On the face of it, representations and warranties can appear very similar. However, understanding the difference between the two can have a dramatic effect on how a claim plays out in court, the remedies available and the amount of damages that can be claimed.
This blog takes a look at the difference between representations and warranties and offers some top tips on how to prevent confusion in your contracts.
What is a warranty?
A warranty is a promise that a particular statement made is true at the date of the contract. A breach of warranty gives rise to a claim for breach of contract – the main remedy being an award of damages. To give an example, in a contract for the sale of goods, a warranty may be given about the condition, age or history of the goods being sold. In a software supply agreement, a warranty is usually given that the software will be free from material defects at the time it is delivered.
What is a representation?
A representation, like a warranty, is a statement of fact but is one which is made during contractual negotiations in order to induce another party to enter into a contract. While representations are usually made prior to the contract they are often repeated and therefore form the basis of a contract.
So, what is the difference between representations and warranties?
The key difference between a representation and a warranty is the remedy available to the innocent party when there is a breach. If a warranty is found to be untrue, the innocent party will be entitled to damages. A breach of warranty does not allow the innocent party to rescind the contract, which would effectively set it aside and put the parties back in the position they were in before the contract was made. As a warranty is a term of the contract, normal breach of contract considerations apply. A breach of warranty will therefore only give rise to damages if the innocent party can prove that the breach resulted in a loss and that the loss was not too remote i.e. the loss was in the reasonable contemplation of the parties at the time the relevant contract was entered into. If damages are available, they will be assessed to put the innocent party back in the position they would have been in had the breach of warranty never occurred.
In contrast, if a representation is found to be untrue the innocent party will be entitled to bring a claim for misrepresentation, which if successful would allow the innocent party to rescind the contract. The right to rescind may be lost, though, if the innocent party affirms the contract, if a significant amount of time has passed, or if third-party rights would be infringed.
A breach of representation may also entitle the innocent party to damages, which in principle are wider in scope than the damages available under a breach of warranty. With a breach of representation, the innocent party will not have to prove that their losses were in the reasonable contemplation of the parties at the time the relevant contract was entered into. Instead, the losses must be “reasonably foreseeable”, which has been held by the courts to be a less onerous test than the test associated with a breach of warranty claim. The manner in which damages are calculated also differs for a breach of representation claim versus a claim for breach of warranty. Under a claim for breach of warranty, damages are usually assessed at the time of the breach. Under a claim for breach of representation, damages are assessed from the date the misrepresentation was made. This is usually an earlier date and so may give rise to a higher level of damages.
Given the potential to rescind the contract and the wider scope for damages, it is generally more advantageous for a party to be given representations rather than warranties. However, whether or not a party can insist on this will depend on the bargaining strength of both parties and the type of contract on the table.
Can warranties also be representations?
If you are familiar with contracts, you may have seen wording such as “the seller represents and warrants…”. Where the wording is clear cut, it is likely that the court will view the statement as both a representation and a warranty. However, where the wording does not expressly provide that a warranty is to take effect as a representation, an innocent party will struggle to argue that the warranty is also actionable in misrepresentation. Take the case of Sycamore Bidco Ltd v Breslin in 2012 as an example. In this case, the court held that various warranties in the share purchase agreement, which were not expressed to be representations, could not be representations.
The case of Idemitsu Kosan Co Ltd v Sumitomo Co Corp in 2016 further reiterated this point. Here, the court concluded that it was not enough that the subject matter of the warranty was capable of being a representation; there was no representation because there was no express provision to that effect. The fact that the agreement contained an entire agreement clause also made it clear that any pre-contractual understandings, communications or representations had not been relied upon or had been withdrawn before completion.
Representations and Warranties – final thoughts
Representations and warranties may appear similar on the surface but the remedies available can be completely different. The question of whether a statement is a warranty, a representation, or both will depend upon the wording used and the context of the contract in question. Careful drafting of representations and warranties, as well as any exclusion clauses, is therefore key!
If you have any questions about representations and warranties, or about any other contract law issue, please contact Neil Williamson.