When a contract is signed, there are certain expectations and statements set forth by the parties in the agreement. These representations and warranties establish the factual basis of the contract upon which the opposing party relies. Every contact, from basic consumer agreements to complex commercial contracts, contains representations and warranties. It is important to understand how they each determine the obligations and rights of each party. Representations and warranties, in essence, are methods of allocating risk in the transaction while providing necessary disclosures about the parties and the agreement.
Representations consist of certain statements as of a period of time. Typically the party making the representations in a contract is the party with greater leverage or the one receiving funds in the transaction. Many commercial agreements have standard representations that include statements related to the organization and good standing of the company, its authority to perform certain actions, the receipt of relevant consents and filings, and the absence of conflict with any laws or other documents.
Specific transactions will mandate mote targeted representations. For example, certain real estate transactions may require representations related to the absence of environmental hazards on the property. Similarly, acquisitions may have extensive representations related to the capitalization of the target company. Representations can be made with or without qualifiers depending on the strength of the representation requested by the opposing party. Thus, a party may state that is has complied with certain agreements in all material respects, or that it has complied with the best of its knowledge.
A warranty makes some statement about the obligations of one party in the future. A warranty functions as a guarantee or promise that assures one party that certain actions will occur upon specified conditions. Warranties can either be express or implied. Express warranties are typically easier to prove in court as they form part of the written contract. In some cases, a party may disclaim any warranties made outside the contract. When there are specific warranties in the contract, the party to whom the warranty is given should specify remedies in the event of a breach of contract.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.