Contracts

An Important Step to Drafting Clear, Concise Contracts: Understanding “Representations and Warranties”

Think back to the last time you read a contract. You may have noticed the phrase “representations and warranties” or “represents and warrants” a dozen or so times and, perhaps, you thought how do these terms differ, and is it redundant to use both terms? Both representations and warranties are functionally the same, especially in this day and age. In this post we’ll define representations and warranties, and inform you why the traditional use of both terms in your contract may no longer be the best practice.

Understanding the Terms
First, let’s explore the legal definitions and examples of each term, representation and warranty.

Black’s Law Dictionary defines “representation” as a statement of fact which was made to induce another to enter into a contract. Typically, representations are statements that a party has examined, considered, and believes to the best of his or her knowledge to be true. These statements generally represent the existence of past or present facts.

For example, a seller of products may represent that he or she has the authority to sell the products you are purchasing. If, in fact, the seller does not have the authority to sell the products to you then you may have a claim for misrepresentation, or fraud (remedies are discussed in greater detail below).

A “warranty”, on the other hand, is a promise that a certain fact is or will be true. These warranties will, in most cases, be guaranteed for a period of time. A warranty protects against loss if the promised statements turn out not to be true.

For example, a car salesperson may warrant that the car you are buying will be free from any engine defects for a specified period of time. If, during that period of time, the car’s engine explodes due to a defect, then you likely have an action for a breach of warranty or, more generally, a breach of contract. Rather than being carless and walking to work, the warranty you bargained for will ensure you receive the benefit of the bargain, or a new car.

Making Sense of the Blurry Distinction
Traditionally, warranties were always included on the face of the contract, were presumed to be material terms, and needed to be strictly complied with (any slight deviation constituted a breach of the warranty, and thus, breach of the contract).

Representations, on the other hand, were generally oral statements, were considered separate inducements to the contract, were not presumed to be material terms of the contract (until proven by the injured party), and did not require strict compliance in many circumstances (often it was enough for the representation to be substantially true).

Differing Remedies
One important distinction between these two terms that continues to persist to this day is the different remedies available in case of a breach. A breach of warranty typically entitles a party to “benefit of the bargain damages,” which are meant to put the non-breaching party in the position they would have been in if there was no breach.

In contrast, both innocent and negligent misrepresentations are entitled to avoidance (they can refuse to perform their contractual obligations) and restitution (they can sue for damages that would put them back in the position they were in prior to the contract). If the misrepresentations were fraudulent, the non-breaching party could also sue for benefit of the bargain damages and punitive damages.

Modern Approach Blurs Distinctions
Modern courts have blurred the distinction between representations and warranties by implying warranties wherever representations are expressly written in contractual agreements.

Historically, courts required drafters to use specific terms in contracts to determine what cause of action the parties were entitled to bring. In other words, a court could hold that a party may only bring an action for breach of warranty if the assertion of fact underlying the claim is referred to specifically as a “warranty” in the underlying contract. Similarly, to bring a valid a claim for misrepresentation, the court could hold that the assertion of fact underlying the claim must be described specifically as a “representation” in the underlying contract.

However, this strict adherence to formalism has been widely abandoned by today’s courts. A brief glance at the Uniform Commercial Code (UCC) reveals a similar approach under commercial law. UCC Section 2-313(3) states that “it is not necessary to the creation of an express warranty that the seller use formal words such as ‘warrant’ or ‘guarantee’ or that he have a specific intention to make a warranty.”

An early Washington state case, Miller v. Commercial Union Assur. Co., further emphasizes this point, stating:

“When the parties by the terms of their contract expressly stipulate that a representation shall be regarded as material, it ceases to be a representation only and becomes a warranty. Warranties differ from representations, then, in that falsity of a representation will defeat the contract only where it is material, as representations are merely inducements to the making of the contract, while in case of a warranty the statement is made material by the very language of the contract, so that a misrepresentation of a matter warranted is a breach of the contract itself.”

Thus, under the modern approach, a breach of representations in a written agreement would entitle the non-breaching party to damages for breach of warranty or misrepresentation.

Eliminating Redundancy in Favor of Clear, Concise Contracts
Businesses should favor clear, concise contracts for a number of reasons, the most important of which is readability. It’s essential that both parties can understand exactly what’s being agreed to. To accomplish these ends, it’s important to limit the words in a contract only to those words that add value and meaning to the contract. Continuing to include the terms representations and warranties rather than just representations adds no value to your contract (other than a safety net if you happen to come across a 19th century formalist for a judge).

We subscribe to the “why use two words when one will do?” approach. Here, use of both terms is redundant and unnecessary. Clarity is the key. Redundancy often leads to confusion, or a lack of understanding. This is the last thing you’ll want when entering into a contractual relationship with another party.

By clearly spelling out the rights under a contract both parties will understand what is being represented as true.

The Bottom Line
At this point you’re likely wondering “if the cause of action is no longer determined by the terminology I use in my contract, why do so many contracts still use both terms?” The answer is simple, it’s tradition. It’s the way contracts have always been drafted. The legal industry is deeply rooted in traditional ways of doing things, including what language to use in a contract. You can continue to use both terms and, most likely, there’ll be no adverse effect on you or your contract, other than a dozen or so overly cumbersome references to “representations and warranties.” Or you can simply use the term represents (and representations). If you’re seeking to draft a clear, concise contract this is one simple step you can take.

Understanding key differences, or lack thereof, between representations and warranties is important when drafting, editing, and negotiating a contract.  Exclusively using the term “representations” will promote clarity, something every business owner should strive for.

It’s important to note that the terms “warrants” and “warranty” should still be used when waiving implied warranties in contracts, such as the implied warranty of merchantability. Implied warranties are outside the scope of this post, but will be the subject of a future iVLG blog post.

          


Gavin Johnson

Gavin enjoys craft beer and is learning the art of brewing.


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