The Essential Contract Review Checklist - Part 4: Representations and Warranties - Establishing the Foundation of Accountability

In Part 4 of this series - a comprehensive checklist for reviewing contracts - we dive into representations and warranties, which are statements in a contract where parties confirm certain facts or promises to be true, providing a basis for trust and accountability in the agreement. These serve as a foundational pillar - allocating risk, delineating obligations, and establishing the parties' baseline understandings about each other and the substance of the agreement.

In this article, I guide you through the most crucial aspects of reviewing representations and warranties, focusing on scope, limitations, qualifications, adequacy, and consistency. These elements play an essential role in ensuring that the agreement reflects the true intent of the parties, while also providing adequate protection against unforeseen risks and liabilities. A thorough review of the representations and warranties section can help prevent future disputes, ensuring that each party is held accountable for the accuracy of their statements and the fulfillment of their commitments. The elements discussed here are only indicative, as each scenario will ultimately depend on factors such as the specific nature of the agreement, the parties’ business needs, the transaction details, associated risks, the industry, regulatory landscape, and the governing jurisdiction, as well as other factors.

Scope and Substance

The contract should incorporate representations and warranties that comprehensively address the parties' main attributes and capabilities. This may include their valid existence, due organization, good standing, their legal ability to enter into and perform the agreement, and their commitment to comply with all applicable laws and regulations. Additional representations can be included as necessary, such as clear title to property or obligations pertaining to intellectual property rights.

Additionally, for contracts involving the sale of products (e.g., tech products or merchantable goods), express product warranties are sometimes included. The seller must affirmatively do or say something about the product to create an express warranty. These voluntary, affirmative statements guarantee specific attributes of the product, such as conformity to specifications, adherence to quality standards, or free from defects in design and functionality. 

Limitations and Qualifications

Including limitations and qualifications in representations and warranties helps the parties to manage risk while still maintaining accountability for core representations. For instance, limiting the scope might involve specifying that a representation applies only to facts actually known to the representing party, often called a “knowledge qualifier”. A knowledge qualifier may limit the representation to the party’s actual knowledge at the time. Let’s take a look at an example -

          “The Seller represents and warrants that, to the best of its actual knowledge after conducting reasonable inquiry, there are no ongoing violations of any applicable laws related to the property as of the date of this agreement. For purposes of this representation, reasonable inquiry includes a review of publicly available records, internal documentation, and relevant communications with regulatory authorities.”

This limits the representation to what the seller is actually aware of, without requiring them to investigate further. Another approach is adding a materiality threshold, which qualifies representations so that only material inaccuracies or violations—those that significantly affect the deal or relationship—trigger liability. In the above example, changing “violations” to “material violations” would be an instance of adding a materiality threshold.

Limiting the survival period of representations and warranties is also sometimes an effective strategy. A typical clause may stipulate that these statements remain enforceable for a certain period after contract execution or transaction closing (e.g., 12-24 months). For instance, in a software development agreement, the parties might agree that the warranty regarding the software being “free from material bugs and non-conformities” will survive for 12 months after the software is installed. After this period, the developer would no longer be liable for claims related to defects or non-conformity, thereby protecting the developer from indefinite exposure while still giving reasonable time to the client to detect errors.

On the other hand, the customer may resist limiting the survival period, preferring the warranty to extend indefinitely or for a longer duration, as they might believe the developer, having designed and built the software, should remain liable for any defects or non-conformities that arise anytime.

Preventing the extension of representations and warranties to third parties is another commonly used protective measure. To avoid unintended liabilities, the contract may include a clause explicitly stating that the representations and warranties are made solely for the benefit of the contracting parties and do not extend to third parties. This prevents parties who are not signatories to the contract, such as subcontractors, affiliates, or customers down the line, from directly relying on representations not intended for their reliance. However, while the representations and warranties themselves may be limited to the parties, a well-balanced contract may still include specific indemnity provisions to address third-party IP claims and avoid any unintended gaps in protection (more on this under “Consistency and Alignment”).

Representations and warranties confirm certain facts or promises to be true, providing a basis for trust and accountability in the agreement.

Adequate Protection

Conversely, when receiving representations and warranties, ensuring adequate protection may involve removing stringent qualifications or restrictions that limit liability or narrow the scope of obligations. For example, a representation that only applies to a narrow time frame (e.g., “as of the date of this agreement”) could be broadened to apply throughout the contract term, ensuring continuous protection. Similarly, a warranty that is heavily qualified with materiality thresholds (e.g., “no material violations of applicable laws”) may be modified to remove such limitations, requiring the other party to warrant full compliance with all applicable laws, regardless of the significance of the violation.

Additionally, it may be prudent to extend the benefit of representations and warranties to a party’s assignees or successors-in-interest, especially in long-term contracts or agreements where the business relationship may transfer to another entity. For instance, in a services agreement, such as a long-term IT services or software maintenance agreement, the customer may want the representations and warranties regarding service quality or data security to extend to any future provider if the original service provider outsources portions of its services to subcontractors or assigns the contract to another company. This ensures that the new service provider remains liable for breaches or defects, even if the original company is no longer directly providing the services, maintaining protection for the customer throughout the contract term.

Consistency and Alignment

The representations and warranties section must be carefully aligned with other key terms of the contract, including but not limited to, indemnification, limitation of liability, and available remedies. For instance, if the vendor represents and warrants that their product does not infringe any third-party intellectual property (IP) rights, the indemnification clause can state that the vendor will indemnify the customer against any third-party IP claims arising from the breach of this warranty.

Furthermore, for instance, if a vendor represents and warrants that they will implement industry-standard security measures to protect customer data, but the limitation of liability clause caps the vendor's total liability to the amount paid under the contract (e.g., one year’s service fees), this could be problematic for the customer as data breaches could result in significant financial losses far exceeding the capped liability. To address this, the customer might negotiate to carve out data breaches from the limitation of liability, ensuring that the vendor bears full liability for any failure to meet their data security obligations. Additionally, the parties should consider the interplay between the limitation of liability and indemnification provisions (more on this when analyzing Limitation of Liability in this series - The Essential Contract Review Checklist).

The representations and warranties should also be typically aligned with available remedies so that they are not rendered illusory. In case of a warranty breach, the remedies clause might provide options, such as repair, replacement, or refund. For instance, in a SaaS (Software as a Service) agreement, a clause might state that in the event of a functionality warranty breach, the vendor must correct the issue within a specified period or offer a refund.

By thoughtfully crafting the representations and warranties section, you can establish a solid foundation for accountability and risk mitigation, whilst setting the stage for a successful and mutually beneficial business relationship.

I love anything to do with contracts, be it drafting, reviewing, or negotiating! In the next article, we will examine the nuances of Indemnification -  Shielding Against Risks and Costs.

THE INFORMATION PROVIDED IN THIS ARTICLE DOES NOT, AND IS NOT INTENDED TO, CONSTITUTE LEGAL ADVICE; AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION; INSTEAD, ALL INFORMATION AND CONTENT IN THIS ARTICLE ARE FOR GENERAL INFORMATIONAL PURPOSES ONLY.