Gaining a Better Understanding of Contract Warranties
December 12, 2016
Understanding Contract Warranties
Many business contracts include representations and warranties. While often considered “standard” or “boilerplate,” these key provisions become essential if the other party fails to live up to its promises.
What is a representation?
In basic terms, a representation is a statement of fact made by one party to another regarding the accuracy of an existing fact the recipient is relying upon, often as an inducement to enter into an agreement. For example, when you buy a new automobile, the seller will represent that it was designed to certain mileage-per-gallon specifications.
What is a warranty?
A warranty is a guarantee or promise by which one party provides assurance to the other party that certain facts or conditions will be true or will happen in the future. For example, when you buy a new television, the seller warranties that it is, and for a period of time after the sale will be, free of defects and agrees to repair any defects that arise within a certain time period.
Sometimes the terms are used interchangeably, but essentially one is a current or past looking statement and the other is a forward looking statement.
Representations and warranties also imply that the party agrees to protect the recipient against loss if the facts are or, in some cases, become untrue, generally backed up by contractual indemnification.
The form or subject of the representation or warranty can vary significantly depending on the type of contract, e.g. services, insurance, consumer or construction. For instance, during a merger or acquisition, warranty provisions are often essential to the transaction. Sellers must frequently give assurances as to the accuracy of a wide range of statements regarding their business operations, such as the ownership of intellectual property and other assets, the accuracy of financial statements, and material operational details regarding the business the buyer requires in order to be willing to enter into the transaction.
Breaches of Representations and Warranties
Breaches of representations or warranties can lead to a variety of damages. The aggrieved party may be entitled to breach of contract damages, to potentially void a contract (i.e., if a misrepresentation arises to the level of fraud), or to certain damages specified in the agreement.
As highlighted above, businesses should never skim over the representations and warranties section. In complex transactions involving the sale or purchase of an existing business or real property, it is also essential to have an experienced attorney who can negotiate on your behalf.
Do you have any questions regarding contract warranties? Would you like to discuss the matter further? If so, please contact me, Jeffrey Cassin, at 201-806-3364.