Representations, Warranties and Covenants clauses are included in all commercial contracts. Traditionally, the nomenclature has not been clearly delineated, and representation and warranties are grouped together in a manner that often led them to be viewed as synonymous terms. While these terms have not been clearly defined in the Indian contract law, the common law jurisprudence has well established that these are two distinct terms, associated with different types of statements and guarantees made by the parties to a contract. Understanding the difference between these two terms, and covenants, and using them appropriately is essential to ensure that the non-breaching party can avail the appropriate remedies in the event of a breach. This Article aims to demarcate the differences between the ‘Representations’, ‘Warranties’, and ‘Covenants’ clauses, and elaborate on the remedies that may be availed by the parties in the event that these clauses are breached.
Representations
Representations capture any fact or circumstance in relation to the action or inaction of the parties to a contract. These clauses contain statements that are made by one party to the other, which lay down the premise for the contractual arrangement between the parties. It is important to note that representations may only be made regarding any past or present fact or status. Any promise or guarantee with regard to the actions that may be performed by a party pursuant to the execution of the contract will not be considered to be a representation. The Supreme Court clarified that “there is undoubtedly a clear distinction between a representation of an existing fact and a representation that something will be done in future. The former may, if it amounts to a representation as to some fact alleged at the time to be actually in existence, raise an estoppel, if another person alters his position relying upon that representation. A representation that something will be done in the future may result in a contract, if another person to whom is it addressed acts upon it. A representation that something will be done in the future is not a representation that is true when made.“[1]
Examples of representations include: (i) a party stating that it has the complete right and power to enter into the contact; (ii) a party assuring the other party that it has acquired all relevant governmental permits required to perform the services contemplated under the contract; and (iii) a party guaranteeing that it has the absolute ownership of any property that may be transacted by virtue of the agreement captured in the contract.
While the Indian law does not define the word ‘Representation’, Section 18 of the Indian Contract Act, 1872 (“Act“) defines the term misrepresentation. “Misrepresentation” is defined to mean:
(i) 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; (ii) any breach of duty which, without an intent to deceive, gains an advantage of the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; or (iii) 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.
Further, Section 19 of the Act clearly stipulates the consequences in case of misrepresentation. This Section provides that any contract which has been entered into due to the misrepresentation by one party, shall be voidable at the option of the other party. This power to avoid the contract is not an unfettered right and Section 19 of the Act provides for an exception to the general rule, i.e., that if the misrepresentation was capable of being discovered by ordinary diligence by the other party, then the contract shall not be voidable at the option of the other party.
While analysing the consequences of innocent misrepresentation, the Hon’ble High Court of Delhi in the matter of Sikka Promoters Pvt. Ltd. v. National Agricultural Cooperative Marketing Federation of India Ltd.[2], held that “The only inference possible is that either the parties were not ad idem as to the property subject matter of sale and in which case there cannot be said to be in existence any contract between the parties or that the contract if held to have come into existence was caused by innocent misrepresentation of the defendant within the meaning of Section 18(3) of the Contract Act as to the property being auction and is thus voidable at the instance of the plaintiff and which right the plaintiff exercised.”
The observations of the Delhi High Court made it abundantly clear that the breach of a representation shall lead to the rescission of the contract.
Warranties
Warranties refer to statements of current and future condition of the parties. It’s a guarantee made by the parties that a fact or condition is, and/or will remain to be true for a period of time at least as long as the term of the contract. The term “Warranty” is a stipulation that denotes a statement with collateral to the main purpose of the contract. This definition has been captured in Section 12 of the Indian Sale of Goods Act, 1930.
Examples of warranties include party stating that: (i) it shall maintain all relevant governmental permits required to perform the services contemplated under the contract; (ii) it currently has absolute ownership of any intellectual property that is contemplated by the contract, and shall have absolute ownership of any intellectual property that may be created by virtue of the agreement captured in the contract; and (iii) it maintains and shall continue to maintain a certain standard in the quality of the work product that is contemplated by the scope of the contract.
Unlike the remedy that may be availed by the non-breaching party in the event of breach of a representation, for a breach of warranty, the non-breaching party may be entitled to damages resulting from the breach. A breach of warranty does not make the contract voidable at the option of the aggrieved party. The Indian Courts have clarified that in order to enable a claim for damages; the non-breaching party is required to establish a direct nexus between the claim and liability under the warranty clause.
While explaining the difference between representations and warranties, the Madras High Court held that “The breach of Warranties is the violation of the assurances as may be given by one party to the other under a contract and such breach may result in loss or damage to the non-defaulting party. Breach of Warranties does not impact the underlying promises on the basis of which the contract was executed and does not result in vitiation of the contract. The consequences of breach of Warranties differ from those in the case of breach of Representations. The remedy available to a non-breaching party, in case of a breach of Warranties, differs on a contract-to-contract basis. The non-breaching party is entitled to damages in addition to any specific remedies that the parties may have contractually agreed upon. However, breach of Warranties does not render the contract voidable. The damages claimed by the non-defaulting party shall be basis the loss that has been caused to the non-defaulting party on account of the breach of the Warranties and the manner in which it has altered the position of such non-defaulting party under the contract, and for other losses as may be contemplated/provided for under the contract and proved by the non-defaulting party.“[3]
It is clear that the non-breaching party may raise a claim for damages in the event that there is a breach of a warranty. The party is entitled to raise a claim for an alternate remedy for damages and for specific performance of the contract.
Covenants
Covenants are promises of future action or inaction on party of the promising party. It is an assurance that a party will do, or will not do, something during the course of the contract. Covenants may be of two types: positive covenants and negative covenants. While a positive covenant is as assurance that a party shall do something, a negative covenant is a restriction on the parties’ actions during the course of the contract.
Example of positive covenants may include: (i) a party stating that it shall follow the production timelines agreed to between the parties; (ii) a party assuring the other party that it shall get the work product produced checked by a testing agency to ensure that any applicable quality standards/requirements are fulfilled; and (iii) a party guaranteeing that it shall ensure any property that will be created during the course of the agreement, shall be created independently, without referring to the intellectual property of any third party.
Similar to a warranty, a covenant is a part of the contract and is not a fundamental statement that is made with the intention of inducing a party to enter into the contract. A breach of a covenant may give rise to injunctive relief or specific performance, a remedy that may not be availed by the non-breaching party in the event of breach of a representation. In addition to compensatory damages for breach of contract, a breach of a material covenant may permit the non-breaching party to immediately terminate the contract. The materiality of a covenant shall be determined on a case-by-case basis. It is essential to note that the jurisprudence on the enforcement of negative covenants is not yet entirely settled, as certain covenants may place an undue restriction on a party’s right to partake in lawful trade, business or practice.
Conclusion
It is apparent that the differentiation between the representation, warranties, and covenants is not as minor as may be assumed. It is of utmost importance to understand this differentiation, as the lack of this understanding may majorly impact the manner in which contracts are drafted and interpreted. Keeping in mind these differences, and the variation in the remedies that may be availed subsequent to a breach, it is essential to classify all contractual statements correctly. The absence of an appropriate classification may lead to the incorrect interpretation of a contract and may deprive a party of suitable remedies in the event of a breach.
[1] Century Spinning and Manufacturing Company Ltd. & Anr. v. The Ulhasnagar Municipal Council and Anr., (1970) 1 SCC 582.
[2] 202 (2013) DLT 49.
[3] All India General Insurance Co v. S P Maheswari, AIR 1960 Mad 484.
English
Chinese (Simplified)
Japanese