Introduction
Any lawyer who has negotiated a contract knows that representations and warranties are among the most heavily debated clauses. These provisions aren’t just standard boilerplate; they play a critical role in allocating risk between parties and ensuring that both sides enter the transaction with a clear understanding of the facts!
At their core, representations and warranties are statements that induce a party to enter into a contract. If these statements turn out to be false, the affected party may seek remedies, either under the contract itself or under general legal principles. This article will give some thumb rules on how to draft the perfect clause and become a super lawyer!
What is a Representation?
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A representation is a statement of fact made by one party to another. If a representation is false, it becomes a “misrepresentation,” which may give the other party the right to terminate the contract or claim damages. This ties back to basic contract law principles. A misrepresentation can be fraudulent, negligent, or innocent, but in all cases, it affects the enforceability of the agreement.
Representations typically cover past and present facts, such as:
- A company’s financial position,
- Its compliance with laws,
- The accuracy of disclosed liabilities,
- Ownership of assets.
A key distinction to understand is the difference between flat representations and qualified representations:
- Flat representations are absolute. For example: “The seller represents that the car has been driven 50,000 miles.”
- Qualified representations introduce a degree of uncertainty. For example: “To the best of the seller’s knowledge, the car has been driven 50,000 miles.”
The difference is significant: flat representations leave no room for doubt, while qualified representations provide some protection for the party making them. Common qualifiers include:
- “To the best of knowledge,”
- “As far as the seller is aware,”
- “As per information available in the public domain.”
From a negotiation standpoint, if you represent a party with less bargaining power, it is advisable to push for knowledge qualifiers. On the other hand, if you represent the party seeking representation, it is best to insist on absolute commitments.
How Are Warranties Different?
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A warranty is a contractual assurance that a particular fact is true, coupled with an implied obligation to indemnify the other party if it later proves false.
A good analogy is a product warranty. When purchasing an appliance with a three-year warranty, the seller guarantees its proper functioning. If the appliance fails within that period, the seller must repair or replace it.
Thus, warranties, like representations, can be either express (clearly stated in the contract) or implied (automatically applied under law). Knowledge qualifiers can also be used for warranties, depending on the level of risk a party is willing to accept.
The Role of Due Diligence
Due diligence plays a critical role in shaping representations and warranties, particularly in mergers and acquisitions. The due diligence process allows the buyer to assess the accuracy of the seller’s claims and provides the seller with an opportunity to disclose any potential risks. These disclosures often serve as exceptions to the representations and warranties, limiting the seller’s liability.
Some Drafting Considerations
Firstly, keep representations and warranties focused on past or present facts. If a statement refers to the future, it is not a representation or warranty; it is a covenant and should be treated as such.
Secondly, understand the relative bargaining power of the parties. If acting for the weaker party, knowledge qualifiers help limit liability. If acting for the stronger party, push for absolute representations and warranties to ensure clear and enforceable commitments.
A well-drafted representations and warranties clause can significantly impact the outcome of a transaction. Striking the right balance between protection and enforceability is key to creating a contract that serves both parties’ interests while minimizing legal risks.
Examples and Samples
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Situation 1: SaaS (Software-as-a-Service) Agreement
Scenario:
TechCorp India Pvt. Ltd. is entering into a SaaS agreement with RetailX India Ltd. to provide a cloud-based inventory management system. RetailX India requires assurances regarding software performance, data security, and legal compliance under Indian law.
Sample Clause:
“TechCorp India Pvt. Ltd. represents and warrants that:
(a) It is a company duly incorporated and validly existing under the Companies Act, 2013, and has the legal capacity, authority, and necessary licenses to provide the SaaS platform to RetailX India Ltd.;
(b) The SaaS platform shall perform in substantial accordance with the specifications and documentation provided to RetailX India Ltd., and TechCorp shall ensure a 99.9% uptime guarantee, except for scheduled maintenance or force majeure events;
(c) The software and services provided shall be free from malware, viruses, trojans, or any other malicious code that may compromise the data or operations of RetailX India Ltd.;
(d) TechCorp India shall comply with all applicable Indian laws, including but not limited to the Information Technology Act, 2000, the Digital Personal Data Protection Act, 2023, and relevant sectoral guidelines, ensuring the lawful processing and security of all personal data handled through the SaaS platform;
(e) In the event of a data breach or security incident caused due to TechCorp India’s negligence, it shall:
(i) Notify RetailX India Ltd. within 24 hours of discovering such breach,
(ii) Take all necessary remedial actions to mitigate any potential harm,
(iii) Indemnify RetailX India Ltd. for any losses directly arising from such breach.”
Situation 2: Mergers and Acquisitions Agreement
Scenario:
AlphaTech India Pvt. Ltd. is acquiring BetaSoft Solutions Pvt. Ltd., a software development company. AlphaTech India requires assurances that BetaSoft Solutions has clear ownership of its intellectual property and no undisclosed liabilities under Indian law.
Sample Clause:
“BetaSoft Solutions Pvt. Ltd. represents and warrants that:
(a) It is a company duly incorporated under the Companies Act, 2013, and has full legal capacity to enter into this Agreement;
(b) It has good and marketable title to all its intellectual property, including patents, trademarks, copyrights, and trade secrets, free from any third-party encumbrances, claims, or pending litigation;
(c) There are no pending or threatened legal proceedings, government investigations, tax liabilities, or regulatory non-compliance matters that could adversely impact the transaction;
(d) Its financial statements provided to AlphaTech India Pvt. Ltd. are true, accurate, and compliant with the provisions of the Companies Act, 2013 and the Income Tax Act, 1961, and no material adverse change has occurred since the last audited financial statement;
(e) It has complied with all applicable laws, and has obtained all necessary regulatory approvals, licenses, and consents for the transaction.”
You can check out more interesting samples here (by Spellbook).
There’s a Lot More to Learn!
This is just the beginning of the exciting journey ahead in learning contract drafting. These tips were based on the extensively prepared modules of the Online Certificate Course on ‘Contract Drafting & Negotiation’ by LLS. Check out the course to gain all the insights it has to provide. These courses by LLS are:
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- Includes a module on negotiation, a crucial skill that can help you negotiate rent agreements, employment contracts, and M&A deals worth crores.
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- Learn how to negotiate effectively in daily life, job interviews, contractual negotiations, and competitions.
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