Another view on representations and warranties

This article will address issues relating to representations and warranties as they arise in the common law, not in the context of the Uniform Commercial Code.

We will begin with representations. They are statements of present or past fact. Future "facts" cannot generally form the basis of representations because no one can know the future.

If a representation is intentionally false, a plaintiff can make a common law claim of deceit (a tort) and allege fraudulent misrepresentation.

Generally, a plaintiff injured by a fraudulent misrepresentation has a choice of remedies. She may rescind the contract and obtain restitutionary recovery, or she may affirm the contract and sue for damages. The ability to rescind — to unwind a closed transaction — is a remedy not available to a plaintiff suing for a breach of warranty, and therefore is a benefit of including representations in a contract. A second benefit is that the plaintiff may be able to obtain punitive damages under special circumstances.

Now, let's turn to warranties. A common law warranty isa promise that a fact is true. According to the New York court, a warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. Indeed, the warranty's purpose is to relieve a promisee from the obligation of determining a fact's truthfulness.

The meaning of warranty is critical to plaintiffs whose defendants made both representations and warranties since a plaintiff's fraudulent misrepresentation claim will fail if she knew the statement was false. But, the plaintiff may sue for breach of warranty on the same statement and recover despite knowledge of the falsity of the statement, subject to some limitations. This is a substantial business and legal reason for a party to receive both representations and warranties.

An example may help to clarify this issue: Occasionally, a buyer will ask a seller to represent as a fact something that the seller knows is not true or does not know whether it is true. Technically, doing so is fraud. A buyer nonetheless defends its request by telling the seller, "It's just risk allocation." In other words, even if the statement is not true, it represents the business deal.

A seller often accedes to this request on the theory that it is not fraud because it has "worked it out" with the buyer. This is cold comfort when the buyer sues for fraud, "forgetting" that it was "just risk allocation" and "forgetting" that the seller explained the situation's actual status. As an alternative, the seller can merely "warrant" the statement. In that case, the seller makes no representation that can be the basis of a fraudulent misrepresentation, and the warranty is the promise of indemnity, precisely the risk allocation the buyer sought.

Representations and warranties are important — but different — tools for the contract drafter. But receiving both of them from the other side usually — but not always — provides a client with the best protection.

(Tina L. Stark. Adaptado de: http://apps.americanbar.org/buslaw/blt/2006-01-02/nonbindingopinion.html

As used in the text, the term common law refers to