Warranties and representations are some of the most important provisions in any agreement; in fact they are fundamental. To recap a prior post, a ‘warranty’ is a promise that a statement is true, and a ‘representation’ is a statement of fact which applies to the past or present and is intended to induce its recipient to act. The remedies for breach of either are different, and the recipient will want to receive both in any contract to ensure maximum enforcement rights.
A breach of a ‘representation’, or more correctly a ‘misrepresentation’ (representations are not promises and cannot be breached), can be innocent, negligent, or fraudulent. All misrepresentations must be material, meaning that a misrepresentation must pertain to an important part of the agreement and bargain. If a misrepresentation is innocent or negligent, the standard remedies are avoidance and restitution. Avoidance, which is the same as rescission, simply means the unwinding of an agreement, as if it had never occurred. Restitution means that each party returns to the other all that it has received, and the agreement becomes null. If a breach is fraudulent, meaning it was perpetrated knowingly and with intent to defraud, the injured party has a choice of remedies. The first choice is restitution, as with the breaches discussed above, the other choice is to retain the benefits of the agreement and seek damages in fraudulent misrepresentation, which may include punitive damages (monetary punishment).
With fraudulent misrepresentation the damages calculation used in Texas, and a majority of states, is the benefit of the bargain measure of damages. This simply means that the damages are calculated as if the breaching party had performed as promised. The number is obtained by subtractive the actual value received from the value of the benefit as represented. So, if an item was purchased for $5k, with a promised value of $10k, and in fact turns out to be worth $3k, the benefit of the bargain measure would mean the proper damages would be $7k, not $5k (the amount paid). The formula is: value as promised-actual value=damages.
The other measure of damages used by a minority of states is the out of pocket measure. This simply means that the actual value is subtracted from the amount paid. In the above example the amount paid was $5k-actual value $3k=damages in the amount of $2k. You can see that the benefit of the bargain measure provides a greater recovery for the plaintiff, and most would agree it is the more fair measure because the buyer relied on the promise that the value of the bargain was much greater than the amount being spent, otherwise the buyer would not have entered the transaction. Punitive damages are also available and should be sought in most cases. The measure for this type of damages is the amount which a court or jury would consider just and sufficient to compensate the victim for other than financial injury, deter further wrongdoing by the defendant, and affirm the public policy of deterring civil wrongdoing.
A breach of warranty will have the standard measure of damages which is the benefit of the bargain described above. The highest potential recovery will dictate the damages sought, which are likely to be benefit of the bargain for breaches of warranty, and benefit of the bargain to include punitive damages for fraudulent misrepresentations. Innocent and negligent misrepresentations will cause a contract to be unwound, avoided and restitution paid to the injured party so the parties end up as though the contract in dispute had never existed.