Representations and warranties in Ibero-American contracts: a problematic legal transplant

Introduction

Representations and warranties ('R&W') have become a standard section of sophisticated commercial agreements across the Ibero-American region. Frequently drafted using standardised US or English law models,^[1] these clauses often appear in contracts governed by laws that lack an exhaustive regulatory framework for R&W, masking the practical difficulties their incorporation entails.

Lawyers who assemble R&W this way—whether driven by the expectations of international clients, the influence of leading US or English firms acting as co-counsel, or the absence of locally tested alternatives—may inadvertently produce instruments that function very differently from their intended design once a dispute arises.

The core problem is straightforward: R&W are not neutral provisions that can be transplanted from one legal system into another without adaptation, or at least they should not be.^[2] They are products of a specific legal environment, designed to operate within a coherent set of rules governing contract formation, performance, breach and remedies. That environment does not exist, in any systematic form, in Ibero-American civil law jurisdictions. The result is a structural tension between the parties' contractual expectations—shaped by the common law model—and the remedial landscape that local laws provide. This article examines that tension and proposes strategies for transactional lawyers and arbitrators alike.

Representations and warranties in their native habitat

In common law systems, R&W serve a cluster of interrelated functions that together form a coherent risk-allocation architecture. A representation is a statement of a past or present fact, made  as of a moment in time intended to induce reliance;^[3] a warranty is a contractual promise that a statement is true.^[4] Under common law, a false representation may give rise to rescission and, in certain cases, damages; whereas a breach of warranty is a purely contractual claim that typically results only in damages. This distinction — often overlooked in drafting—matters because the remedies differ materially: rescission unwinds the transaction, while a damages claim allows it to stand.

In US practice, R&W typically appear as a compound concept, but the underlying remedial sophistication is preserved through carefully negotiated indemnity provisions, disclosure schedules, materiality scrapes, knowledge qualifiers, and, increasingly, R&W insurance. Together, these tools calibrate the parties' exposure: they determine, among other things, which facts trigger liability, who bears the cost of unknown risks, the limitation period for claims, and how much the seller is ultimately liable for.

This architecture presupposes a supporting legal environment. Rules on causation and remoteness developed in Hadley v Baxendale,^[5] the parol evidence rule, and the implied covenant of good faith all interact with R&W to produce commercially intelligible outcomes. Remove that structure, and the clauses become unpredictable. As Alan Watson observed in his work on legal transplants, adopting a legal rule without its surrounding doctrinal context often produces results the receiving legal system never intended.^[6]?

The Ibero-American regulatory vacuum

No Ibero-American jurisdiction has enacted legislation that systematically governs R&W as used in complex commercial agreements. Civil codes in jurisdictions such as Argentina (2015), Brazil (2002), Chile (1855), Colombia (1887), Mexico (1928), and Spain (1889) address analogous issues only through scattered provisions on saneamiento (warranty against eviction and hidden defects), rules on error and dolo as vices of consent, and, in some cases, principles of pre-contractual liability. The widespread claim in transactional practice — that R&W constitute a comprehensive contractual regime for post-closing risk—has no statutory anchor in these systems.

The saneamiento regime is often invoked in the absence of a complete R&W framework.^[7] Under the Chilean Civil Code, articles 1837 to 1866 impose on the seller an obligation to remedy hidden defects (vicios redhibitorios) that render the thing sold unfit for its ordinary use or significantly diminish its utility, to the extent that the buyer would not have purchased it, or would have done so only at a lower price, had the defect been known. Articles 1857 and 1860 offer the buyer two primary remedies: rescission of the sale (acción redhibitoria) or a proportional price reduction (acción quanti minoris).^[8] This architecture is rigid and binary. Damages beyond the return of the price are available only where the seller acted with knowledge of the defect (article 1861), and even then, fall short of the bespoke indemnity logic that R&W seek to implement. Crucially, as a Chilean legal scholar has noted, contractual liability for a breach of R&W in Chile is also governed by fault-based rules under article 1547 of the Civil Code. This raises an unresolved question: can a seller who made an inaccurate R&W in good faith escape liability altogether? Such an outcome would be fundamentally inconsistent with the strict liability approach that underpins common law R&W practice.^[9]

These regimes cannot replicate the tailored indemnity architecture of a well-drafted R&W section. They do not accommodate liability caps, tipping provisions, or the concept of fundamental representations that survives closing. They interact awkwardly with disclosure schedules and may impose remedies the parties neither contemplated nor desired.

Although UNIDROIT Principles of International Commercial Contracts (2016 edition) provide additional flexibility through their provisions on non-disclosure (Article 3.2.7), mistake (Articles 3.2.1–3.2.7) and damages (Articles 7.4.1 et seq., the latter enshrining the general entitlement to damages for non-performance and articulating its scope through the principles of full compensation, foreseeability of harm, certainty of damage and contribution to harm), they were not designed to replace a negotiated R&W regime. Their interaction with mandatory domestic law remains uneven across courts and arbitral tribunals in the region. Accordingly, incorporating them does not fully resolve this issue.

A further adaptive tool, sometimes underestimated in transactional practice, is the principle of good faith. All Ibero-American civil codes enshrine good faith as a source of contractual integration and interpretation—see, among others, articles 1546 of the Chilean Civil Code, 961 and 1061 of the Argentinean Civil and Commercial Code, 1603 of the Colombian Civil Code, 1796 of the Mexican Federal Civil Code, 422 of the Brazilian Civil Code, 1362 of the Peruvian Civil Code and 1258 of the Spanish Civil Code. Properly invoked, good faith may operate as a bridge between the literal R&W architecture and the remedial logic of civil law, allowing adjudicators to give effect to the parties' risk-allocation intent without disregarding mandatory domestic rules.

Taken together, the foregoing observations show that the theoretical mismatch between the common law architecture of R&W and the Ibero-American legal landscape is not a mere doctrinal curiosity: it has tangible consequences whenever a dispute arises. To illustrate how this structural tension materialises in practice, the following section examines four categories of R&W routinely included in regional M&A transactions, each of which exposes a different facet of the z problem.

Illustrative problems: when R&W clauses malfunction

Four categories of R&W commonly found in Ibero-American M&A illustrate some of the distinct facets of the transplant problem.

1. Financial statement representations. The seller represents that financial statements fairly present the target's condition in accordance with IFRS. If accounts receivable are overstated, the buyer can invoke contractual indemnity. A civil law court or tribunal may, however, characterise the claim as one for hidden defects in the shares sold, thereby triggering saneamiento and its abbreviated limitation period rather than the indemnity the parties negotiated.
2. Tax representations. The seller represents that all taxes have been paid and that no undisclosed tax contingencies exist. Tax R&W are frequently litigated in regional post-closing practice for a structural reason; because tax authorities often have several years to audit past returns, which far exceed the six-month period civil codes allow for hidden defect claims. Sophisticated drafting should carve out tax R&W from general survival periods and align them with statutory tax limitation rules.
3. Fundamental representations. The seller represents that the shares are duly issued, validly held and free of encumbrances. Representations concerning title and capitalisation are typically treated in Anglo-Saxon practice as uncapped and subject to extended or perpetual survival and excluded from materiality scrapes. However, in civil law systems, defects in title may trigger nullity doctrines whose ex-tunc unwinding overrides the carefully negotiated indemnity structure.
4. Environmental representations. The seller represents compliance with environmental laws and the absence of undisclosed contamination. Environmental liability across most of the region is strict and attaches to successor owners regardless of fault. Discovery periods may persist for decades, dwarfing any negotiated R&W survival period, and joint and several liability towards prior operators means that the buyer's exposure to the public authority is independent of any indemnity right it may hold against the seller.

These issues are not merely theoretical. In international arbitrations seated in Ibero-America, the characterisation of R&W claims has increasingly become a central and often dispositive issue.^[10]

Drafting strategies for transactional lawyers

If clients (understandably) insist on standardised R&W, lawyers can still (substantially) mitigate the associated risks described above through careful contract design, without abandoning the R&W structure that clients may expect. In particular, the following would be advisable:

1. Select an appropriate governing law. Where the parties have a real choice, selecting English law to govern the agreement insulates the R&W regime from most of the characterisation problems described above. However, this may be incompatible with the rest of the substantive content of a contract intended to produce most of its effects in an Ibero-American country.
2. Exclude competing remedies. Where permitted, the contract should expressly exclude all other statutory remedies that might otherwise apply, designating the negotiated indemnity regime as the sole and exclusive remedy for any breach of a R&W. Such an exclusion should be specific and prominent.
3. Define key concepts with precision. Materiality, knowledge, and related qualifiers should be explicitly defined in the contract to limit interpretive uncertainty and reduce reliance on domestic case law.

Guidance for arbitrators

Arbitrators addressing R&W disputes in Ibero-American seated proceedings face a structural difficulty: the parties' reasonable expectations, as embodied in the contractual text, may conflict with the default or mandatory rules of the applicable law. Several guiding principles may help.

1. Prioritise the parties' agreement. In the context of R&W, this means beginning with the contractual text including defined terms, agreed caps and baskets, remedial limitations and taking into consideration what the parties may have said during negotiations regarding R&W.
2. When possible, use the UNIDROIT Principles as a gap-filler. Where the applicable civil law provides no satisfactory answer, where permissible, arbitrators may invoke the UNIDROIT Principles as evidence of internationally accepted standards of commercial contract law, supplementing domestic law without displacing it. Their provisions on non-disclosure and damages offer a principled framework that is closer to the parties' likely expectations than the rigid civil code provisions applied to facts they were never designed to address.^[11]
3. Respect negotiated limitations on liability. Indemnity caps and deductible baskets are central to the commercial equilibrium of R&W. Arbitrators should be reluctant to override them through analogies to civil law rules limiting exclusion clauses, unless a clearly applicable mandatory rule governs the claim in question. The principle of freedom of contract, affirmed in all Ibero-American civil codes,^[12] should serve as the appropriate starting point.

Conclusion

R&W function effectively within the legal systems that developed them. Transplanted into Ibero-American contracts without structural adaptation, they risk producing outcomes that neither party anticipated and that no legal system handles cleanly. The problem is real and becoming more frequent as cross-border contractual activity in the region increases. Transactional lawyers can mitigate these risks and deliver the protection their clients expect through deliberate contract design, including governing law choices, express exclusions of competing civil law regimes or remedies and the use of precise definitions and concepts. Arbitrators, in turn, can resolve resulting disputes in ways that honour reasonable expectations while maintaining doctrinal coherence. In the absence of a statutory framework for R&W in the region, practitioner ingenuity can and must substitute for legislative design.
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^[1] Their English origin is explained by Tina Stark: “English lawyers created warranties centuries ago to tackle the common law's inflexibility. At the time, no contract-related writ permitted a plaintiff to sue the other side if it had not performed its obligations under the contract. The ever-inventive common law lawyers solved the problem by transforming nonperformance of a contract into a tort—an action of deceit that required reliance. Over time, a suit for breach of warranty became an action of assumpsit, a contract action" (T. L. Stark, Drafting Contracts. How and Why Lawyers Do What They Do (Aspen Coursebook Series: 2014, p 67).  

^[2] For a comprehensive study of the issue of “legal transplants," see A. Watson, Legal Transplants. An Approach to Comparative Law (University of Georgia Press: 1993), especially pp 21-30, 95-101. The same problems, mutatis mutandis, arise from the “transplant" of standardised contractual clauses.  

^[3] T. L. Stark, Drafting Contracts. How and Why Lawyers Do What They Do (Aspen Coursebook Series: 2014, p 66).  

^[4] T. L. Stark, Drafting Contracts. How and Why Lawyers Do What They Do (Aspen Coursebook Series: 2014, p 67). 

^[5] Hadley v Baxendale (1854) 9 Exch 341. 

^[6] A. Watson, Legal Transplants. An Approach to Comparative Law (University of Georgia Press: 1993), pp 21-30. 

^[7] For a contrary view of this issue under Chilean law, see E. Alcalde (2008), 'La cláusula de 'declaraciones y garantías' en la venta de una empresa: naturaleza jurídica y efectos' (2008) 17 Actualidad Jurídica, pp 244-245.  

^[8] In the case of Chile, there are authors such as E. Alcalde who argue that, as a rule, it will always be theoretically possible to request a price reduction in the event of a breach of an R&W, based on articles 1814, 22, and 24 of the Civil Code. See E. Alcalde (2008), 'La cláusula de 'declaraciones y garantías' en la venta de una empresa: naturaleza jurídica y efectos' (2008) 17 Actualidad Jurídica, pp 252-254. Similarly, see R. Quezada, 'La Responsabilidad del Vendedor por Infracción a las Declaraciones y Garantías: Resolución Parcial, Rebaja de Precio e Indemnización de Perjuicios' (2015) 8 Revista de Derecho – Escuela de Postgrado, p 44.  

^[9] See J. Recart, 'Sobre el conocimiento del comprador, antes de la firma del contrato o del cierre, de la falsedad de las declaraciones y garantías' (2020) 47 | 2 Revista Chilena de Derecho, pp 576. 

^[10] E.g. (1) Food Investment SpA; Joyvio Group CO. Ltd. & BJ Joyvio Zhencheng Technology CO., Ltd. v Isidoro Quiroga; Asesorías e Inversiones Benjamín S.A.; María Victoria Quiroga Moreno; María Dolores Quiroga Moreno; María Dolores Feliú Quiroga; Jorge Esteban Feliú Quiroga & Paulina Andrea Feliú Quiroga, CAM Santiago Case No A-5484-2023, Final Decision (22 May 2025); (2) Corporación Financiera Colombiana S.A. v Invercolsa S.A., Cámara de Comercio de Bogotá Case No 938-V, Final Decision (5 May 2005); (3) XX1 S.A. & XX2 S.A. v ZZ S.L., CAM Santiago Case No A-3454-2018, Final Decision (20 June 2020); (4) ASA Bioenergy Holding A.G. and others v. Mr. Adriano Ometto and Adriano Ometto Agrícola Ltda., ICC Case No. 16176/JRF/CA (and related case No. 16513/JRF), Final Award (21 November 2011). 

^[11] See UNIDROIT Principles, Arts. 3.2.7, 7.4.1 and 7.4.13.  

^[12] See Argentinean Civil and Commercial Code, Art 958; Chilean Civil Code, Art 1545; Colombian Civil Code, Art 1602; Mexican Federal Civil Code, Art 1796; Peruvian Civil Code, Art 1354; Spanish Civil Code, Art 1255.