pay damages to the wronged party. The breach would not inherently lead to the option of termination of the contract. As warranties are already very tightly defined, the scope of damages to be paid can be limited. To summarise, a breach of representations would have more pressing consequences than a breach of warranties as the contract has the potential to be completely void. If the warranties are breached, the wronged party can simply ask for damages to be paid, as pre-determined in the contract itself.
The Representations and Warranties clause holds its significance in the world of contracts. It is always preferable to have the clause be well-defined and easy to understand rather than flowing along in the sea of legal jargon. Most transactions can be made hassle-free when all facets are expressly defined so that there is no room for implied connotations. This clause must not be kept open-ended and parties must try to tie all the loose ends for smoother execution.
Author(s) Name: Aboli Nimbalkar (Campus Law Centre, Delhi University)