Concept and Meaning of ‘Representations’ in Law
In a legal context, particularly in Anglo-American jurisdictions, the term ‘Representations’ (in German: assurances or guarantees) refers to a significant contractual institute. The term plays a central role in contract law, especially in connection with company acquisitions, financial transactions, real estate deals, as well as in general obligations law. ‘Representations’ are legally binding, pre-contractual or inherent contractual declarations by one contracting party concerning certain facts, characteristics, or legal circumstances that are significant for the conclusion and execution of the respective contract.
Systematic Classification and Distinction
Distinction from Other Contractual Assurances
‘Representations’ are particularly to be distinguished from conduct covenants (‘Warranties’), ancillary contractual obligations, and mere notices or statements of intent (‘Covenants’ and ‘Undertakings’). While ‘Warranties’ comprise statements regarding future conduct, ‘Representations’ typically refer to present or past facts. In common law contracts, both terms are often used alongside each other (‘Representations and Warranties’), whereby the exact distinction must be determined in each case through contract interpretation and the applicable law.
Terminological Standards in German Law
There is no exact equivalent to ‘Representations’ in German law; however, parallels can be drawn to warranty rights, guarantees pursuant to § 443 of the German Civil Code (BGB), as well as declarations concerning qualities or characteristics within the scope of obligations. They also play a decisive role in connection with ‘culpa in contrahendo’ (c.i.c.) and pre-contractual breaches of duty.
Legal Functions and Significance
Function Within Contracts
‘Representations’ aim to render essential contractual prerequisites transparent and distribute risks. Typically, one party declares that certain conditions or facts exist at the time of contract conclusion, which are of considerable significance to the other party—such as ownership of certain assets, absence of legal defects, or the accuracy of balance sheets in the context of a company acquisition.
Liability and Legal Consequences of Incorrectness
An incorrect, incomplete, or missing ‘Representation’ regularly constitutes a legal breach of duty. The legal consequences vary depending on the applicable law and contractual design but may include the following consequences:
- Claim for Damages: If ‘Representations’ are demonstrably false or misleading, there is often a claim for damages. Depending on the legal system, this may relate to expectation interest or—in particular for pre-contractual misrepresentations—to reliance interest.
- Right of Withdrawal or Rescission: Under certain circumstances, the injured party may withdraw from the contract or assert a rescission if the misrepresentation was fraudulent or material.
- Guarantee Claims: In cases of expressly agreed guarantees, an independent obligation to indemnify may exist alongside contractual claims.
Burden of Proof and Exclusion of Liability
The party that has made the ‘Representation’ generally bears the burden of proof for its accuracy, unless the contract provides otherwise. Contracts often include exclusions or limitations of liability that clearly delineate the scope of liability, especially for cases of slight negligence or where the acquirer was aware of certain defects.
Typical Areas of Application for ‘Representations’
Share Purchase Agreements (Mergers & Acquisitions)
In share purchase agreements, ‘Representations’ serve to disclose and secure essential key figures, legal relationships, and existing risks. This includes, for example, declarations regarding the financial situation, existing contracts, intellectual property rights, ongoing legal disputes, and compliance with regulatory requirements.
Real Estate Law
In real estate law, ‘Representations’ are used, among other things, to assure unencumbered ownership, the permitting status, or the structural characteristics of a property.
Capital Markets and Financing Agreements
In banking and capital markets law, ‘Representations’ are regularly made regarding creditworthiness, authority, power of representation, and the absence of payment difficulties, in order to secure, for example, loan disbursements and to manage claims for repayment.
Case Law and Drafting Practice
Standard Clauses and Wording Examples
In international model contracts, standardized wording can be found, for example:
“The Seller hereby represents and warrants that the Company has complied with all applicable laws and regulations as of the Closing Date.”
Such clauses are individually adapted during contract negotiations, with scope and precision playing a central role in subsequent enforceability.
Contractual Exclusion Periods and Notice Regulations
Contracts often contain exclusion periods within which claims for breach of ‘Representations’ must be asserted. Additional formal requirements may apply, such as written notice of misrepresentations (‘Notice of Claim’).
Private International Law and Implementation in German Contract Law
Applicable Law
In cross-border transactions, the applicable law is crucial for the interpretation and effectiveness of ‘Representations.’ While common law includes comparatively far-reaching liability consequences, German law requires a higher degree of individualization and their express contractual inclusion.
Transposition into German Contract Law
To avoid misunderstandings and liability traps, German-language contracts often expressly regulate which statements are to be regarded as ‘Representations’, ‘Warranties’, or ‘Guarantee’ within the meaning of the German Civil Code. It is also advisable to provide differentiated definitions of these terms in the contract text.
Summary
The legal institute of ‘Representations’ forms a central element for risk allocation, transparency, and liability regulation in contracts under international business law. Careful contractual coordination is required, particularly in cross-border transactions. While common law provides comprehensive protection mechanisms in connection with ‘Representations’, German contract law requires precise rules on the basis and enforceability of claims to avoid misunderstandings and liability risks.
This article provides a comprehensive presentation of the term ‘Representations’ in a legal context, explains typical areas of application, legal functions, as well as the implementation in German contract law, and systematically distinguishes the term from other assurances and duties.
Frequently Asked Questions
When is a representation legally effective?
A representation in a legal context is effective if it is made bindingly to the relevant recipient at the time of issuance and meets all statutory requirements for a legal declaration. Above all, the representation must be clear, definite, and truthful, and, if required, made in writing or in another legally prescribed form. Depending on the field of law (e.g., contract law, company law, or M&A transactions), different requirements may apply to form and content. Furthermore, no statutory prohibitions or immoral content may be present. It is crucial that the person making the representation is authorized and empowered to do so. If such authorization is missing or the person acts outside their scope of representation, the representation may be invalid or lead to personal liability risks.
What are the legal consequences of a false representation?
If a party makes a false representation, serious legal consequences can arise. In contract law, this can, for example, lead to rescission for fraudulent misrepresentation in accordance with § 123 BGB, or to contractual claims for damages if the representation was agreed as a guarantee or quality agreement. In company law and for transactions, false representations are often the subject of warranty and indemnity clauses that entitle the contractual partner to extensive claims. Liability for breach of ancillary obligations pursuant to § 280 BGB may also be triggered. Particularly serious cases, such as intent or gross negligence, can even result in tort liability under § 823 BGB or criminal liability.
What is the distinction between representations and warranties in legal terminology?
Although ‘Representations’ and ‘Warranties’ in German law are often translated together (for example, in international M&A contracts as ‘assurances and guarantees’), they are, from a legal point of view, different institutes. A representation is a statement of fact about present or past circumstances, while a warranty is a contractual assurance or guarantee regarding the existence or occurrence of a certain circumstance. The distinction is legally relevant especially as to whether, in case of incorrectness, claims for damages (in particular arising from contract), rights of withdrawal, or even rescission due to misrepresentation are available. In common law, defective representations tend to give rise to claims for misrepresentation, whereas defective warranties underlie contractual claims for damages.
To what extent can representations be contractually excluded or modified?
The parties to a contract can generally determine the scope and extent of representations freely, provided there are no statutory prohibitions or mandatory provisions to the contrary. International contracts often include so-called ‘Entire Agreement’ clauses to provide that representations made outside the contract have no effect. Similarly, disclaimers or limitations regarding knowledge and duties of care can be agreed in the contract. This is valid only to the extent such agreements do not contravene mandatory provisions, particularly those regarding consumer protection or standard terms law (§§ 305 ff. BGB). In individual cases, certain representations, for example those regarding a thing’s tradability, may be subject to statutory minimum requirements which cannot be contractually waived.
Who bears the burden of proof in disputes over the accuracy of a representation?
The burden of proof for the accuracy of a representation generally lies with the party that invokes its inaccuracy, typically the contracting party to whom the representation was made. In the event of a dispute, this party must prove that the representation was in fact inaccurate and that this caused them damage. In terms of guarantees or expressly agreed quality assurances, however, the burden of proof can shift, so that the guarantor must prove that the guaranteed circumstance actually exists. Judicial practice and contract drafting play a significant role in this respect, as do contractual provisions regarding rules of evidence (‘burden of proof’ clauses).
What role do representations play in company acquisitions (M&A transactions)?
In M&A transactions, representations are of central importance, as they give the buyer insight into key legal and financial circumstances of the target company. Classic examples include representations regarding ownership of shares or assets, the proper keeping of accounts, the existence of ongoing litigation, or compliance with compliance rules. They enable the buyer to identify risks and secure them in the course of contract negotiations, for example by way of price reductions, retention of purchase price, or indemnities. Incorrect or incomplete representations can lead to substantial claims for damages and warranties and are frequently the basis for protracted disputes after completion of the company acquisition.
How are representations to be assessed in light of German consumer protection law?
In German consumer protection law, representations are subject to special restrictions and transparency requirements. For example, if a consumer is given a representation concerning the condition of a product, they receive extensive protection through warranty law and protection against misleading statements pursuant to §§ 434 ff. BGB and the Act Against Unfair Competition (UWG). Exclusions or limitations of liability for representations are often ineffective against consumers if they unreasonably disadvantage the consumer (§ 309 BGB). In addition, the entrepreneur is obliged to provide true, complete, and non-misleading information; otherwise, fines, warnings, or claims for damages may result.
