466 16 Key Provisions of the Acquisition Agreement
tion 16.4). Typically, what such a rule means is unclear. In practice, it can influ-
ence three fundamental things: the scope of rules governing the sale of goods (un-
der German law, the applicability of Sachmängelhaftung instead of Rechts-
mängelhaftung); the applicability of rules setting out the statutory specifications of
the object; and the assessment of the amount of damage and the amount of price
reduction.
Because of the general flexibility of the interpretation of law and the particular
risks caused by the application of traditional contract law rules to acquisitions, it is
in the interests of both parties to regulate the specifications of the object in the
contract and not rely on legal background rules. For the acquirer, the use of de-
tailed contract terms on the specifications of the object belong to the most impor-
tant ways to mitigate risks inherent in the interpretation of contracts, counterparty
commercial risk, and problems caused by the agency relationship between the ac-
quirer and its contract party.^9
In order to reduce legal risk, the parties should also regulate the consequences
of the breach of such contract terms.
Vendor’s representations and warranties: survival. The main rule is that a
party’s actual or constructive knowledge of lack of conformity excludes the other
party’s liability.^10 In practice, this can mean that some of the vendor’s representa-
tions and warranties will not survive buyer due diligence (section 13.3.3). If the
acquirer wants the representations and warranties to be enforceable regardless of
its actual or constructive knowledge in general and the due diligence inspection in
particular, it should ensure that the contract contains an express clause to this ef-
fect.
Vendor’s representations and warranties: classification of promises. Normally,
the vendor’s representations and warranties have a broad scope. In addition, the
vendor represents and warrants that its declarations are true and correct as of a cer-
tain date, typically both on the signing date and on the closing date.
Although the terms “representations” and “warranties” are often used inter-
changeably, they are not always interchangeable. Different kinds of promises can
be combined with different legal consequences depending on the governing law.
US. This can be illustrated by certain differences between US, English, and German law. In
the US, there are substantial legal reasons for the protected party (the acquirer) to require
both representations and warranties. (a) Common law “representations” are statements of
present or past fact (“facts” cannot relate to the future). The aggrieved party can make a
common law claim of deceit and allege fraudulent misrepresentation, if a representation is
intentionally false. In addition to rescission, fraud can lead to punitive damages. (b) In CBS
Inc. v. Ziff-Davis Publishing Co.,^11 a common law “warranty” was defined as a promise of
indemnity if a statement of fact is false. This means that the other party may sue for breach
of warranty and recover damages despite knowledge of the falsity of the statement.
(^9) Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp 175–
177.
(^10) CISG Article 35(3); DCFR IV.A.–2:307.
(^11) CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990).