Representations and Warranties

Found in most contracts, representations and warranties are contractual assurances about matters that the beneficiary of the warranty and / or representation can rely on - for example, the quality of products. If a representation or warranty is breached, the non-breaching party may then sue for damages or losses arising from such a breach or perhaps even terminate the contract.

The giver of warranties and representations will want to ensure they are not exposed to unlimited liability scenarios where the same are breached. The giver of a warranty and/or representation may specifically look to reduce their liability - for example by their liability (owing to the breach) to a fixed sum. Parties may also wish to consider excluding liability for specific types of damages and/or for damages that are disproportionate to the economics of the transaction.

When are Representations/Warranties (“R/W”) used?

R/W’s are typically used by a contracting party where it cannot ascertain a particular state of affairs with respect to its counterparty – under such circumstances, the contracting party may require its counterparty to provide a R/W in relation to that state of affairs; or when it requires further performance assurances from its counterparty with respect to the performance of certain obligations – the contracting party may request for the counterparty’s obligation to be elevated from a mere contractual obligation to a R/W. 

The importance of representations/warranties

Where a party breaches its representation, the other party has the right to rescind the contract – this entails terminating the contract and restoring parties to their respective positions prior to their entry into the contract. 

Where a party breaches its warranty, the other party has the right to claim monetary damages against it. 

Typically, commercial contracts stipulate that a party “represents and warrants” a certain state of affairs, or that it will perform an obligation. Where the party breaches such “representation and warranty”, the other party has the option to either rescind the contract, or claim monetary damages against the breaching party. 

When reviewing the scope of R/Ws in a contract, you should examine the following:

● Are the obligations covered by these R/Ws critical enough to be elevated to such a status?

● Are you comfortable with providing the counterparty with its requested R/Ws?

Obtaining representations and warranties (R/W)

Where parties engage in discussions over IP, the holder of the IP license is likely to make certain assertions with respect to the IP. Where the IP in question is crucial, the licensee may wish to consider requesting the holder to undertake certain R/Ws with respect to these assertions.

R/Ws are a form of performance assurance. The effect of undertaking an R/W is that where such assertions are found to be untrue, the assignee would be entitled to a wider range of remedies. A breach of representation would generally entitle the innocent party to rescind the contract. A breach of a warranty would entitle the innocent party to monetary damages. Accordingly, where an R/W is breached, the assignee may have the option to claim monetary damages or to terminate the contract.

What next?

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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.