Usefulness of the "Representations and Warranties" in contracts

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What are the representations and warranties in contracts reflected?

In contracts in general and especially those of Sale of businesses, Special care is applied to the wording of paragraph "Representations and Warranties".

It is an imported practice common law. The "Representations and Warranties" They are a series of statements made by the parties, on both situations of fact or law relating to the contract. With regard to time, They may refer to past situations as both present and future.

Its main use is refine and clarify the situations of non-compliance party with the consequent responsibility. In principle, would not be necessary in our law would be sufficient for the application of the regulations established in the Civil Code and the Commercial Code. However, in practice, They help to define and clarify the possible infringements with its consequent responsibility, generally hidden defects the selling party.

On the one hand, They provide information to the buyer on issues on which it has not done the "due diligence". If the buyer has had the opportunity to complete the process, the "representations and warranties" serve as confirmation of its conclusions.

Alternatively, impropriety in the "representations and warranties" will allow the implementation of the arrangements made by the parties, or failing, the application of the regulation in cases of breach of contract.

In the absence of special stipulation about, the three main routes to establish the liability of that has made "representations and warranties" would be inaccurate following:

1.- Hidden defects: Defects at the time of delivery of the thing, They exist but are not visible and can be appreciated by a buyer. The inclusion in the contract reduces the doubt that may bring about its importance for the buyer "If any known that, the buyer would not have purchased or would have paid less money for it ": The deadline for the claim is 6 months from delivery of the object (Arts. 1.484 a 1.490 Civil Code). Allows the resolution or reducing the price by an amount proportional. And if the seller knew the defects, must compensate for damages.

2.- Breach of contract: Breach of the obligation agreed that, to have been collected in the contract, will offer little doubt. Your are enforceable within 5 years old (art. 1.964 of C. Civil) and can lead to both the resolution of the contract (art. 1.124 C.Civil) as compensation for damages (With. 1.101 C.Civil)

3.- Cancellation of the contract by fraud or error vitiates consent: You could apply for annulment on (art. 1.265 C.Civil) with the corresponding reciprocal restitution of benefits made (art. 1.303 C.Civil). The deadline for bringing proceedings is four years (art. 1.301 C.Civil).

In each specific case, we must analyze the "Representations and warranties" most relevant for inclusion in the contract, But in general, usually concern the following points:

• Ownership of the object of sale, Seller sufficient capacity and seizure.
• tangible assets of the company (both real estate and other physical assets).
• Intangible assets of the company (existing contracts, industrial property, Permits, licenses).
• Liabilities (loads, taxes, guarantees, indebtedness, pending litigation, agreements with related persons or companies).
• Compliance with accounting and financial obligations
• obligations to third parties, both public bodies, mainly social security and taxes as labor, environmental, Competition, Data Protection,
• Insurance (premium payments, beneficiaries and potential litigation).
• Grants that may be claimed.

Last, It is important to include a statement that such events have had essential character for the granting of consent so that in case of violation may be required to the end if (and not considered as "less serious" breach).

Ultimately, proper drafting of "Representations and warranties" a contract facilitates action for damages for breach. But we must not forget that legal proceedings become longer and get a judgment by not necessarily mean condemnation charge.

As the English say:

“Possession is nine-tenths of the law”


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