EM Law Representations and Warranties

Representations and Warranties What's the Difference?

This blog takes a look at the difference between representations and warranties and offers some top tips on how to prevent confusion in your contracts.

What is a warranty?

A warranty is a promise that a particular statement made is true at the date of the contract. A breach of warranty gives rise to a claim for breach of contract - the main remedy being an award of damages. To give an example, in a contract for the sale of goods, a warranty may be given about the condition, age or history of the goods being sold. In a software supply agreement, a warranty is usually given that the software will be free from material defects at the time it is delivered.

What is a representation?

A representation, like a warranty, is a statement of fact but is one which is made during contractual negotiations in order to induce another party to enter into a contract. While representations are usually made prior to the contract they are often repeated and therefore form the basis of a contract.

So, what is the difference between representations and warranties?

The key difference between a representation and a warranty is the remedy available to the innocent party when there is a breach. If a warranty is found to be untrue, the innocent party will be entitled to damages. A breach of warranty does not allow the innocent party to rescind the contract, which would effectively set it aside and put the parties back in the position they were in before the contract was made. As a warranty is a term of the contract, normal breach of contract considerations apply. A breach of warranty will therefore only give rise to damages if the innocent party can prove that the breach resulted in a loss and that the loss was not too remote i.e. the loss was in the reasonable contemplation of the parties at the time the relevant contract was entered into. If damages are available, they will be assessed to put the innocent party back in the position they would have been in had the breach of warranty never occurred.

In contrast, if a representation is found to be untrue the innocent party will be entitled to bring a claim for misrepresentation, which if successful would allow the innocent party to rescind the contract. The right to rescind may be lost, though, if the innocent party affirms the contract, if a significant amount of time has passed, or if third-party rights would be infringed.

A breach of representation may also entitle the innocent party to damages, which in principle are wider in scope than the damages available under a breach of warranty. With a breach of representation, the innocent party will not have to prove that their losses were in the reasonable contemplation of the parties at the time the relevant contract was entered into. Instead, the losses must be “reasonably foreseeable”, which has been held by the courts to be a less onerous test than the test associated with a breach of warranty claim. The manner in which damages are calculated also differs for a breach of representation claim versus a claim for breach of warranty. Under a claim for breach of warranty, damages are usually assessed at the time of the breach. Under a claim for breach of representation, damages are assessed from the date the misrepresentation was made. This is usually an earlier date and so may give rise to a higher level of damages.

Given the potential to rescind the contract and the wider scope for damages, it is generally more advantageous for a party to be given representations rather than warranties. However, whether or not a party can insist on this will depend on the bargaining strength of both parties and the type of contract on the table.

Can warranties also be representations?

If you are familiar with contracts, you may have seen wording such as “the seller represents and warrants…”. Where the wording is clear cut, it is likely that the court will view the statement as both a representation and a warranty. However, where the wording does not expressly provide that a warranty is to take effect as a representation, an innocent party will struggle to argue that the warranty is also actionable in misrepresentation. Take the case of Sycamore Bidco Ltd v Breslin in 2012 as an example. In this case, the court held that various warranties in the share purchase agreement, which were not expressed to be representations, could not be representations.

The case of Idemitsu Kosan Co Ltd v Sumitomo Co Corp in 2016 further reiterated this point. Here, the court concluded that it was not enough that the subject matter of the warranty was capable of being a representation; there was no representation because there was no express provision to that effect. The fact that the agreement contained an entire agreement clause also made it clear that any pre-contractual understandings, communications or representations had not been relied upon or had been withdrawn before completion.

Representations and Warranties - final thoughts

Representations and warranties may appear similar on the surface but the remedies available can be completely different. The question of whether a statement is a warranty, a representation, or both will depend upon the wording used and the context of the contract in question. Careful drafting of representations and warranties, as well as any exclusion clauses, is therefore key!

If you have any questions about representations and warranties, or about any other contract law issue, please contact Neil Williamson.


EM Law Liquidated Damages

Liquidated damages – are they payable even when the contractor does not complete the works?

For this reason, the parties to these contracts often pre-determine the level of damages to which a party is entitled in the event of certain specified breaches occurring. These pre-determined damages are known as liquidated damages and are often triggered when there is a failure to complete works within a specified time. In this blog we take a look at the recent case of Triple Point Technology Inc v PTT Public Company Ltd and consider whether a liquidated damages clause can survive the termination of a contractor’s engagement.

Liquidated damages - current position 

The question of whether or not a liquidated damages clause will trigger a payment obligation when a contractor does not complete works has been disputed by the courts on numerous occasions over the past few years. The conventional position, derived from earlier case law, is that an employer will be entitled to claim liquidated damages for delay up to the point of termination but must bring a general damages claim for any delays which accrue after that date. The logic is that, after termination, the contractor loses control of the time for completion, especially if another contractor is employed to complete those works. However, the cases of Halland another v Van Der Heidenand GPP Big Field v Solar EPC Solutionsmuddied the waters by concluding that an employer could claim liquidated damages for the period after termination. So where do we stand now? The recent Court of Appeal case of Triple Point Technology Inc v PTT Public Company Ltd has offered some much needed clarity on this issue.  

Triple Point Technology background 

In 2012 Triple Point Technology entered into a contract with PTT Public Company Ltd for the supply of a software system. Under the contract, Triple Point were to provide the new software system in two phases, with each phase having multiple stages of work. In the first phase, the new CTRM System would replace PTT’s existing system, and in the second phase the new CTRM System would be developed to accommodate new types of trade. The contract also contained a liquidated damages clause, referred to as Article 5(3), which stated:

“if contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, the contractor shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…” 

In February 2013 Triple Point Technology began working on the project however the first two stages of phase 1 were completed 149 days late. Nevertheless, Triple Point submitted an invoice in respect of this work, which was duly paid by PTT. Triple Point then submitted further invoices in respect of work which had not yet been completed, on the basis that the payment dates for such work had passed. However, PTT refused to make such payments and in May 2014 Triple Point Technology suspended work. By February 2015 PTT had terminated the CTRM contract and Triple Point technology had commenced proceedings in the High Court. 

High Court decision

Following termination of the contract, Triple Point Technology commenced High Court proceedings against PTT for the sums it said they were due. PTT counterclaimed for damages for delay and damages upon termination. In the High Court, Mrs Justice Jefford dismissed the claim and awarded PTT just under $4.5 million of which just under $3.5 million represented liquidated damages for delay pursuant to Article 5(3) of the contract. As the further milestones had not been reached, Triple Point Technology were not entitled to further payments. Triple Point were therefore not entitled to suspend work in May 2014 and were accordingly in repudiatory breach of contract. 

The appeal decision 

Triple Point Technology appealed Mrs Justice Jefford’s decision. Among other grounds of appeal, Triple Point Technology argued that Article 5(3) should not be engaged because it should only apply when work was delayed, but nonetheless completed and then accepted by the employer. In this case, the work was delayed and the contract was subsequently terminated. 

The Court of Appeal held that there were three different approaches towards clauses providing liquidated damages for delay, namely: 

  • The liquidated damages clause would not apply at all (as in the case of British Glanzstoff manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd);
  • The liquidated damages clause would only apply until the point of termination (as in the case of Greenore Port v Technical & General); or
  • The liquidated damages clause would continue until the second contractor achieved completion (as in the case of Hall and another v Van Der Heiden).

In the court’s view, the question of whether the liquidated damages clause ceased or continued to apply up until termination, or even beyond that date, depended on the wording of the clause itself and there was no blanket rule that applied by default. Relying heavily on the reasoning in British Glanzstoff manufacturing, Sir Rupert Jackson stated that there was “no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”

Sir Rupert Jackson also held that Article 5(3), which focused specifically on delay between the contractual completion date and actual completion, had no application in a situation where a contractor never completes the work. It followed that PTT was entitled to recover liquidated damages of $154,662 in respect of Triple Point Technology’s 149 day delay and would have to bring a claim for general damages in respect of any other delays. Although Sir Rupert Jackson emphasised that every case would turn upon the wording of the clause in question, he did cast doubt on the previous decisions in Halland GPP

Liquidated damages - concluding thoughts

The case of Triple Point Technology v PTT Public Co illustrates how the law in relation to liquidated damages is far from settled. Parties to construction or software contracts should think carefully about when they want their liquidated damages provisions to apply. Clear and effective drafting is therefore key to ensure that you do not encounter any surprises when bringing a claim for breach of contract. If you have any questions about liquidated damages clauses in construction contracts or software agreements please contact Neil Williamson.


EM Law Breach of Contract Claim

Breach Of Contract What Are We Entitled To?

Signing and dealing with contracts is an integral part of running a business. But have you ever considered what would happen if one of these contracts didn’t go to plan? Breach of contract disputes are one of the most common claims brought in courts today so knowing your rights when things go wrong can put you one step ahead of the game. This blog takes a look at breach of contract claims and considers what you can do if you ever find yourself in such a situation. 

What is a breach of contract?

A contract is a legally binding agreement between two or more parties. A breach of contract occurs where one party fails to perform an obligation imposed by another party under that contract. Typical examples of breaches of contract include:

  • Failing to perform obligations in whole or in part
  • Failing to pay for what has been provided
  • Failing to provide obligations on time
  • Providing defective goods or services 

Remoteness of damage

As in the law of tort, the law of contract accepts that not all losses flowing from a breach of contract are necessarily recoverable. If the court decides that a loss is too “remote” you will not be able to recover for that breach of contract. The traditional principles of remoteness are set out in the case of Hadley v Baxendale. The main question to ask here is whether the loss was the type of loss within the reasonable contemplation of the parties at the time the contract was made. If not, it is likely to be too remote and as a result not recoverable. So, for example, if I agreed to sell you 500 widgets for £50 and, unbeknown to me you had agreed to sell those widgets to someone else for £500, if I failed to sell those widgets to you, you would not be able to sue me for your loss of £450 because this loss would not have been in the reasonable contemplation of the parties at the time the contract was made (assuming 500 widgets generally sell for around £50!)  

Contributory negligence 

A defendant to a breach of contract claim may seek to argue that the loss suffered by the innocent party is partly down to them. If successful, a claim for damages here would be reduced to such an extent as the court thinks just and equitable having regard to the innocent party’s share in responsibility for the damage. 

Exceptions to the general rule

In a limited number of cases the court may also award damages which go beyond a strict measure of compensation. Examples of non-compensatory damages include nominal damages, aggravated damages, restitutionary damages and account of profits. Restitutionary damages may be awarded where there is a gain by the defendant but no measurable loss by the innocent party. Nominal damages are small, token sums which may be awarded where the innocent party has suffered no recoverable loss. 

Other possible remedies for breach of contract

In addition to claiming damages for breach of contract, the court has discretion to award a non-financial, equitable remedy. Equitable remedies are awarded at the court’s discretion and will only be granted if damages would not be adequate. These non-financial equitable remedies may include an order for specific performance or an injunction. An order for specific performance compels a party to perform its contractual obligation and an injunction compels a party to refrain from doing something that would be a breach of contract. 

Be careful not to waive the breach

Before pursuing a breach of contract claim, you need to make sure that you have not unintentionally waived the breach. Waiving a breach essentially means giving up your right to claim any sort of remedy and can be demonstrated by something as simple as your behaviour. Unfounded delay or waiting to bring the claim at a convenient time may be enough to constitute a waiver. 

Final thoughts

If you are thinking “there’s been a breach of contract what are we entitled to?” the first thing you should do is take legal advice. It’s important that you do not take steps that could jeopardise your claim or which could even put your own business in breach of contract. If you have any questions on breach of contract claims or dispute resolution more generally please contact Joanna McKenzie

Mitigation

The rule of mitigation requires a party who has suffered loss to take reasonable steps to minimise the amount of loss suffered. The question of what steps are ‘reasonable’ is generally fact-sensitive, but an innocent party cannot generally recover for any loss that could have been easily avoided. For example, where a seller fails to deliver goods for which a market substitute is available, the innocent party should attempt to purchase a replacement rather than sit back and attempt to claim for all losses. 

Remoteness of damage

What can I do?

Suing someone for breach of contract is not always an easy process. In order to make a claim you must first overcome a series of legal hurdles. After proving the existence of a contract and that the contract was breached, you must then prove that you have sustained a loss and that loss was a direct consequence of the breach of contract. This is often referred to as the ‘but for’ test, requiring the innocent party to prove that the loss would not have occurred but for the breach.   

What am I entitled to?

Once the above has been established, you can go on to consider what you might be entitled to. The basic remedy in English law for a breach of contract is an award of damages. An award of damages is essentially an award of money which aims to put the innocent party in the same position they would have been in had the contract been properly performed. Although there are no rigid rules for the quantification of damages in a breach of contract claim, the assessment of damages is essentially a question of fact. You should consider any revenue or profits you would have earned, any costs that would have been avoided and any non-financial benefit that would have been received, provided it was a major object of the contract. 

However, you should also be aware that not all losses flowing from a breach of contract are recoverable. The rules on mitigation, remoteness and contributory negligence may restrict, and in some cases entirely prevent, an award of damages.

Mitigation

The rule of mitigation requires a party who has suffered loss to take reasonable steps to minimise the amount of loss suffered. The question of what steps are ‘reasonable’ is generally fact-sensitive, but an innocent party cannot generally recover for any loss that could have been easily avoided. For example, where a seller fails to deliver goods for which a market substitute is available, the innocent party should attempt to purchase a replacement rather than sit back and attempt to claim for all losses. 

Remoteness of damage

As in the law of tort, the law of contract accepts that not all losses flowing from a breach of contract are necessarily recoverable. If the court decides that a loss is too “remote” you will not be able to recover for that breach of contract. The traditional principles of remoteness are set out in the case of Hadley v Baxendale. The main question to ask here is whether the loss was the type of loss within the reasonable contemplation of the parties at the time the contract was made. If not, it is likely to be too remote and as a result not recoverable. So, for example, if I agreed to sell you 500 widgets for £50 and, unbeknown to me you had agreed to sell those widgets to someone else for £500, if I failed to sell those widgets to you, you would not be able to sue me for your loss of £450 because this loss would not have been in the reasonable contemplation of the parties at the time the contract was made (assuming 500 widgets generally sell for around £50!)  

Contributory negligence 

A defendant to a breach of contract claim may seek to argue that the loss suffered by the innocent party is partly down to them. If successful, a claim for damages here would be reduced to such an extent as the court thinks just and equitable having regard to the innocent party’s share in responsibility for the damage. 

Exceptions to the general rule

In a limited number of cases the court may also award damages which go beyond a strict measure of compensation. Examples of non-compensatory damages include nominal damages, aggravated damages, restitutionary damages and account of profits. Restitutionary damages may be awarded where there is a gain by the defendant but no measurable loss by the innocent party. Nominal damages are small, token sums which may be awarded where the innocent party has suffered no recoverable loss. 

Other possible remedies for breach of contract

In addition to claiming damages for breach of contract, the court has discretion to award a non-financial, equitable remedy. Equitable remedies are awarded at the court’s discretion and will only be granted if damages would not be adequate. These non-financial equitable remedies may include an order for specific performance or an injunction. An order for specific performance compels a party to perform its contractual obligation and an injunction compels a party to refrain from doing something that would be a breach of contract. 

Be careful not to waive the breach

Before pursuing a breach of contract claim, you need to make sure that you have not unintentionally waived the breach. Waiving a breach essentially means giving up your right to claim any sort of remedy and can be demonstrated by something as simple as your behaviour. Unfounded delay or waiting to bring the claim at a convenient time may be enough to constitute a waiver. 

Final thoughts

If you are thinking “there’s been a breach of contract what are we entitled to?” the first thing you should do is take legal advice. It’s important that you do not take steps that could jeopardise your claim or which could even put your own business in breach of contract. If you have any questions on breach of contract claims or dispute resolution more generally please contact Joanna McKenzie


Mitigation

The rule of mitigation requires a party who has suffered loss to take reasonable steps to minimise the amount of loss suffered. The question of what steps are ‘reasonable’ is generally fact-sensitive, but an innocent party cannot generally recover for any loss that could have been easily avoided. For example, where a seller fails to deliver goods for which a market substitute is available, the innocent party should attempt to purchase a replacement rather than sit back and attempt to claim for all losses. 

Remoteness of damage