Representation – A representation is a statement of a past or present fact, made as of a moment in time to induce a party to act. Representations are assertions that the parties to an agreement make to each other, assertions that shield the contracting parties from any misgivings related to the transaction. Representations can be explicit or implied and apply to either a past or present fact.
The Indian Contract Act, 1872 does not define the word ‘Representation’; However, it defines ‘misrepresentation’ in section 18 as –
“Misrepresentation” means and includes—
(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of anyone claiming under him.
(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.
Basically, it classifies misrepresentation in two parts: –
a. Fraudulent misrepresentation – Fraudulent misrepresentation bestows upon the innocent party the right to claim damages and repudiate the contract. However, the right to repudiate the contract does not arise in a case where the misrepresentation was not an inducement to the contract for the innocent party.
b. Innocent misrepresentation – Misrepresentation in which there is no intent to deceive are innocent misrepresentation. The counter party may get the right to claim damages; However, the right to repudiate the contract is subject to whether the misrepresentation could not have been discovered with ordinary diligence.
Indian contract act, 1872 define fraud in section 17 as –
“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true.
(2) the active concealment of a fact by one having knowledge or belief of the fact.
(3) a promise made without any intention of performing it.
(4) any other act fitted to deceive.
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation – Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.
While the Indian contract act defines fraud, very interestingly the Indian contract act also provides that mere silence isn’t a fraud, unless there is an obligation to speak. Therefore, there’s no obligation on the parties to disclose unless there exists a legal duty to disclose.
In the case of Shri Krishnan v. The Kurukshetra University, the Supreme Court of India confirmed the principle that mere silence is not fraud. In the case of Shri Kishan V. Kurukshetra University, student did not mention that he did not have the adequate attendance to give an exam. University authorities did not pay attention to this fact. The supreme Court in this case held that the student was merely silent, the university authorities had a means to discover the truth. Hence, it does not amount to fraud.
However, it may be noted that the Act distinguishes between ‘mere silence (passive concealment) and ‘active concealment’ which courts can determine based on a factual enquiry.
Warranty – A warranty may apply to the present and future. A warranty is a contractual statement that a condition is, and/or will be, true when made and/or for a period, often for the term of the agreement. A warranty is a promise that if statement in the representation is false, the maker of the statement with indemnify the other party for damages suffered because of false statement. Once again, the term ‘Warranty’ is not defined under the Act. One common example of a warranty provided by parties in commercial contracts is with respect to infringement of intellectual property. A service provider will warrant that the deliverables/ work product provided will not infringe the intellectual property rights of a third party.
In the Indian context, the term “Warranty” is a stipulation, collateral to the main purpose of the contract and the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated as per the provision of Section – 12 of the Indian Sale of Goods Act, 1930. The extent of coverage of warranty differs from case to case.
Warranties may be generally express in nature, but there are certain implied warranties under the Indian Sale of Goods Act, 1930. For instance, that a buyer shall have a quiet possession of goods, goods are free from any charge or encumbrance, quality and fitness, merchantability of goods etc. Here the warranty should cover all the identified risks but the extent of liability and time limit for claiming losses should be set.
To enable a claim for damages a direct nexus between the claim and liability under the warranty clause should be established.
An essential difference between Representations and Warranties, is the remedies available to the parties in case of a breach. In case of a breach of warranty, the non-breaching party has the right to claim damages in accordance with the principle of restitution. On the other hand, a breach of representation (misrepresentation) gives the innocent party a right to terminate the contract and claim damages on the basis of the principle of restitution. Furthermore, the amount of damages one can claim also varies significantly in a claim of misrepresentation vis a vis breach of warranty as the principle of remoteness of damage and the relevant date from which damage is assessed, operate differently under both the concepts.
In the case of All India General Insurance Co. Ltd. and Anr. v. S.P. Maheswari, the Madras High Court, in the context of insurance contracts, recognized the two different terms and the difference in the remedies for a breach of either. The Madras High Court states that “The duty of disclosure comes under two heads, viz. (i) representation and (ii) warranties: representations which are made the basis of the contract and those which do not constitute the basis of the contract of insurance.”
Further the court holds “Therefore the main distinction between representation and warranty is that as a general rule answers to questions are representations and not warranties, though it is possible for persons to stipulate that answers to certain questions shall be the basis of the contract, in which case they become part of the warranties. In the case of a warranty materiality or immateriality of the fact warranted signifies nothing. Its incorrectness constitutes a defence to an action on the policy, even though it be not material and be made in perfect good faith. But, in the case of a representation, the insurer can avoid the policy only by proving that the statement is false and fraudulent or that it was false and material to the risk. In other words, it is only a material misrepresentation that can avoid a policy if the truth of the facts contained in the representations be not warranted by the policy.”
How to draft representation and warranties?
The language introducing representations and warranties is simple and results in each statement of fact being both a representation and a warranty.
Example – Party X represents and warrants to Party Y as follows:
Using represents and warrants together, rather than either term alone, precludes any ambiguity as to the contract’s meaning. A drafter can safely omit all but one of the words without changing the phrase’s meaning. But using just represents or just warrants could create different legal consequences because those terms have different substantive meanings. By using both represents and warrants, a drafter reduces a client’s litigation risk by explicitly saying what the parties mean—a cardinal principle of good drafting.
Each representation and warranty establish a standard of liability. If a statement is false—if the statement does not reflect reality—then the standard has not been met and the party making the statement is subject to liability. However, there are risk allocation mechanisms. This means that the degree of risk that each party assumes with respect to a statement varies depending on how broadly or narrowly the statement is drafted. One way to reduce the risk is to make qualified representation instead of flat representation.
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Disclaimer – The article has been prepared for information purpose only and does not constitute any kind of legal opinion/ advice. The possibility of different view on the subject matter cannot be ruled out. Readers are requested to check before taking any decision/action. The author shall not be responsible for any of the decisions/actions taken based on this article.
Representation & Warranty
