Representations and Warranties in Contract Law Drafting By Seth Doe Esq

Introduction

In commercial contracts, the terms representations and warranties are frequently used, often in tandem, yet they serve distinct legal purposes. Their proper use and understanding are essential for lawyers engaged in contract drafting and negotiation, since the distinction affects risk allocation, liability, and the remedies available upon breach or misstatement. This article provides a detailed examination of representations and warranties in contract law, their legal consequences, key drafting considerations, and practical illustrations to assist both practitioners and students in mastering this important area.

1. Definitions and Legal Character

1.1 Representation
A representation is a statement of fact made by one party to induce another to enter into a contract. If the representation proves to be false, the misled party may have the right to rescind the contract and, in certain cases, claim damages for misrepresentation. A representation is not, in itself, a contractual term; rather, it exists to inform or induce, rather than to promise or guarantee performance.

1.2 Warranty
A warranty, by contrast, is a contractual promise that a certain fact or condition is true or will be fulfilled. If a warranty is breached, the innocent party is generally entitled to damages but not to rescind the contract, unless the warranty is fundamental or classified as a condition. Unlike a representation, a warranty forms part of the contract itself, and breach of a warranty gives rise to a claim for breach of contract.

2. Distinction Between Representations and Warranties

The distinction between representations and warranties is crucial in drafting and interpreting contracts. A representation is a pre-contractual statement, whereas a warranty is a contractual promise. The purpose of a representation is to induce the other party to enter into the contract, while a warranty’s function is to allocate risk and provide assurance. When breached, a representation gives rise to remedies such as rescission or damages for misrepresentation, but a warranty generally allows only damages for breach of contract. To succeed on a misrepresentation claim, a party must prove reliance and inducement, whereas breach of a warranty requires only proof that a contractual term was not fulfilled. Moreover, misrepresentations may give rise to liability for fraud, while warranties typically do not, unless the statement is also characterised as a representation.

3. Legal Consequences of Misstatements

3.1 Misrepresentation
The consequences of a misrepresentation depend on its nature. A fraudulent misrepresentation is made knowingly or without belief in its truth. A negligent misrepresentation arises when a statement is made carelessly and without reasonable grounds for believing it to be true. An innocent misrepresentation, although made with reasonable belief in its truth, is still untrue. In England and Wales, the Misrepresentation Act 1967 governs statutory rights for misrepresentations, permitting rescission and/or damages depending on the circumstances.

3.2 Breach of Warranty
A breach of warranty entitles the innocent party to claim damages, which are assessed under the ordinary rules of causation and remoteness, as established in Hadley v Baxendale (1854). However, breach of a warranty does not allow the innocent party to rescind the contract; the contract remains in force notwithstanding the breach.

4. Common Uses in Commercial Contracts

4.1 Share Purchase Agreements (SPAs)
In share purchase agreements, representations and warranties are typically set out in detailed schedules. For instance, a seller may represent and warrant that the company has no undisclosed liabilities, that all tax filings are up to date, and that there is no ongoing litigation. If any of these statements prove false, the buyer may claim damages for breach of warranty or, if the statement also qualifies as a representation, pursue a misrepresentation claim.

4.2 Loan Agreements
In facility agreements, borrowers are required to make representations and warranties regarding their legal status, authority to borrow, compliance with laws, and absence of default. These assurances are often repeated on drawdown dates or periodically during the loan term, thereby imposing continuing obligations.

4.3 Supply Agreements
In supply agreements, suppliers often warrant that the goods are fit for purpose and conform to agreed specifications. Breach of such warranties entitles the buyer to claim damages for non-conforming goods.

5. Drafting Considerations

5.1 Clarity of Language
Ambiguity in classification can lead to disputes. For this reason, drafters should expressly state whether a statement is intended to operate as a representation, a warranty, or both. For example, a clause might provide:

“The Seller represents and warrants that the Accounts give a true and fair view of the Company’s financial position as at the Accounts Date.”

This ensures that the buyer benefits from both contractual and misrepresentation remedies.

5.2 Knowledge Qualifiers
Representations and warranties are often qualified by phrases such as “to the best of the Seller’s knowledge.” This limits liability, especially in transactions such as share sales. A common formulation might read:

“The Seller is not aware, having made reasonable enquiries, of any material litigation pending against the Company.”

The effectiveness of such clauses depends on how knowledge and reasonable enquiry are defined in the agreement.

5.3 Materiality and Disclosure
Drafters also employ materiality thresholds and disclosure mechanisms to limit liability. For instance, a clause might state:

“Except as disclosed in the Disclosure Letter, the Company has no material contracts exceeding £100,000 per annum.”

This narrows liability to non-disclosed and significant matters, reducing the scope of potential disputes.

5.4 Repetition of Representations
In financing agreements, certain representations are drafted to repeat on each interest payment date or drawdown. This imposes an ongoing obligation, which borrowers must carefully manage to avoid inadvertent default.

6. Integration with Remedies and Indemnities

Contracts often supplement representations and warranties with specific indemnities. Unlike damages for breach, indemnities are construed strictly and may not require proof of actual loss. They are frequently used to cover known risks, such as environmental liabilities, while representations and warranties provide broader assurances.

7. Governing Law and Jurisdictional Considerations

The treatment of representations and warranties varies across jurisdictions. Under English law, the distinction between them is significant because rescission and statutory remedies under the Misrepresentation Act 1967 apply to representations. By contrast, in U.S. law, representations and warranties are often treated together, with less emphasis placed on distinguishing them. Drafters must therefore consider the governing law and the approach of the courts in the relevant jurisdiction. This also requires attention to exclusion clauses, non-reliance statements, and entire agreement provisions, all of which affect the enforceability and scope of representations and warranties.

8. Practical Illustration: Sale of a Business

Consider a buyer who acquires a small manufacturing company under a share purchase agreement in which the seller represents and warrants that “the Company is not currently involved in any litigation, and there are no threatened claims.” If it later emerges that the company was under regulatory investigation at the time of sale, which the seller failed to disclose, the buyer has several possible remedies. They may claim damages for breach of warranty if the statement is false. They may claim misrepresentation if the statement induced them to enter the contract and the seller knew or ought to have known of its falsity. In serious cases, the buyer might even seek rescission, provided the parties can be restored to their pre-contractual position. This scenario demonstrates the importance of accurate disclosure and careful drafting of representations and warranties.

Conclusion

Representations and warranties are essential tools for risk allocation, due diligence, and legal remedies in contractual relationships. Because their legal consequences differ, they must be drafted with clarity and precision. By distinguishing clearly between the two, understanding their implications, and linking them with appropriate remedies, legal practitioners can safeguard client interests and minimise post-contractual disputes. In contract law drafting, precision is not optional but necessary. When properly drafted, representations and warranties strengthen the integrity of the contractual process and provide a framework for accountability and fairness between contracting parties.