A warranty in a commercial contract may be a term or a statement of affairs or statement of a required level of performance. Where a warranty, that this is a statement of affairs and not a fundamental term, is breached, the innocent party may seek damages but not the termination of the contract.
The word ‘warranties’ is often used to describe terms of a contract but are strictly speaking distinct from the terms of a contract. In the remainder of this article, we consider warranties as representations or statements of fact. You can often identify warranties relating to representations by words such as ‘Party A warrants that…’
Where a warranty is a representation, it is a statement or acknowledgement by a party of certain facts. For example, the seller of a commercial property may provide a warranty that it is the absolute and beneficial owner of the property.
Where warranties are missing
Warranties are important as they provide a contractual statement of certain matters that are fundamental to the deal between the parties.
A number of warranties are customary for example when it comes to ensuring that the parties have the required authority to enter into an agreement. Warranties may also be included relating to consents or approvals required to give effect to an agreement. It is important that parties to a commercial transaction consider the inclusion of appropriate warranties.
It is important that warranties are clearly defined and that the parties have certainty as to their meaning and effect. The consequences of a breach of a warranty should be clearly set out.
Warranties can be limited to ‘actual knowledge of the parties’ and also limited to a specific time i.e. as of the execution of an agreement. Parties should consider the appropriate limits to place on warranties when finalising an agreement.