Avoid Pitfalls in Drafting Environmental Representations and Warranties
A recent decision by the Washington State Court of Appeals underscores how careful one must be in drafting representations and warranties, such as environmental reps and warranties in Purchase and Sale Agreements (PSAs). In Terry Martin v. Stanley Smith, 192 Wn. App. 527 (2016), the court interpreted contractual language stating that each party “warrants and represents” created an express warranty. Under Washington law, the breach of an express warranty voids the contract. The contract will be voided or cancelled even if the warranting party has no knowledge that a fact is false at the time the contract is executed or the fact is not material to performance of the contract by either party.
The solution is to make representations only and not warranties because the cause of action for a breach of a representation is fraud, which is difficult to prove and prevail upon. By avoiding the inclusion of an environmental warranty in the PSA, you avoid the risk of making a representation that turns out to be a false fact in an environmental technical report or letter, and thus potentially voiding the real estate contract. If the other party insists that you “warrant” the environmental representations, then be sure that you clearly identify and limit the source of the facts in the representations. For example, draft the representations so that they consist of “the facts in the technical reports listed on Exhibit A,” and not unlisted technical reports or other environmental documents. A stand-alone exhibit naming all the documents that constitute the reps that are bing warranted is a good practice to avoid later disagreement.