This article on ‘Representation vs. Warranty in Commercial Contracts: Understanding the Key Differences’ was written by Amruta Patil, an intern at Legal Upanishad.
Introduction
A contract is an agreement that is enforceable by law as defined under Section 2(h). A contract has numerous terms, clauses, conditions and warranties which are involved in the making of it. A few key clauses are the Representation and Warranty Clauses which are often part of various kinds of contracts such as commercial contracts, Loan agreements and others.
The terms Representation and Warranty are often seen to be part of the contract and are often used interchangeably. But both the terms not only have independent definitions but are also remedied differently in case of a breach which is different from case to case. The same clauses are elaborated below in the article.
Commercial Contract: Meaning and Concept
A commercial contract can be defined as a contract that helps in regulating the business equations between businesses or individuals which would include a range of clauses defining the purpose of the business and a dispute resolution mechanism in case of a breach of the terms and conditions. Representation and Warranty are often part of commercial contracts, which are placed in contracts that indemnify the parties concerned in case of a breach on the part of either of the parties. Under the Indian law of contracts, it indemnifies the seller by placing greater responsibility on the buyer through the principle of Caveat Emptor which means let the buyer be aware.
What is a representation clause in a contract?
Representation means a presentation of facts that are true to the date of execution. In a commercial contract, the party asserts that the facts which are mentioned in the contract are true to nature. It can be implied which is through the conduct of the party or is explicit in nature which would induce the other party to enter into the contract. Representation is not defined under the Indian Contract Act, 1872. However, the Act does define Misrepresentation which means a false statement of facts which are made to induce the other party to enter into the contract.
Misrepresentation is of two kinds:
- Fraudulent Misrepresentation- In this kind of misrepresentation, the representation is done intentionally either by omitting the fact or leading to believe the fact to be true when it is otherwise. The law provided remedies in case there was a misrepresentation that resulted in a breach of the contract. Rights claimed are-
- Right to claim damages- the innocent party can claim for the damages which have been incurred due to the fraudulent misrepresentation leading to acting upon the contract.
- Right to repudiate the contract- is when the party either through his actions or by words does not intend to perform the obligations set out in the contract.
- Innocent Misrepresentation- when one party makes a statement to another party to induce them into entering into the contract without knowing whether the statement made is correct or false.
What is a warranty clause in a contract?
A warranty is a statement or assurance made by the party about the facts or conditions in a contract. A warranty can be implied or expressed. A warranty is made concerning incidents that can occur either in the present or in future. A warranty is usually used in contracts of sale. Not all representations form as part of the contract but the ones which do are called stipulations. An example would be this Mobile will receive software updates for the next three years. In this case, if the device as promised does not receive the updates then the device company can be sued by the user.
Role of warranty and representation in a commercial contract
In a commercial contract clauses such as representation and warranty play a very crucial part in the contract. They both act as protective clauses or measures which are enclosed in a contract in case a breach occurs, it safeguards the buyer in a contract. Both the clauses are often used together in the realm of commercial contracts while execution of these clauses does not share the same process.
These clauses help in reducing the risk often arising due to the breach of contract. While the seller would prefer the clause to be such that it minimizes the damage incurred by the seller if the buyer decides to sue. On the other hand, the buyer would prefer the interpretation of the clauses in broader terms which would indemnify the buyer from all possible damages that could be incurred by him.
Are the two defined under the ICA?
The Indian Contract Act 1872, does not define Representation and Warranty in the act. As mentioned above, the Act defines Misrepresentation and provides remedies for the same.
The Warranty is however defined in Section 12 of the Sales of Goods Act,1930 (SOGA). the act defines a Warranty as stipulation collateral to the main purpose of the contract, a breach which gives rise to a claim for damages but to a right to reject the goods and treat the contract as repudiated.
How are the Representation and Warranty Clause different?
In All India General Insurance Co v. S P Maheshwari (AIR 1960 Mad 484), the Hon. Madras High Court discussed the distinction between representations and warranties-
Warranties are representations which are made the basis of the contract whereas a representation is not strictly speaking a part of the contract or the essence of it, but rather something preliminary and like an inducement to it.”
The Indian Contract Act is very much based on the principles of English Common law, hence both the terms are well elaborated in the English Law as opposed to the Indian Contract Act.
As often being drafted together in commercial contracts can easily give an illusion that they both are the same. But when looked at closely one can see that both the clauses are different and breaches of either of the clauses have different remedies.
While on the one hand Representation is the way the statement of facts is in the present situation or has been in the past. A warranty is a promise about the present or the future.
The common thing which is between the two clauses is that in case there is a breach of either of the conditions it would result in damage to the parties involved. The quantum of the damage and remedy would be based on the kind of contract and the applicability of the laws of the land where the breach occurs.
Things to be kept in mind while drafting warranties and representation clauses in the contract
There are a few steps that can be followed when drafting Representation and Warranty Clauses in the contract. They are as follows-
- Set it out separately- when a contract is formed it would be a prudent move to set the representation and warranty clauses separately to avoid future confusion during the issue of a breach of the contract. As the former deals with the facts concerning the present or that which has taken place in the past, the latter deals with events that are promised in the present or have the possibility of happening in the future.
- Disclosure of the business- the buyer must have complete knowledge about the seller’s business to the buyer. Also, the buyer needs to run a thorough check as to whether the facts being presented are true or not.
- The method of resolution – both the representation and warranty clause are defined separately and in case of a breach are also to be dealt with in the same manner. By mentioning the method of resolution when the facts are misrepresented or the warranty of the object of the contract is not fulfilled it would be helpful to determine the damages if the method of resolution is already mentioned in the contract.
Conclusion
Representation and Warranty often appear to be two sides of the same coin. But in reality, both these clauses are very different, while one is a statement of fact, the other is a promise of the future. These clauses aim to bring the experience of the past with the possibility of the future in terms of the contract. Often clubbing these clauses together creates difficulty in interpretation, it would be best that the two clauses are drafted in simpler language along with interpreting them independently.
List of References
- Ashima Obhan and Vrinda Patodia, Revisiting Representation And Warranty Clauses, MOndaq, 19 June 2020, available at: https://www.mondaq.com/india/contracts-and-commercial-law/955660/revisiting-representation-and-warranty-clauses
- Representations and Warranties, Thomson Reuters, available at: https://uk.practicallaw.thomsonreuters.com/8-382-3760?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=A%20representation%20is%20an%20assertion,if%20the%20assertion%20is%20false.
- Sankeit Taneja, Representation and warranties in a contract and the effect of non-compliance, iPleaders Blog, 14 July 2020, available at: https://blog.ipleaders.in/representation-warranties-contract-effect-non-compliance/