4.5 Warranties (and conformity)

Warranty: a promise of indemnity that a statement of fact is correct.

Allocation of risk. The party making a warranty assumes the risk that if the warranty is incorrect, the other party will have a claim against it or anoth­er appropriate remedy under the agreement. Depending on the interpretation of the warranty, a failure in the contractual object may fall within the scope of the warranty (and therefore the customer can make a claim) or it may not (and accordingly, the risk remains for the customer). It may well be that neither party knows whether or not a warranty is correct, even after comprehensive investigations and testing. Having the seller, service provider, borrower or licensor make the warranty is a simple allocation of risk.

Terminology: warranties, not representations and warranties. The word warranties is very often coupled with representations, in that the parties do not merely warrant, they would represent and warrant. Many people argue that ‘representation’ and ‘warranty’ signify the same legal concept, and that the use of the one or the other is interchangeable. While this is true for all non-common law systems (where warranties do not have a distinct meaning), within common law – most evidently under English law – the two terms relate to fundamentally different concepts.

Representations under common law. Under English common law, a representation is a statement of fact made by one party to induce the other party to enter into the contract. Being a statement of fact means that it can relate (and must be drafted to relate) to past or present facts or circumstances only. As in many other legal systems, a misrepresentation (a ‘breach’ of a representation), by consequence, affects (the appropriateness, validity or cause of) the transaction. A misrepresentation operates the way the legal concept of ‘mistake’ (erreur, Irrtum, dwaling) works in non-common law jurisdictions. Accordingly, the default remedy is (and as codified for English law in the Misrepresentation Act 1967 indeed is) that the induced or misled other party may rescind the contract if the misrepresentation so justifies. An immediate consequence would then also be that, rather than a (contractually qualified and contractually limited) claim under ‘contract’, such other party would make a claim in ‘tort‘ or ‘unjustified enrichment’.

Although one may reflect the representations in the contract, by a representation’s very nature (as an inducement to enter into the contract) such written reflection is not necessary: whether the remedy (rescission of the contract) is justified will be determined regardless of whether the representation was in writing. Having the representation in writing is of course good evidence.

Warranties under common law. The term warranty has a slightly different meaning: it reflects the promise about (the effects of) the contemplated transaction made by one party to the other, so about what such other party might expect from performance under the contract. If a warranty appears to be incorrect, the remedy under common law is: damages (and not rescission). If the incorrectness is fundamental, the contract can be terminated. However, the default remedy under common law is the payment of damages resulting from the warranty being incorrect.

Unlike a representation, the contract is not undone as though it never existed. A warranty should be drafted such that one can say that it is ‘correct’ or ‘incorrect’. Accordingly, like representations, semantically, a warranty takes the ‘structure’ of a statement of (past, current or future) facts. Whilst representations refer to the particular facts as they are (or would be) at the time of contracting, a warranty must be presumed to address a promised future fact, benefit or circumstance measured as of the moment such a warranty is made. On similar grounds, warranties imply a contractual risk allocation mechanism, which is – in view of the remedy (rescission) – not the case with a representation. Having pointed out these notions of warranties vs. representations, it must be admitted that many common law lawyers are unaware of the distinction.

Reps and warranties in the rest of the world. On the European continent, one would expect that representation is the preferred wording. At least from a semantic point of view, the well-known concept of a ‘juridical act’ (being something like ‘a statement or declaration, which has legal effect as such’) seems to match better with that terminology (whereas a warranty has no specific legal meaning). Regardless of this somewhat arbitrary argument, European contract laws are conceptually built on notions such as the parties’ (mental, psychological) consent, their free (subjective) mutual will, or the meaning that a reasonable person would (objectively) attribute to what the parties expressed as their agreement. Because of such notions, the English-language distinction is not so obvious that using one word or the other is of any decisive relevance. What is relevant is that one party makes a statement of fact and that the party relying on that statement may or may not invoke a contractual or statutory right when that statement happens to be incorrect.

Guarantee? Some European originating contracts may use the term guarantee (i.e. the verb) or guaranty (i.e. the act as such). This can be explained from the translated concept (e.g. ‘garantie’ (French), ‘Garantie’ (German), ‘garantie’ (Dutch)). Still, in the common law, the concept guarantee is much more closely related to a suretyship, the undertaking by one person to stand in for the due and timely performance by another person.

Best practice – written as a statement of fact. A representation and a warranty must be drafted as a statement of fact. A properly drafted warranty is either true (or correct) or not. There should be no room for something in-between. Of course, a warranty can be partially incorrect, but this implies that the warranty in its entirety is also incorrect. In the English language, it is also appropriate to stipulate that a warranty is ‘accurate’ (or ‘inaccurate’).

Best practice – never include obligations. Like recitals and definitions, a warranty should never contain obligations, remedies or other operative provisions. If the drafter wants to provide for an obligation or a remedy in the case a warranty is incorrect, or for any consequences depending on the degree of ‘incorrectness’ of a warranty, this should be addressed in a separate provision: a separate article, section or at least its own sentence.

Warranties in all-caps: ‘conspicuousness’ ? Many contract drafters believe that a disclaimer or limitation of liability must be printed entirely in capital letters. The requirement to capitalise-only can be found in the U.S. Uniform Commercial Code (UCC) and applies to a few nominal types of contracts only: the sale of goods, the licence of software, a lease or a warehousing contract. In such contracts, a seller of a product can disclaim implied warranties and limit its exposure to liability conspicuously. The UCC defines[1] the conspicuous requirement as something written (i.e. printed) in such a way that a reasonable person ought to have noticed it. Language in the body of a contract would be considered conspicuous if it is in a larger font or other contrasting type or colour (for sales contracts, a broader definition applies). The UCC does not require all-capitals. Whether or not text, as printed, is considered conspicuous is for decision by the court. Finally, since the requirement of conspicuousness has its origins in the UCC, it applies only if the contract is governed by the law of (most) U.S. states. Almost no other country adopted such a conspicuous requirement.

[1]           UCC, Article 1, General provisions, § 1-210(10).