The Legal Effect of Representations and Warranties Clauses in Contracts, and Practical Responses (Explained from the Perspective of Vietnamese Law)
A Vietnamese attorney explains, in accessible terms, the position under Vietnamese law of "representations and warranties" clauses in M&A and other transaction agreements, along with practical responses. In addition to the meaning and effect of the clause and how to respond to a breach, this article also introduces points to watch during contract negotiations and practical tips for avoiding disputes. NEXORA Law Firm has a strong track record supporting Japanese companies with contract review, drafting, and negotiation, and brings particular strength to practical measures for risk reduction and dispute prevention. We provide contract support that achieves both legal certainty and enforceability.
In large transactions such as M&A deals, financing arrangements, and business cooperation agreements, a "representations and warranties" clause is indispensable for bridging information asymmetries and managing risk. In contracts involving foreign companies or investors in particular, this clause is sometimes treated as a condition precedent to closing the transaction. However, Vietnamese law contains no standalone regime governing "representations and warranties," and various practical questions arise as to their legal effect and how a breach should be treated.
Based on Vietnam's Civil Code and Commercial Law, this article explains, from a legal perspective and in accessible terms, the position and effect of representations and warranties clauses, the legal consequences of a breach, and practical drafting approaches for such clauses in a contract.
A Legal Analysis and Practical Consideration of Representations and Warranties Clauses Under Vietnamese Law
01 - What Are Representations and Warranties?
A "representations and warranties" clause is a provision under which a contracting party, either prior to or during the term of the contract, makes statements of fact regarding its own legal status, financial information, the condition of the target assets, and the like, and warrants the accuracy of those statements.
For example:
A seller represents that it "validly holds the shares of the target company, free of any third-party rights whatsoever."
In a loan agreement, the borrower warrants that "its financial statements have been properly prepared and there are no material undisclosed liabilities."
Clauses of this kind are extremely important as a basis for hedging risk and making decisions in a relationship marked by asymmetric information.
02 - Their Position Within the Vietnamese Legal System
2.1 No Express Statutory Regime Under Vietnamese Law
At present, neither Vietnam's Civil Code (as amended in 2015) nor its Commercial Law contains an express definition or regime specifically addressing "representations and warranties" as a distinct institution.
Accordingly, the basic position is that the effect of such a clause, and the legal consequences of a breach, are left to the principle of freedom of contract and to what the parties have agreed (Articles 385, 402, and 423 of the Civil Code, among others).
2.2 Two Interpretations in Practice
In practice, two interpretations exist:
· Under the first view, representations and warranties are merely "statements of fact" and do not constitute a contractual obligation. On this view, even if a statement turns out to be inaccurate, that inaccuracy does not, in itself, constitute a breach of contract.
· Under the second view — which is the prevailing view in practice — representations and warranties impose a genuine legal obligation on the party making them, and a breach may give rise to a claim for breach of contract or damages.
The reasons supporting the second view include the following:
The terms "cam đoan" (representation) and "bảo đảm" (warranty) themselves connote an affirmative obligation to bring about or maintain a certain result or state of affairs.
In actual contracts, it is common for the parties to expressly specify sanctions (a penalty for breach, termination, damages, etc.) applicable where a representation or warranty proves false or incomplete.
03 - The Legal Effect of a Breach of a Representations and Warranties Clause
3.1 Is a Breach Treated as a Breach of Contract?
Where the contract clearly states the following, a breach is likely to be treated as a breach of contract:
An express statement that the representations and warranties constitute "a condition precedent to this Contract"
A provision stating that the representations and warranties remain "continuously in effect" throughout the contract term and after its termination
Specific sanctions or damages provisions applicable in the event a representation proves false
Conversely, if these provisions are inadequate or ambiguous, the legal force of the clause weakens, and it may become difficult to prove in the event of a dispute.
3.2 Principal Legal Effects Where a Breach Is Found
Effect
Legal basis (Vietnam's Civil Code)
Claim for damages
Article 419
Claim for the penalty for breach (where agreed)
Article 418
Termination or suspension of the contract
Article 428
Assertion that the contract is void (fraud or mistake)
Article 127
04 - Practical Points to Note When Drafting the Contract
To draft a representations and warranties clause that is legally valid and practically effective, the clause should be structured with the following points in mind:
Item
Point
Specificity of content
Specific statements are preferable, e.g., "the target company has no undisclosed tax risk"
Clearly stated validity period
Effective as of signing, as of closing, and/or for a set period thereafter, etc.
Verification method
Obligation to disclose supporting materials, third-party confirmation, etc.
Remedies for breach
A fixed penalty amount, damages, termination of the contract, adjustment of the contract price, etc.
Standalone treatment of each clause
Each representation should be set out as its own separate clause, so that a breach can be clearly identified
Continuity of the representation
State expressly that it remains effective "as of the signing date and through the closing date"
05 - Practical Trends and Case Examples (VIAC and the Courts)
At present, there is no official precedent or guidance from the Supreme People's Court, but the following practical examples have emerged:
An arbitral award of the Vietnam International Arbitration Centre (VIAC) (2020):
In an M&A contract, the buyer sought termination and damages based on the seller's false representation. The arbitral tribunal found the representations and warranties clause to constitute a binding obligation between the parties.
A judgment of the Ho Chi Minh City Economic Court (2018):
The buyer sought to terminate the contract on the ground of a breach of representations and warranties, but because the contract contained no provision on the "effect of a breach," the court did not allow termination.
As these examples show, the clarity of the parties' agreement and the drafting of the clause are the practical keys to success.
🔻Conclusion and Practical Takeaways
A representations and warranties clause is an extremely important provision for correcting information asymmetry and enhancing the transparency and reliability of a contract. Although it is not established as a standalone regime under Vietnamese law, it can, based on the principle of freedom of contract, be given substantial legal effect through clear agreement and careful structuring by the parties.
In drafting a contract, it is important to specifically set out the content of the representations, the applicable period, the method for determining a breach, and the remedies available in the event of breach. Clarity of wording, and linkage to sanction clauses, are also essential to ensure the clause is given effect in the event of a dispute.
As commercial transactions in Vietnam become increasingly complex and internationalized, the legal position and practical structuring of representations and warranties clauses will only grow in importance. In-house counsel and legal professionals alike are called upon to deepen their understanding of these clauses and strengthen their ability to draft them effectively.