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Representations & Warranties: Breach Mandates Indemnification

With subtle hints that the economy is finally turning from its free-fall, merger and acquisition transactions will begin to surface once again.  The preamble of many transaction documents includes various “representations and warranties”, provisions which may provide the parties with a foundation to detail certain facts and circumstances which found a transaction.  Typically, the representations and warranties are promised to be true and correct when made and as of the closing, and will survive the closing.  For example, under a stock purchase agreement, a seller may represent that “there are no claims, legal actions, suits, arbitrations or governmental investigations in progress or pending”.  Representations will have reach well after the final signature is notarized at closing.

The 1872 Court of Appeals decision in Hawkins v. Pemberton confirms long-standing, black letter, law that an unequivocal written representation of fact constitutes a warranty:

To constitute a warranty, it is not necessary that the word warranty should be used.  It is a general rule that whatever a seller represents, at the time of a sale, is a warranty. (Wood v. Smith, 4 Car. & Payne, 45.)

In Stone v. Denny (4 Metcalf, 151) it is said that the courts in their later decisions “manifested a strong disposition to construe liberally, in favor of the vendee, the language used by the vendor in making any affirmation as to his goods, and have been disposed to treat such affirmations as warranties whenever the language would reasonably authorize the inference that the vendee so understood it.”

In Oneida Manufacturing Society v. Lawrence (4 Cowen, 440) Chief Justice Savage says: “There is no particular phraseology necessary to constitute a warranty. The assertion or affirmation of a vendor concerning the article sold must be positive and unequivocal. It must be a representation which the vendee relies on, and which is understood by the parties as an absolute assertion, and not the expression of an opinion”.

This common law principle is in accord with the Uniform Commercial Code:

§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample

(1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.

It is well settled that a warranty is “an assurance by one party to a contract of the existence of a fact upon which the other party may rely” and effectively constitutes a promise to indemnify the promisee for any loss it may suffer if the fact warranted proves untrue.  The warranty serves to relieve the promisee of any duty to ascertain the warranted fact for himself; the maxim “ignorance of the law is no excuse” may not be invoked to preclude one from relying upon a warranty.  The risk of the fact being different from what is warranted is placed upon the party giving the warranty and the warrantor’s good faith belief in the veracity of the representation is no defense to the breach of warranty claim.  Once the express warranty is shown to be relied upon as part of the contract, the right to be indemnified in damages for its breach does not depend upon proof that the buyer believed the assurance of fact made in the warranty would be fulfilled – rather, the right to indemnification depends only upon establishing breach of the warranty.  The warrantor is liable for damages if the fact or condition it warrants as true turns out false.  Inasmuch as a breach of contract occurs when a party to a valid contract commits an act in violation of its terms, a subsequent falsity of a warranty given at the time of a transaction constitutes such a violation.

In light of the long-term ramifications which result from representations and warranties, coupled with the fact that a good faith belief in the veracity of a representation is wholly irrelevant to defense of a breach of warranty claim, it is imperative that counsel work closely with clients to confirm the absolute accuracy of the same.




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