REPRESENTATIONS AND WARRANTIES Flashcards
(20 cards)
SECTION 18-Misrepresentation” defined.
“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 any one claiming under him; by misleading another to his prejudice, or to the
prejudice of any one 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.
SECTION 19-Voidability of agreements without free consent.
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have
been if the representations made had been true.
Exception.—If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation.—A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.
SECTION 12 SOGA- Condition and warranty.
(1) A stipulation in a contract of sale with reference to goods which
are the subject thereof may be a condition or a warranty.
(2) A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract.
SECTION 13 SOGA- When condition to be treated as warranty.
(1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
(2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as .repudiated, unless there is a term of the contract, express or implied, to that effect.
(3) Nothing in this section shall affect the case of any condition or warranty fulfilment of which is
excused by law by reason of impossibility or otherwise.
SECTION 59-Remedy for breach of warranty.
(1) Where there is a breach of warranty by file seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may—
(a) set up against the seller the breach of warranty in diminution or extinction of the price; or
(b) sue the seller for damages for breach of warranty.
(2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does
not prevent him from suing for the same breach of warranty if he has suffered further damage.
Fundamental Warranties
Fundamental warranties usually relate to the seller’s/the issuer’s authority, capacity and title (but they can include other warranties that the buyer/subscriber is particularly concerned about in the circumstances, such as intellectual property). These warranties are often subject to longer/higher, or even no, limitation periods or liability thresholds.
Tax Warranties
Tax Warranties pertain to payment of taxes, tax litigations, compliance with tax laws etc. and are carved out from the general warranties as the survival period of such warranties is typically tied to the tax authority enquiry periods in the relevant jurisdictions. Depending on the nature of the deal, parties also negotiate for a separate tax indemnity.
Specific Warranties
Pursuant to the diligence exercise, the buyer/subscriber may seek specific warranties from the sellers/the company (as the case maybe). The buyer/subscriber would typically negotiate for these warranties to be subject to longer/higher, or even no, limitation periods or liability thresholds.
General Warranties
These warranties tend to relate to the condition of the target’s business, assets and operations, including warranties relating to financial statements, business contracts, employees, insurance, litigation and consents. The survival period of these warranties is typically tied to the statute of limitation (3 years in India), however, depending on the nature of the deal, the parties may negotiate a shorter survival period.
Sandbagging
A situation where the buyer is or becomes, aware that a specific representation or warranty made by the seller is false or incorrect, yet instead of alerting the seller to this fact or despite the knowledge of this fact, the buyer consummates the transaction and thereafter seeks damages against the seller for the breach, post-closing
Normally, parties in an M&A transaction will take on of the following two approaches:
Expressly include a sandbagging clause either pro or anti; or
Remain silent.
Examples of Pro and Anti Sandbagging Clause
Example of a pro-sandbagging clause in the template Investment Agreement: “Notwithstanding anything to the contrary contained in this Agreement but subject to the specific disclosures under ANNEXURE B, the Parties agree that for the purposes of the Transaction Documents and the transactions contemplated in this Agreement, there shall be no presumption of knowledge imputed to any Investor and the Investors shall be entitled to completely rely on the Warranties.”
Example of an anti-sandbagging clause in the template Investment Agreement “No Party shall be liable for any Losses resulting from or relating to any inaccuracy in or breach of any Warranty, if the Party seeking indemnification for such Losses had knowledge of such breach of Warranty before Closing.”
Sandbagging & Warranty
No Indian legislation creates a carve out similar to Section 19 of the Contract Act, 1872 with regard to knowledge and warranties.
Question is whether despite all discoveries made pursuant to the due diligence exercises a party can proceed to repudiate a contract or claim damages for misrepresentation or breach of warranty?
The issue was considered by the Bombay High Court in GWL Properties Ltd. vs. James Mackintosh and Company Private Limited wherein it upheld the arbitral award against the seller- petitioner for misrepresentations made by them, in the share purchase agreement. The Court observed that reliance by the respondent-buyer on representations or warranties in a definitive agreement cannot be diluted by the fact that a diligence was conducted by them, prior to the agreement.
Knowledge Qualifiers
A knowledge qualifier is basically a qualification to the effect that ‘to the best of his/her knowledge’ the representation or warranty made by the provider under the contract is correct. For example, below is a sample warranty with knowledge qualifier:
“To the best of its knowledge, none of the directors or employees of the Company have entered into any settlement, trust or foundation or any proposed settlement under which any such director or employee of the Company is or may become interested in respect of any Shares of the Company”
Actual Knowledge
this definition is more favourable to the seller because of its narrow scope, sellers would only be liable for misrepresentation of facts in their actual knowledge, without any obligation to investigate,
Constructive Knowledge
this definition is less favourable to the seller because this definition will include constructive, implied and imputed knowledge to the seller (ie. the inclusion of an “after due inquiry” concept as opposed to simple actual knowledge).
Materiality Qualifiers
The indemnified party also uses a materiality qualifier to limit the scope of the representation or warranty made by such party under the contract is correct. For example, below is a sample warranty with materiality qualifier:
“The Company has materially complied with all applicable Laws, including without limitation in relation to the conduct of its Business. The Company has not acted in violation of applicable Law and has not been involved in any unethical business practices.”
OR,
“The Company’s financial records contain no material inaccuracies.”
What constitutes material must be clearly defined.
For example, in Project Toppan, “Materially”, in the context of the first warranty stated in the previous slide, was defined as “Materially” in relation to Clause 6.1 of Schedule III means compliance with all applicable Laws such that there are no violations / breaches which are non- compoundable.
Below is another sample definition of term “material” that may be used in Investment Agreements:
“Material” and “Materially” refer to a level of significance that would have affected any decision of a reasonable person in the Buyer’s position regarding whether to enter into this agreement or would affect any decision of a reasonable person in the Buyer’s position regarding whether to consummate the transaction contemplated by this agreement.
Materiality Qualifiers-2
If representing the buyer/subscriber, the following argument may be taken to remove/not agree to materiality qualifiers for representations and warranties provided by the seller(s)/the company:
A typical purchase agreement/subscription agreement contains an indemnity “basket”, which is intended to provide the the indemnifying party protection from general indemnity claims below a certain negotiated amount. Thus, the basket protects the indemnifying party against “immaterial” claims. However, materiality or MAE qualifiers throughout the representations and warranties arguably create a “double materiality” threshold for the indemnified party to “fill the basket” before indemnity is triggered. Consequently, the buyer could incur many losses as the result of unrelated breaches of the seller’s representations and warranties that are not individually material but are material in the aggregate, and such losses would not count toward the basket.
Where agreements also have, in addition to a basket, a “de minimis threshold-te, claims of less than INR X are not covered by indemnification nor counted towards the basket-the buyer can argue that these materiality qualifiers creates a “triple materiality” threshold.
Disclosure Schedule
A disclosure schedule is a schedule of non-compliances/disclosure which is voluntarily made by the provider of the representation or warranties at the time of execution of the contract to limit the recipient’s right to claim damages/indemnity for breach of representations or warranties arising due to the disclosures mentioned in the disclosure schedule. Below is a sample provision used in an Investment Agreement regarding the disclosure schedule:
“Without prejudice to the right of the Indemnified Parties under Clause 14.2, the Indemnified Parties shall not be entitled to any claim in respect of any disclosures expressly provided under the Disclosure Schedule.”
Key points to consider while drafting disclosure schedule:
General Disclosures vs Specific Disclosures
Option to update the disclosure schedule on the closing date
Disclosure schedule or updated disclosure schedule to be acceptable to provider and recipient of disclosures.
Avoid accepting wide or vague disclosures.
The provider of disclosure should involve the employees/personnel with the required knowledge to make the disclosures.
Representations and Warranties Insurance
In recent times insurance has been a major economic driver for risk averse approach towards representation and warranties. Counsels can suggest that the representation and warranties insurance be procured to better protect the interests of the parties.
Types of risks that can be covered by insurance are:
risk arising from a disclosure,
risk of any change in policy and/or law, losses that may be incurred as a result of any discovery made pursuant to a due diligence exercise which if materialized could have a huge impact;
investment by a buyer in a foreign jurisdiction.
sellers’ insurance: indemnifies sellers against losses resulting from claims made by the buyer for breaches of the warranties under the contract, and
buyer’s insurance, indemnifies the buyers if the sellers are unable or unwilling to provide the necessary level of warranty cover to the buyer.
Warranties- Meaning and Examples
Classify, to the extent possible, the stipulations into - Conditions, Representations and Warranties.
Date of providing the representations and warranties, Whether they are provided on the date of execution of the agreement or are also repeated in the CP completion certificate and on the closing date.
Warranties provided under the agreement should be independent of other warranties.
Providing/accepting accept knowledge qualifiers, materiality qualifiers and disclosures against the warranties.
Consequences of breach of a representation, condition or warranty - indemnity being the sole remedy vs. cumulative with other remedies.
The consequences of a breach of warranty to travel to the other connected agreements? For e.g. under an SHA a breach of the warranty under the SSA to trigger drag rights of the investor?
