Warranties and representations: A very brief overview
October 22, 2008
[This page is intended to serve as commentary for several warranty-related clauses, so that I don't have to repeat the text and slow down the download process.]
A warranty is like an insurance policy
Generally speaking, a warranty is something like an insurance policy: It’s a promise that:
- if a particular statement of fact proves untrue,
- and the other party shows that it incurred X dollars worth of damage as a result,
- then the warrantor will reimburse the other party for the X dollars, that is, it will indemnify the other party.
See, e.g., CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990).
Warranties versus representations
Contract drafters and reviewers should be cautious about using the phrase “Provider Inc. represents and warrants to Customer Co. that X is true ….” If things were to go badly, the ‘representation’ part could open the door to allegations of negligent misrepresentation or even fraud.
Suppose Customer Co. later claimed that statement X was untrue or even just misleading. Suppose also that a judge or jury agreed, and concluded (1) that Provider Inc. either knew that statement X was misleading, or it recklessly disregarded the possibility; (2) that Provider intended for Customer to rely on statement X; and (3) that Customer was justified in so relying.
In that situation, Customer Co. might be entitled either to a damages award or to unwind (’rescind’) the deal. Not only that, but Provider Inc. might be liable for punitive damages, which normally are not available in straight-up breach of contract cases.
For more information, see Tina L. Stark, Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006 (accessed Oct. 18, 2008).
Comments
-
CAUTION: Don't rely on Drafter's Choice materials as a substitute for legal advice; ask your lawyer if they're right for your situation, and use at your own risk.
Add New Comment
Thanks. Your comment is awaiting approval by a moderator.
Do you already have an account? Log in and claim this comment.
Add New Comment