GENERALLY

Facts are important in any business transaction. In a project financing, however, an understanding of the details of a project is crucial to proper structuring of each of the project contracts and the financing arrangements. Any unverified fact is the potential weakness of a project, for uncertain facts may lead to unpredictable results.

In contracts, facts are traditionally memorialized in the representations and warranties section. It is here that the contracting parties in a project financing can determine whether the elements necessary to support a project financing exist. Thus, the representation and warranty section of project contracts, including the project loan agreement, serves an important role in the project due diligence process.

Definition

Representations and warranties form the basis of most business transactions, including a project financing. A representation is a statement by a contracting party to another contracting party about a particular fact that is correct on the date when made. A representation is made about either a past or a present fact but never a future fact. Facts required to be true in the future are covenants.

A warranty is sometimes confused with a representation, but in practice, the two terms are used together, the contracting party being asked to “represent and warrant” certain facts. As an oversimplification, a warranty is a duty created in a contract; a representation induces a party to enter into a contract and can exist even though no valid contract is created. A contractual warranty, therefore, is a guarantee that a given fact will exist as warranted at some future date.