Representations and warranties derive from the legal practice of common law countries. Such clauses are often used in international transactions and this way also became widely used in commercial agreements governed by Polish law. Currently they are common part of various transactional documents. For example, most agreements regarding the purchase of shares or mergers and acquisitions employ such clauses as a way of limiting risk or extending liability. However, representations and warranties are not regulated in Polish law, which may lead to significant interpretational problems when determining the legal consequences of a clause.
General consequences of representations and warranties
A breach of representations and warranties is usually understood as the discrepancy between the actual states of affairs and the warranted ones. Most authors opine that under Polish law a breach of representations and warranties generally gives the creditor a claim for performance of a guarantee-type duty by the debtor. As a result, such breach raises the debtor’s contractual obligation to act as promised and redress the damage caused by the breach.
Some authors argue that the above general claim is the only one that may be raised as a consequence of the breach. But other scholars feel that it is up to the parties to precisely decide what claims the creditor may raise. Such additional claims may include, for example, an obligation to bring the actual state of affairs in line with the one warranted under the representations and warranties or to pay an agreed amount.
Representations and warranties made to the best of one’s knowledge
Parties to the agreement usually pay special attention to the provision setting out that a particular representation or warranty is made “to the best of X’s knowledge”. But the consequences of such clause are not entirely clear under Polish law.
Some of the doctrine and legal practitioners are of the opinion that a breach of a representation or warranty made “to the best of X’s knowledge” triggers the debtor’s liability only if it knew that a representation or warranty was untrue.
Other authors state that such a clause means that the debtor make additional, special efforts to ensure that a given representation or warranty is true, which in practice leads to an extension of the debtor’s liability. It is thus advisable to expressly determine the parties’ understanding of this reservation.
Lack of sanctions for breach of representations and warranties
It is not clear whether under Polish law a breach of representations and warranties that were, for example, set out in a share purchase agreement and concerned the company’s operations or business may constitute grounds for claiming that such agreement is voidable for defects of will provided for in the Polish Civil Code (mistake – błąd or fraud – podstęp). Under Polish law, defects of will are a basis for withdrawal from the agreement.
Most of the representatives of the doctrine claim that the consequences of breach of any of the representations or warranties are generally restricted to claims for damages. Breach of the representations and warranties concerning the company’s operations or business should not be treated as a basis for withdrawal, if such consequence is not expressly set out in the agreement.
Some of the representatives of the doctrine state that the most significant representations and warranties (eg, relating to the incorporation of the company, legal title to shares or authorisation and capacity) may need a different approach. But defects of will under Polish law (ie, mistake and fraud) may be applied as a basis for challenging the agreement only when the general requirements are met (ie, in particular, the mistake is material one; Art. 84 § 2 of the Polish Civil Code) or there is an adequate causal link between the fraud and the conclusion of the agreement. The scholars underline that under Polish law the breach of the representations and warranties cannot automatically raise grounds for challenging the agreement based on defects of will.
Representations and warranties are part of a foreign legal system and cannot be simply transposed into Polish law. As a result their use in the agreements governed by Polish law may raise numerous interpretational issues. Clauses implementing representations and warranties may sometimes lead to consequences contrary to the intentions of the parties. Such clauses should be drafted with special care and precision. To avoid problems, lawyers and managers should pay particular attention to provisions introducing sanctions for breaching representations and warranties.
Clauses implementing representations and warranties may sometimes lead to consequences contrary to the intentions of the parties. Such clauses should be drafted with special care and precision.