Contract Drafting & Law Course Preview
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<p class="banner-heading-text-two-line"><span>Representation and Warranties</span><br><span class="banner-sub-heading">Module III: Contract Drafting & Interpretation</span></p>
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<p><span class="padded-dropcap">I</span>n the previous sections we have studied the law behind representations, whether those are fraudulent representations (Section 17) or misrepresentations (Section 18). Then again we have considered what amounts to a warranty as given under the Sale of Goods Act, 1930.</p>
<p>Representations are statements made at the time of contract negotiations to induce the other party to enter into a contract.</p>
<p>Take for example where, Company A, the seller, is selling its business to Company B, the buyer. At the time of negotiations, Company A may make certain statements to Company B to induce Company B to proceed with the purchase. These could be for example:</p>
<ol class="indented-list">
<li>The financial statements are true, accurate, and complete. This would be to assure the buyer that the business’s financial health has been accurately disclosed.</li>
<li>The Seller owns or has the right to use all the assets listed in Schedule A of this agreement, and such assets are free from any encumbrances except as disclosed. This may be to confirm that the seller has clear title to the assets being sold.</li>
<li>The business is, and has been, in compliance with all applicable laws and regulations, including environmental, labor, and tax laws.These could be to assure the buyer that the business is not operating in violation of legal requirements.</li>
</ol>
<p>Similarly, the seller could make representations regarding any pending litigation or regarding the intellectual property held by the company. At the time of entering into a contract a lawyer would like to include these statements in the contract. A lawyer does so in the representation and warranties section.</p>
<p>A Warranty, as discussed in the previous section, and as defined in the Sale of Goods Act, 1930, is:</p>
<p class="indented-list">A stipulation collateral to the main purpose of the contract…</p>
<p>The main distinction between the two is that a representation is made in order to ‘induce’ the other party to enter into a contract. However, a warranty is only with respect to some aspect that is collateral to the main purpose of the contract. It may not have induced the other party to enter into the contract. But it is true that the same statement can be interpreted by the court as a warranty or as a representation. Suppose Company A represents that it owns the intellectual property with respect to a particular invention. Now this could be a representation as it may have played a part in Company B entering into the contract or it may not have induced Company B, in which case it may only be a warranty. The reason this makes a difference is that the remedies available to Company B would change depending on whether the statement was a representation or a warranty. If the statement induced Company B to enter into a contract then Company B, in addition to claiming damages, could choose to repudiate the contract. However, if the statement was only a warranty then Company B can only claim damages and wouldn’t be able to repudiate the contract. So lawyers then tend to put all the statements under one heading called ‘Representations and Warranties’. All statements under this head then become ‘representations and warranties’. Now all the remedies are available to the aggrieved party.</p>
<p>Specifically the remedies available in case of a breach of a warranty or in case of an inaccurate representation are as follows:</p>
<p><strong>Remedies in case of a false representation</strong>:</p>
<ul class="indented-list">
<li><strong>Rescission of Contract</strong> (Under <strong>Section 19</strong> of the Indian Contract Act, 1872):</li>
</ul>
<p style="padding-left: 60px;">• The aggrieved party can void the contract if the representation was false or fraudulent.</p>
<p style="padding-left: 60px;">• Rescission may not be allowed if:</p>
<p style="padding-left: 90px;">• The party affirmed the contract after discovering the misrepresentation.</p>
<p style="padding-left: 90px;">• Substantial rights of third parties have accrued.</p>
<p style="padding-left: 90px;">• Restitution to the original position is impossible.</p>
<ul class="indented-list">
<li><strong>Damages</strong>:</li>
</ul>
<p style="padding-left: 60px;">• For <strong>fraudulent representation</strong>: Compensation may be claimed for all losses directly resulting from the fraud, as provided under <strong>Section 73</strong> of the Contract Act.</p>
<p style="padding-left: 60px;">• For <strong>negligent representation</strong>: Damages can be claimed if the misrepresentation arose from carelessness.</p>
<p style="padding-left: 60px;">• For <strong>innocent representation</strong>: Generally, no damages are awarded, but rescission may be available.</p>
<p><strong>Remedies in case of a breach of warranty</strong></p>
<ul class="indented-list">
<li><strong>Claim for Damages</strong>:</li>
</ul>
<p style="padding-left: 60px;">• The buyer may claim damages for the difference between the value of the goods as warranted and their actual value at the time of delivery.</p>
<p style="padding-left: 60px;">• Example: If a car is sold with a warranty for a mileage of 20 km/l but delivers only 15 km/l, the buyer can claim damages for the reduced utility.</p>
<ul class="indented-list">
<li><strong>Retention of Goods</strong>:</li>
</ul>
<p style="padding-left: 60px;">• The buyer must accept the goods and cannot repudiate the contract for a breach of warranty.</p>
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