Representations and warranties

Representations and warranties (진술 및 보장/陳述保障, (日) 表明保證) are provisions that a party to a contract presents its statement of facts is true by undertaking the responsibility based on the statement, and, if such statement proves to be false or is breached by the party, then the party is subject to the effect of default and other contractual remedies. It's because both parties are relying on each other to provide a true accout of all information in executing the contract.

This clause is inserted in a standard loan agreement and a merger and acquisition agreement. The representations (abbreviated to "reps") and warranties clause are much more functional and operative in an M&A agreement than any other agreement. As a matter of fact, unlike a loan agreement, an M&A agreement has to be completed after the deal is executed. So a certain statement turns out to be falsified, the other party need to be protected by contractual remedies.

Key words
representations (reps), warranties, consideration, forbearance, contractual responsibility, pari passu

In Korea
In common law contries, the reps and warranties amount to a consideration (약인/約因) of a contract. Such reps and warranties are explained as one party's self-inflicted duty and forbearance, and the other party's reliance thereon. Initially in Korea, no standard contract cotains the reps and warranties clause derived from the common law. Nowadays it is usual to find reps and warranties not only in a loan agreement written in English but also in an ordinary agreement which needs appropriate assertions by a concerned party.

Types of reps and warranties
Various reps and warranties are found in a clause regarding:
 * Capacity and authorization of a party;
 * Relation with the existing contract, or laws and regulations;
 * Financial statements; and
 * Other matters related with a party.

Examples
In a typical international loan agreement, the Borrower hereby represents and warrants:
 * 1) that it has full legal power to enter into and perform the Agreement and to borrow the funds available hereunder;
 * 2) that the execution, delivery and performance by the Borrower of this Agreement have been duly authorized by all appropriate actions of the Borrower;
 * 3) that the Borrower is not in default under any agreement to which it is a party or by which it may be bound, a default in respect of which might have a material adverse effect on the Borrower, or its operations, properties or financial condition, and no litigation, administrative proceeding or arbitration is presently pending or, to the best knowledge of the Borrower, threatened against it or its properties, which might have a material adverse effect on its operations, properties or financial condition;
 * 4) that the Loan when made will rank at least pari passu with all other present or future indebtedness of the Borrower; and
 * 5) that this Agreement constitutes a valid and legally binding obligation of the Borrower enforceable in accordance with its terms.

Effects
The above-mentioned representations and warranties form the basis of due diligence on the part of the obligor. Reps and warranties should are made for the other party to declare the following effects in the event of violation thereof:
 * Conditions precedent to closing a contract (정지조건);
 * Event of default (기한이익상실사유);
 * Ground for indemnificaion (면책청구사유).

Implications in Korea law
The reps and warranties clause is deemed effective under the Korean law on account of the principle of private autonomy (사적자치/계약자유의 원칙). Also any knowledge or negligence is not necessary in the other party's claiming such responsibility. So the responsibility is of nature of contractual one rather than the legal responsibility. Some scholars say it is similar to Garantievertrag (손해담보계약) under the German law.