11 August 2015 #Commercial
You may well see references to a party “warranting” something, or “indemnifying” another party in relation to something or perhaps not making a “representation” about something in commercial agreements, such as for the sale of goods and services, businesses or shares.
It might be tempting sometimes to see these concepts as one and the same, perhaps almost interchangeable and a bit of “elegant variation” by lawyers with no real consequence. Before taking that view, it is worth considering what they really mean and what the consequences of breach might be.
A warranty is a statement or promise in a contract that something is or will be true. If a person makes a statement or promise in a contract which amounts to a warranty, that statement or promise is untrue and, as a result, the party to whom the statement or promise was made suffers loss, the “innocent party” will have a contractual claim for damages (i.e. compensation).
Any damages assessed to compensate the innocent party will be based on putting them in the same position as if the contract had been performed properly and in accordance with its terms (i.e. as though the warranty had not been breached). By way of example, if I sell an item for £20, warranting that it is worth £50, but the buyer finds it is really only worth £30, the buyer may be able to seek to recover the £20 difference between the value as warranted and the actual value from me (ie the “loss of bargain”).
A representation is a pre-contract statement made to a party to a contract, as a result of which that party is induced into entering into the contract. If a representation turns out to be incorrect, the buyer may be able to sue for misrepresentation. Fraudulent and negligent misrepresentation are treated differently by the courts from innocent misrepresentation, but the basis for damages for misrepresentation is that used for torts – ie most types of civil wrong – and not contractual damages.
This basis for damages may produce a quite different result from the contractual basis explained above. The purpose of damages in such a case would be to arrive at the sum which would put the innocent party in the position it would have been in had the representation not been made. To take our example above, if I sell an item for £20, and wrongly represent pre-contract that it is worth £50, but it is really only worth £30, the buyer may be able to recover from me (in a misrepresentation action) the £10 difference between what it paid and the actual value.
So, whereas damages in tort (ie for misrepresentation) will restore, as far as possible, the buyer to the position it was in before the misrepresentation, in contract (ie for breach of warranty), the buyer would be put in the position it would have been in had the contract been performed without any breach.
An indemnity is simply a promise to pay for losses or damage suffered by another party. If a party promises to indemnify another for the consequences of a specified event, which then subsequently occurs, then the party to whom the indemnity was given can ask the indemnifying party to, in effect, make it whole for all the financial consequences.
This can be very significant when compared with both the contractual and tort bases of damages. For both of these, the actual amount recovered by way of damages is likely to be reduced by the courts from the starting amounts set out in the above examples, based on principles such as the duty of the innocent party to mitigate its loss, remoteness and causation.
No such reducing factors apply in the case of indemnities which allow a simple pound-for-pound recovery for loss and damage. In fact, warranties may even be turned into indemnities by inserting a provision in the contract providing that a party can seek damages on an "indemnity" basis. This means that, at its option, the innocent party may seek to be paid an amount equal to all losses incurred by it as a result of the breach of warranty, without any reducing factors.