Contracts touch all of us every day and particularly in business they are essential when buying and selling products or services.

Contracts of course can be written or verbal but in business it is important to always reduce your contracts to writing and ensure they are clear so there is no misunderstanding between the parties. 

This will hopefully avoid disputes and most importantly alleviate any unnecessary litigation between the parties.

One of the questions clients always ask is – what do terms such as representations, warranties, indemnities and undertakings mean in the context of any contract and how do they influence the performance of the contract?

Representations

A representation is very simply a statement of fact which is made by one party to the other. 

Importantly it is made before or at the time of entering into and executing the contract and induces the party to whom it is made to enter into the contract.

A representation can be contrasted to a condition of a contract in that it is made outside of the contract.

Even thought it is not a condition in the contract if a representation is material to the performance of the contract and is acted on by the person to whom the representation is made the person making it may be legally liable for it.

A representation that is false is a misrepresentation and as a result there can be legal consequences for the party who makes that misrepresentation.

There are two types of misrepresentation – innocent or fraudulent.

Generally where it is an innocent misrepresentation the contract will be revoked and the parties will revert to the position before they entered the contract.

On the other hand if it is a fraudulent misrepresentation the party making the statement may be liable for damages or can even be subject to a charge of fraud.

A party selling goods and services in Australia is subject to Australian Consumer Law (ACL) which is legislated for in the Competition and Consumer Act 2010.

The ACL protects consumers and enforces strict consumer protections on businesses to ensure any representations they make are accurate and not misleading.

We advise our business clients to avoid and minimise the risk of being accused of misrepresentation to their customers or clients they should:

• Ensure that all their marketing materials and contracts are reviewed for the accuracy of any representations or otherwise as to their products or services
• Have appropriate disclaimers where it is appropriate to do so
• Make sure all communications between their clients and themselves is clear and retained
• Have proper training in place for staff to ensure they are compliant and understand the implications of any representations they make
• Get input from their lawyers when drafting contracts or undertaking negotiations which involve representations

Warranties

A warranty is a written promise expressly stated in a contract or implied by legislation such as in the Competition and Consumer Act 2010, a States’ Sale of Goods or by the common law.

Generally the warranty will relate to quality of the product or the service provided or against  any defect.

Many warranties are standard in many contacts such as the relevant authority to enter in to a contract.

It is important that any warranties in a contract are clearly defined and the consequences of any breach of that warranty is also clearly defined.

A breach of warranty will generally on give rise to damages rather than the ability to terminate the contract unless it is expressly provided that the termination of the contract could be a remedy.

Indemnities

An indemnity is a promise from one party to compensate another party for certain losses or damage.

In many contracts it is often the case that an indemnity is not readily identifiable due to the manner in which the contract is drafted.

Often you may see the terms ‘hold harmless’ or ‘make good’. 

A hold harmless clause is a promise by party providing the indemnity to the other party against any loss or damage as a consequence of entering into the contract.

A make good clause puts the indemnified party back into the position they were in before the contract, that is, their original position.

There are basically four types of indemnities that are found in business contracts in Australia:

• Bare indemnities which cover all liabilities or losses that might be incurred in connection with a particular event or circumstance without any specific limitations
• Proportionate indemnities which limit the loss caused as a result of the breach of the indemnity
• Reverse indemnities which re the opposite of proportionate indemnities, and where the indemnifier agrees to indemnify for the indemnity holders own acts or omissions, even if negligent
• Third-Party indemnities where one party indemnifies the other party relating to any claim made by a third party.

It is important to remember when considering providing any type of indemnity you consider a range of issues such as the event that could give rise to the indemnity could well be outside of your control.

Indemnities should not be given without proper legal advice and clear and precise drafting as the consequences both financially and reputationally can be considerable to any business.

Undertakings

An undertaking is a legal promise or commitment to do something, which may be legally binding.

An undertakings may ask one party to commit to do something by a certain date, not to do something or pay money.

An undertaking may be enforceable or it may not.

The basic types of undertakings are:

• Contractual for example in a legally binding document
• Fiduciary where you act on behalf or in the interests of another party
• Professional such as when a lawyer gives an undertaking to do something unless released by the recipient or a court
• Statutory where it is provided for in legislation or a particular regulatory body
• Unconditional as is the case if a financial guarantee
• Judicial in the course of litigation or as required by an order of the court

How can FC lawyers help?

At FC Lawyers our business and corporate team have extensive experience in all aspects of contract drafting across a broad range of industries and professions.

Contact our team today to discuss your contract law needs.