Often, in the business context, agreements contain representations and warranties of the parties to the agreement. The representations and warranties can range from general items such as business forms and the payment of taxes, to more specific items, such as the accuracy and reliability of financial information. While such representations and warranties are commonplace in business agreements, their importance should not be overlooked.
Under Pennsylvania law, when performance of a duty under contract is due, any non-performance is a breach. If a breach constitutes a material failure of performance, the non-breaching party is discharged from its duties under the contract. A party who has materially breached a contract may not complain if the other party refuses to perform. In other words, a material breach of contract may excuse performance by the non-performing party.
In the context of representations and warranties contained in a business agreement, should the representations and warranties contained in the agreement prove to be false, the party to whom the representations and warranties were made may raise the falsity of the representations and warranties to excuse further performance of any contractual obligations under the agreement. Such a circumstance could spell disaster in the business context – particularly in a case where the payment of money is due at some time after closing.
Pennsylvania courts impose an element of materiality to the breach of a representation or warranty. The elements of materiality under Pennsylvania law include the extent to which an injured party will be deprived of the benefit which he reasonably expected, the extent to which the injured party may be adequately compensated for that part of the benefit of which he will be deprived, the likelihood that the party failing to perform or offer to perform will cure, and the extent to which the party failing to perform comports with the standards of good faith and fair dealing.
Accordingly, representations and warranties contained in an agreement should not be taken lightly, but should be made with any eye toward the potential ramifications in the event of breach.