March 30, 2019
Contract Law

Representations and warranties are a core part of the contract law module in any law student’s course timetable. That said, they remain important to the lawyer and the businessperson alike. Knowing the difference, and the consequences of breach, can help you navigate even the most complex agreements and contracts.

What is a warranty?

A warranty is a promise that a particular statement made is true at the date of the contract. That said, it can relate to current and/or future conduct and/or facts.

A good example of the former is: ‘the Supplier warrants that it has sufficient Stock to fulfil the Distributors’ Orders in connection with this Agreement’. Contracts for the sale of goods often contain additional warranties about the condition, fitness, or adherence to a given specification.

With the latter, in a services context, a frequently used or sought warranty is: ‘the Contractor will perform the Services with reasonable care and skill.’

Warranties are also used frequently in the purchase of businesses. A seller of shares would almost certainly warrant something along the lines of: ‘The Sale Share constitutes the whole of the allotted and issued share capital of the Company and is fully paid or credited as fully paid.’ It can get more complicated, depending on the contract. For example, warranties in a Share Purchase Agreement are typically broken down into warranties of quality (of the company) and warranties of reasonable care (that certain figures may not be precisely true, but care has been taken to make sure that they are). If the figures were wrong, a claimant would have to demonstrate that reasonable care was not taken in getting the correct figure and/or it was otherwise reasonable to provide that figure in the context of the sale.

 A breach of warranty gives rise to a claim for breach of contract – the main remedy being an award of damages. In England, an award of damages is to compensate for loss. Therefore, a breach of a warranty asserting that a good was in proper condition, but it was not, would entitle the claimant to (potentially) replace the good or to get it fixed. Another way this can be assessed is diminishment in value.

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.

Prior representations that are not incorporated into the contract are not actionable in contract law. However, the parties must themselves contract for one to bring an action in respect of a representation.

There are three types of action if a representation is untrue (discussed in more detail in our article here):

  1. Fraudulent misrepresentation: occurs where a representation is made, it is false, and the representor made it knowingly and recklessly as to the truth.
  2. Negligent misrepresentation (pursuant to the Misrepresentation Act 1967): occurs where a false representation is made by a representor without care or without reasonable ground for belief in its truth.
  3. Innocent misrepresentation(pursuant to the Misrepresentation Act 1967): where a false representation is made by a representor where it had reasonable grounds for believing in its truth

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; a an action in respect of a representation, however, may.

As a warranty is a term of the contract, normal breach of contract considerations apply as set out above.

In contrast, if a representation is found to be untrue the innocent party will be entitled to bring a claim for misrepresentation, as above.

Where a false representation is made fraudulently, the claimant can be awarded tort damages, which differ from contractual damages, in that there is no ‘remoteness’ bar (see our article on remoteness here).

The assessment of damages, in essence, differs because 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.

A successful action for fraudulent misrepresentation would also entitle the claimant to rescind the contract.

A representation made negligently would entitle the claimant to tort damages and recission, but the Courts have the power to award damages ‘in lieu’ of recession, meaning that the obligations of each party under the contract continue.

A false representation made innocently only entitles the successful claimant to recession, but the Court does have the discretion to award damages instead.

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 [2012] EWHC 3443 (Ch) 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 [2016] EWHC 1909 (Comm) 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, Colin Lambertus, or the EM Law team here.