Representations and warranties – sense and all nonsense

Warranties, also referred to as representations (but see below), are statements of fact. At least, as a matter of best practice, representations and warranties should be statements that are either true or not true. Warranties are made by one party (e.g. a seller, service provider, borrower or licensor) to the other party, typically as at a particular moment in time. The purpose of a warranty is (a) by way of promise about the future post-signing, to confirm or stand in for the warranted facts and events, as those may be important to the other party’s expectations, and (b) to encourage (but in common law, this is called a representation) its business decision to enter into the transaction (on the agreed terms of the contract).

If warranties are incorrect, this would result in rights or remedies under the contract. For a distinction between representations vs. warranties (as is made in common law) this is essential. Below, we will address various aspects of warranties and best practices.

Introduction to warranties #

Like recitals, warranties are statements of fact. Someone can ‘breach’ a contractual obligation or covenant, but not 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 also the warranty in its entirety is incorrect. In the English language, it is also appropriate to stipulate that a warranty is ‘accurate’ (or ‘inaccurate’).

Smoking out the facts. The process of asking and negotiating warranties should trigger the disclosure of facts and events that might not otherwise become known. In this respect, warranties spur the seller on to discharge its ‘duty to inform’, whilst at the same time the purchaser effectively conducts its ‘duty to investigate’. Asking and negotiating the warranties is therefore a natural outflow of the due diligence investigation. (Ideally, a purchaser’s due diligence questionnaire will match the set of model warranties, which a purchaser would require if it had full bargaining power. At the same time, since such a set is likely ‘complete’, a seller would organise its data room consistent with such model warranties.)

For example, a purchaser will ask the seller of a company to make the following warranty:

Except as disclosed in Schedule 11, there have not at any time been any Spills or Contaminations on or from the Production Site.

When the seller receives this warranty as part of the first draft set of warranties, it has several options:

  1. refuse to make the warranty (either in general terms “take a closer and critical look at what you are asking” or more specifically “we are unwilling to make this warranty”). In this last case, the suggestion arises that the seller hides environmen­tal contaminations, and the purchaser will want the warranty even more;
  2. qualify and limit the warranty to the seller’s knowledge, so that the warranty is only incorrect if the seller fails to disclose relevant facts actually known to it. (Often, reference is made to the seller’s best knowledge: the qualification is non-sense because someone either ‘knows’ or ‘does not know’.) In many cases, the responsible former and current managers are named to further limit the scope of seller’s knowledge, imposing a necessity to scrutinise them about the warranties qualified as such.
  3. make the warranty, as well as a disclosure of all facts or events of which it is aware.

Allocation of risk. A warranty removes legal issues related to attributability (and partly also of causation) of damages if the warranted facts or events appear to be incorrect. The result is that a warranty operates as a risk allocation mechanism. 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 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.

Representations or warranties, in common law and elsewhere #

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 or limited) claim under ‘contract’, such other party would 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. In Black’s Law Dictionary’s explanation:

guarantee, vb. (18c) 1. To assume a suretyship obligations; to agree to answer for a debt or default. 2. To promise that a contract or legal act will be duly carried out.

Best practices of warranties #

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.

Hindsight effect of obligations. If a party wants to ascertain that the other party has been acting as if the obligations had been agreed earlier in time, this should be achieved by a warranty, not by an obligation. It is simply impossible for a party to undertake that it would not have acted or would not have omitted to act in a certain manner in respect of a period preceding the date of execution of the agreement. This is because no-one can reverse time or step into a time machine in order to perform an obligation.  A party should only warrant that it did act (or did omit to act) in a certain manner up to the present date.

For example, a confidentiality agreement that should have retroactive effect must be phrased in the following way:

6.1       Preceding Disclosures. The Receiving Party hereby confirms that Confidential Information already disclosed in relation to the Purpose and any discussions already held between them, from 15 March 2020 and thereafter, shall be subject to this Agreement.
6.2       Warranty. The Receiving Party warrants that during the period between the date in Section 6.1 and the date of this Agreement, it has not disclosed, done or omitted anything that would have constituted a breach of this Agreement, if this Agreement had been in entered into immediately preceding such period of time.

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 capitalize can be found in the United States Uniform Commercial Code (UCC) and only applies to a few nominal types of contracts – 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 the conspicuous requirement as something written (printed) such that a reasonable person ought to have noticed it.[1]

Language 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 the text is considered conspicuous is for the court to decide. Finally, since the requirement of conspicuousness is based on the UCC, it applies only if the contract is governed by the laws of a U.S. state. Almost no other country adopted such a conspicuous requirement.

Warranties in ordinary course business contracts #

Fitness for purpose and merchantability. In day-to-day business contracts, warranties related to fitness for a particular purpose and ascertaining the merchantability of the products are very common. Also the opposite, that such warranties are specifically disclaimed, is common practice.

What do they mean? Most legal systems require that a sold product must generally be fit for the ordinary purpose for which such products are to be used (and the meaning of which depends on the particular context). If not, the seller would be selling defective products and would rely on a disclaimer allowing it to be in material breach without any remedy or penalty. People call that deceit.

Should the parties agree on a warranty that the products are delivered “AS IS” (and that any other warranties are disclaimed), a purchaser should inform itself more careful as to whether the sold goods meet its expectations. However, even such limited ‘warranty’ does not permit the seller to deliver crap or even something of which it actually knows that it does not meet the purchaser’s expectations at all (unless the purchaser actually assumed the risk that the seller’s performance could potentially lead to no result at all). Non-performance is something else than performing with no guarantee of success.

Sometimes, a seller disclaims that a product is “fit for a particular purpose”. Such disclaimer attempts to avoid that a seller is held to deliver according to l is therefore ineffective if it allows the seller to deliver defective products. The trick is in the specificity of the purpose and in the extent to which the product should meet the purchaser’s personal intentions (i.e. those particular purposes on top of what may generally be expected).

In connection with a warranty of fitness for a particular purpose, the U.S. Uniform Commercial Code requires that (a) at the time of entering into the contract, the seller must have reason to know the purchaser’s particular purpose (i.e. the purchaser must have told or informed the seller in a somewhat deliberate way for what purpose it would use the goods), (b) the seller must have reason to know that the purchaser is relying on the seller’s skill or judgement to deliver suitable products, and (c) the purchaser must – in fact – rely upon the seller’s skill or judgement.

Disclaiming the merchantability of a product refers to the freedom of the purchaser to sell the product to third parties (and such third parties’ freedom to use it without infringing another person’s rights). Normally, this is not problematic at all. When the product is subject to a limited licence or if the use of the product independently or in combination with another product infringes the (intellectual property) rights of a third party, however, the product is not merchantable. The same applies if the product is subject to encumbrances or if it cannot be delivered because of any litigation, seizure or embargo.

Generally, merchantability is something that a seller should warrant. However, the complication in relation to intellectual property is that a seller is not always capable of knowing which IP-rights its competitors own (or in which jurisdiction they apply). Furthermore, it disregards another aspect of merchantability: the seller does not necessarily know how its product will be processed and probably the product is subject to additional regulatory requirements under any local law (e.g. export or import restrictions, registration requirements or specific permits or authori­sations). In the U.S. Uniform Commercial Code[2], ‘merchant­ability’ is equivalent to fitness for ordinary purpose.

Warranty of specifications. A warranty requiring that a product meets the ‘specifications’ may trigger the purchaser to clarify for which purpose it will use that product. Because this can be very subjective (and probably also subject to changes) it is risky for a seller to make warranties that the product is fit for the particular purpose for which the purchaser will use it.

Capitals. Many contract drafters believe that in international commerce, a disclaimer or limitation of liability must be printed in capital letters. For example:

THE PRODUCT IS PROVIDED TO PURCHASER “AS IS” WITHOUT ANY WARRANTIES OF ANY KIND. SELLER EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS. SELLER SHALL HAVE NO LIABILITY TO PURCHASER OR ITS AFFILIATES OR ANY THIRD PARTY FOR ANY DAMAGES, INCLUDING DAMAGES RESULTING OR ALLEGED TO RESULT FROM ANY DEFECT, ERROR OR OMISSION IN THE PRODUCT, ANY USED THIRD PARTY PRODUCTS OR AS A RESULT OF ANY INFRINGEMENT OF INTELLECTUAL PROPERTY OF ANY THIRD PARTY. IN NO EVENT SHALL SELLER BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUFFERED BY PURCHASER OR ITS AFFILIATES OR ANY OTHER THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EVEN IF SELLER HAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

Background: ‘conspicuousness’. The requirement to capitalise only applies to a few nominal types of contracts. They can be found in the Uniform Commercial Code (UCC) related to the sale of goods, the licence of software, a lease or warehousing contract: a seller of a product can disclaim implied warranties and limit its exposure to liability conspicuously. The UCC defines[3] the conspicuous requirement as something that is written (i.e. printed) in such a way that a reasonable person against whom it is to operate ought to have noticed it. Language in the body of a contract would be 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 is 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 certain U.S. states, where such a requirement is also adopted. This is the case only in a limited number of states.

Disclosures against warranties – strategy and best practices #

Triggering disclosure and clarification. In major transactions, warranties serve to smoke out the facts. The process of asking and negotiating warranties should trigger the disclosure of facts and events that might not otherwise become known. In this respect, warranties spur the seller on to discharge its ‘duty to inform’, whilst at the same time the purchaser effectively conducts its ‘duty to investigate’. Asking and negotiating the warranties is therefore a natural outflow of the due diligence investigation. (Ideally, a purchaser’s due diligence questionnaire will match the set of model warranties which a purchaser would require if it had full bargaining power. At the same time, since such a set is likely to be ‘complete’, a seller would organise its data room consistent with such model warranties.)

Example and strategy. For example in the context of a sale of a chemical business, the buyer most probably wants to know whether there are any environmental contaminations for which the target company may be held liable at some point in time. The potential purchaser will ask the seller of a company to warrant the following:

Except as disclosed in Schedule 10, there have not at any time been any Spills or Contaminations on or from the Production Site.

To continue the example, the seller may have carried out environmental investigations providing a minimum of comfort that there are no environmental complications. However, there may have been hazardous spills that were not accurately reported in the records and not discovered in the soil investigation.

When the seller receives this warranty as part of the first draft set of warranties, it has several options:

  1. refuse to make the warranty (either in general terms stating “take a closer and more critical look at what you are asking” or in more specific terms stating “we are unwilling to make this warranty”). In our example, refusal may imply that the seller is hiding environmental contaminations, and the purchaser will want the warranty even more;
  2. qualify the warranty by the words to the seller’s knowledge, so that the warranty is only incorrect if the seller fails to disclose relevant facts actually known to it. (Often, reference is made to the seller’s best knowledge: the qualification best is nonsense because someone either ‘knows’ or ‘does not know’.) In many cases, the responsible former and current managers are named to further limit the scope of seller’s knowledge, imposing a necessity to scrutinise them about the warranties qualified as such;
  3. limit the scope of the proposed warranty. A mark-up of the above example could state that the seller has always had adequate waste spill reporting policies in place in accordance with the best industry practices at such moment in time, and that it has conducted adequate soil investigations;
  4. make the warranty, as well as a disclosure of all facts or events of which it is aware.

The best approach to negotiating warranties depends on several circumstances:

  • the negotiating power and leverage of the disclosing party,
  • the sensitivity of the negotiations generally (e.g. the level of mutual trust or confidence of the parties),
  • the time of internal discovery of ‘defects’ in warranties (i.e. disclosure letters tend to be prepared and handed over after the warranties have been negotiated, at least to some extent),
  • the disclosing party’s liability exposure in view of thresholds and baskets,
  • the disclosing party’s general approach to being complete and comprehensive (or not),
  • the willingness to address (highly) sensitive subjects (e.g. potential antitrust issues).

Disclosures may also be made by excluding, or carving out, the incorrect facts or events otherwise covered under the warranty. This is appropriate if the exception is rather extensive as opposed to the scope of the warranty against which it is disclosed.

The disclosing party should realise in advance that proposing a dis­closure may in turn trigger a buyer to require specific indemnities separate from the warranties (and excluded from the warranty-related limitations of liability). Such a specific indemnity may take many forms: from a specific indemnity limited in scope, time and amount to remedial action taken by the seller (or under its supervision and at its costs).

Disclosures – best practice rules. Like warranties, disclosures are statements of facts or events. Therefore, disclosures must not contain obligations, promises or undertakings of any kind. Like warranties, disclosures may refer to annexes attached to the disclosure schedule, which annexes may list, describe or otherwise report the disclosed facts or events.

It is good practice to organise meetings with the senior employees who should potentially have any knowledge of possible warranty breaches. In other words, when a disclosure letter is to be drafted, the disclosing party’s lawyers should meet with each such employee (or small group of employees). They should explain the impact of a warranty breach (i.e. being somewhat different from ordinary course warranties), the thresholds above which a warranty breach is likely to become an issue, and explain word-by-word what is meant by a warranty. Each employee should be encouraged to give as much information as possible. After that, he or she may well be requested to sign off on the reflection in the disclosure letter, or to document any disclosure. Subsequently, it should be the negotiation project team that decides whether or not making the disclosure is appropriate.

General vs. specific disclosures. The party that prepares the disclosure letter will try to avoid the disclosure of information that is publicly available (e.g. in public registers, such as for companies, for ownership rights of real estate, or for patents or trademarks). Obviously, the work related to making such disclosures can be enormous (with a risk of missing certain specifics), whilst the information itself may not be very useful (other than having an aggregated list of items that will be transferred).

Similarly, the disclosing party will prefer to refer to existing and readily available documents, such as the transaction’s information memorandum and (the Powerpoint handouts of) management presentations, as well as any disclosed financial statements and management reports. For this reason, a first draft disclosure letter will likely attempt to include all information that is generally available to the public or otherwise available to the other party. The part of the disclosure letter that addresses these disclosures is referred to as general disclosures (as opposed to specific disclosures that are prepared in view of a certain warranty).

In an M&A-transaction a seller will try to elaborate on the opportunities that were given to the purchaser and its advisers to undertake an (extensive) due diligence investigation. Accordingly, the seller will attempt to have the complete dataroom considered to be a disclosure against all warranties.

Numbering of disclosures. It is recommended that the numbering of individual disclosures match the numbers of the warranties. Accordingly, the disclosed item gets a number that corresponds to the warranty in connection with which it is primarily included.

Disclosure against what? Because a warranty will typically have a great level of overlap with matters addressed in other warranties, the related disclosures will inevitably need to be either repeated or a statement be included that the disclosures are deemed to be made against each of the warranties (and that grouping them is for convenience only). This also implies that the party seeking the disclosure may fail to recognise its impact, whilst at the same time, the opposite approach would lead to unnecessarily extensive and repetitive disclosure letters.

Warranties in large transactions (M&A or financing) #

Below, we will address a few other particularities of warranties and limitation of liability as they are used in the context of major transactions (e.g. M&A or financing transactions).

Sandbagging and warranties. Negotiating for contractual provisions that create burdens to actually receiving compensation is referred to as ‘sand-bagging’. Sand bags are used to protect against invasions and may indeed imply the impossibilities associated with battles taking place in the trenches. Sand-bagging behaviour obviously insinuates that a seller is creating contractual burdens and is overly complicating a purchaser’s ability to recover damages. As Dutchmen, however, we should emphasise that sand-bagging is also a modest alternative to a dike and yet is a proper means to prevent a flood.

Making incorrect warranties. In line with the principle of allocating risk, some people consider that it is appropriate for a seller of a company to make warranties about information which it already knows to be incorrect, without making (or even attempting to make) disclosures against such warranties. Such behaviour may be questionable in the event that such incorrect warranty substantially impacts the purchaser’s ability to recover damages under any other warranties, because of the agreed limitations on liability claims (i.e. the ‘cap’).

It is inappropriate if a seller does not answer questions during a due diligence exercise, anticipating a subsequent first draft of warranties in which the subject matter will most likely be addressed (and also anticipating that it will be able to stay away from making such warranties during the negotiations). Conversely, a seller may expect that if a data room is not as such a disclosure against warranties and it contains important information that clearly and materially contradicts a warranty, such information should be addressed during the negotiations rather than that the purchaser raises it as a warranty claim immediately after the closing of the transaction.

Categories of M&A-warranties. Warranties commonly made in the context of an M&A transaction can be classified in three basic categories:

  • Warranties about the transaction as such. The first category includes warranties related to the transaction. The purpose of these warranties (also known as enforceability warranties) is to ascertain that the party making them has the contractual capacity and authority to enter into the agreement, and that the contract is enforceable and does not violate a law or regulation. These are standard warranties. Under EU member state laws they are often also largely (if not entirely) redundant since modern legal systems will most likely protect the other party against such warranties being incorrect (in any respect). Therefore, enforceability warranties rather serve information purposes. They are rarely negotiated, except that a purchaser may try to extend their scope to subject matters in the second category.
  • Subject matter warranties. A second category of warranties relates to the subject matter of the transaction. These warranties are made to en­sure that a party is acquiring what it agreed to and may reasonably expect, and are tailored to the specific context of the transaction. Some examples:

*   an ordinary sales agreement may include warranties that the products are unused, of good workmanship and free of any material defects;
*   a software licence would include warranties that the software will be free of worms and viruses and will not perform any operation other than specified in the Specifications;
*   a business and asset purchase agreement will include warranties that the sold property is free from encumbrances;
*   a patent licence contains warranties by the licensor that the patent is properly registered and does not infringe other (pre-existent) patented technologies;
*   a share purchase agreement includes warranties that the target company has withheld all taxes required to be withheld and paid all taxes in a timely manner.

  • Warranties about the parties. Many contracts require the parties to make warranties about themselves. These are desirable if a party must be (and remain) able to perform its contractual obligations. Examples relate to the financial condition of the party, and in particular its creditworthiness.

To ‘bring down’ warranties. Warranties are made as of a particular moment in time. That moment can be the signing date of the contract, the closing date of the transaction or any other date provided for in the contract. Without further specification, a warranty will be deemed to be made on the date that the relevant product is delivered. Warranties that are deemed to be repeated on a later date are referred to as being brought down.

Bringing down warranties is usually required at times when a significant event occurs under an agreement. For example, a share purchase agreement may provide for completion of the transfer only after the required approvals are obtained; the pur­chaser will require the seller to bring down its warranties at the closing. This bring-down implies an extra incentive for the seller to make sure that the quality of the transferred business remains as it was at the signing date by leaving any deterioration for the account of the seller.

Warranty bring-downs are also found in other types of agreement. In master sale agreements with ongoing deliveries of products pursuant to purchase orders, the purchaser needs the warranties to be made as of each delivery date. Similarly, a borrow­er is required to bring down its warranties to the lender each time it draws under a loan or credit agreement.

If a warranty in a credit agreement provides that all of borrower’s subsidiaries are listed in a schedule, the bring-down of that warranty may become impossible (and rightfully so): when new subsidiaries are created or acquired, the creditworthiness of the borrower will probably change. In such cases, additional drawings cannot be made without violating the warranty, unless a specific waiver is obtained or an appropriate amendment made to the schedule. Obviously, such waiver or amendment will trigger the lender to scrutinise the creditworthiness of the borrower after creating or acquiring the subsidiaries.

Survival of warranties. Other than the bringing down of warranties at some future moment in time, there is also the concept of warranties ‘surviving the closing of a transaction’. Survival of the warranties in fact refers to the right of the purchaser to claim under those warranties.

Normally, the seller will limit this right by stipulating that all claims related to a warranty being incorrect must be made (or made known) within a certain period of time. In such case, it is appropriate to distinguish between the various types of warranties. Accordingly, short periods would apply to running business and tangible assets, whilst warranties related to real estate and environmental contamination would probably be subjected to longer periods. Warranties related to taxation are often subject to the statutory period during which tax authorities may continue to impose taxes related to the period before closing of the transaction.

[1]      UCC, Article 1, General provisions, Section 1-210 (10).
[2]      UCC § 2-314(2).
[3]      UCC, Article 1, General provisions, § 1-210(10).

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