Warranties and misrepresentations

The inextricable connection between law and language can present significant challenges when law is translated from one tongue into another. Sometimes, translated text is an accurate reflection of the original, and nothing is lost in the translation. At other times, the original text reflects concepts that are unique to the law of its relevant jurisdiction so that it is very difficult to translate those concepts into another language. This is particularly so in the case of words and phrases that have a specific meaning or legal interpretation under the laws of the jurisdiction from which they originate.

Representations and warranties are a good example of the way in which some words and phrases can only be understood in the context of the governing law, and give rise to rights and remedies that are only available under the governing law. To translate these concepts into Chinese is challenging, particularly where an attempt is made to incorporate them into contracts governed by PRC law.

The inclusion of clauses containing representations and warranties in commercial contracts is a common phenomenon. Sale and purchase agreements, shareholder agreements and a variety of other contracts typically contain such clauses. But what is their purpose and effect?

Both representations and warranties are statements or assertions of fact. Traditionally, under English law, a representation was a pre-contractual statement by one party to the other. If a statement induced the other party to enter into the contract and proved to be incorrect, then the affected party would be able to rescind the contract. The effect of rescission in the case of a misrepresentation was that the contract would be considered to be void ab initio (i.e. ineffective from the start). In such circumstances, the remedy that a court would order would be an order restoring the parties to the position they were in before the contract was entered into (i.e. restitution). In addition to rescission, the affected party would be able to claim damages for any loss suffered if a tort was committed (e.g. a negligent or fraudulent misrepresentation).

A warranty, on the other hand, is a contractual statement, a breach of which entitles the affected party to claim damages for any loss suffered as a result of the breach. A typical example is a warranty in a contract for the sale of goods that the goods are fit for the purpose for which they were sold. In the case of a manufacturer’s warranty, the manufacturer warrants that the goods are free of defects and undertakes to repair or replace the goods if found to be defective during the warranty period. Traditionally, a breach of warranty differed from a misrepresentation in that it only entitled the affected party to claim damages for any loss caused by the breach; it did not entitle the affected party to rescind the contract.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew Godwin is currently on secondment to the ALRC as Special Counsel to assist with its inquiry into corporations and financial services regulation. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com