Representations and Warranties in Civil-Law Deals: Lessons from the Australis Annulment

For the first time under its modern arbitration statute, a Chilean court has annulled an international arbitration award. In Food Investment SpA et al. v. Asesorías e Inversiones Benjamín S.A. et al., Corte de Apelaciones de Santiago, Rol N° 17.067-2025 (“Australis”), the court set aside the award as extra petita, holding that the tribunal had granted a price-reduction remedy the buyers never requested. Its lesson reaches every cross-border deal that grafts common-law drafting onto civil-law foundations.

The dispute and the award

The dispute arose from a Share Purchase Agreement (“SPA”) for the sale of a Chilean salmon producer. The buyers alleged that the sellers willfully misrepresented the company’s compliance with environmental regulations. They sought, inter alia, (i) termination of the SPA and reimbursement of the full purchase price (USD 920 million) or (ii) damages measured by the overprice paid for a non-compliant company (USD 620 million). Because the sellers acted in bad faith, the buyers argued, the SPA’s limitations on liability for breach of representations and warranties (“R&Ws”)—including the damages cap—did not apply.

The arbitration was seated in Santiago, administered by CAM Santiago, governed by Chilean law, and heard by three seasoned Chilean arbitrators.

The majority found no bad faith but a breach nonetheless: one representation was incomplete. The sellers suspected, on well-founded grounds, that the regulator would soon tighten enforcement and sanction the company’s overproduction—yet disclosed nothing. On that basis, the majority granted neither termination nor damages but a partial restitution of the price. Invoking the price-reduction logic of the Chilean Civil Code’s hidden-defects and lease provisions as an expression of the “general spirit” of Chilean legislation (Award ¶¶ 322–327), the tribunal recalculated the company’s value and awarded the buyers roughly USD 217 million. One arbitrator dissented, concluding that the sellers had not breached the SPA and that the buyers’ damages claim was, in any event, unfounded (Award ¶ 748).

Kluwer reported the award in detail here.

The annulment

The sellers sought annulment on three grounds: they had no opportunity to be heard on the restitution remedy; the tribunal exceeded the scope of the submission; and the award violated public policy.

The Santiago Court of Appeals agreed, 2–1, and annulled the award on the second ground alone. The award was extra petita under article 34(2)(a)(iii) of the Chilean Arbitration Law (Law No. 19,971, “LACI”), which mirrors the UNCITRAL Model Law and permits setting aside an award that “contains decisions on matters beyond the scope of the submission to arbitration.” Finding the vice inseparable from the rest of the award, the court set it aside in full. The dissenting judge would have upheld the award: the overprice was litigated throughout the arbitration, tribunals may recharacterize claims under iura novit curia, and annulment courts do not review the merits.

What the annulment means for arbitration in Chile

Chile enacted the LACI in 2004, adopting the UNCITRAL Model Law almost verbatim. The statute was a deliberate bid to make Chile a leading arbitral seat in Latin America.

LACI’s article 5 confines judicial intervention to the cases the law expressly allows, and article 34 makes annulment the sole recourse against an award. Since the first annulment petition in 2007, the Santiago Court of Appeals has heard more than twenty challenges to international awards and, until now, rejected every one—two decades of consistent, pro-enforcement jurisprudence. Australis, the first award set aside under the LACI, is a genuine milestone, not a retreat from that record.

Article 34(2)(a)(iii) enforces a bedrock principle: arbitrators’ powers derive from the parties’ consent. The provision traces to Article V(1)(c) of the New York Convention. If the parties did not submit a claim, the tribunal has no power to decide it. That, for the court, was the award’s flaw: no party had asked for a reduction in the price.

Leading arbitral seats police the same limit, whether as an excess of the tribunal’s mandate or as a denial of the parties’ right to be heard on a new basis for relief. In France, the Paris Court of Appeal set aside an award in which the tribunal, rather than awarding the lost profits the claimant had sought, awarded damages for a “loss of chance” the claimant never pleaded and had no opportunity to address (Commercial Caribbean Niquel v. Overseas Mining Inv., 25 March 2010, aff’d, Cass. 1re civ., 29 June 2011). In Switzerland, the Federal Tribunal partially set aside an award that recharacterized a claim for declaratory relief as one for payment (DFT 4A_294/2019, 13 November 2019). And in England, the High Court has confirmed that a tribunal may not decide issues the parties neither raised nor had a fair opportunity to address (Omnibridge Consulting v. Clearsprings, 12 October 2004).

U.S. courts apply the same principle. Section 10(a)(4) of the Federal Arbitration Act permits vacatur where “the arbitrators exceeded their powers.” The Second Circuit gives that provision “the narrowest of readings,” asking whether the arbitrators had the power to reach an issue, not whether they decided it correctly (Jock v. Sterling Jewelers Inc., 646 F.3d 113, 122 (2d Cir. 2011)). Courts have accordingly vacated awards granting relief neither party requested (Totem Marine Tug & Barge, Inc. v. N. Am. Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979); PMA Capital Ins. Co. v. Platinum Underwriters Berm., Ltd., 659 F. Supp. 2d 631, 638 (E.D. Pa. 2009), aff'd, 400 F. App’x 654, 656 (3d Cir. 2010)).

The root cause: a common pitfall in cross-border M&A

Cross-border M&A contracts are typically drafted in a common-law idiom. Representations and warranties ("R&Ws"), indemnities, baskets, caps, and survival periods are the standard vocabulary, whatever the parties’ nationality or the governing law. Read through a civil-law lens, that vocabulary can wrench the dispute away from the facts and toward a threshold question the parties never expected: what their own clauses are, and what their breach yields.

That is what happened in Australis. The tribunal observed that R&Ws are an institution of foreign origin, unknown to Chilean law. Because the Civil Code offers no cause of action fitted to their breach, the majority derived a price-adjustment remedy by analogy to the Code’s price-reduction provisions (Award ¶¶ 322–327). The dissent would instead have applied Chile’s contractual-liability regime, which requires fault (Award ¶ 748).

Had New York law governed the SPA, the threshold contest would not have arisen. R&Ws are a mature construct there: a warranty is a bargained-for assurance of fact, and its breach entitles the buyer to damages on proof that the warranted fact was false—without any showing of fraud, or even of the buyer’s belief in the warranty’s truth (CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503–04 (1990)). Indemnification provisions tied to R&W breaches are routine and generally enforceable (Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 359 (2003)).

Where a local target, local regulators, or mandatory rules foreclose a New York governing law, the contract must do the work the governing law will not. First, define the representations and warranties as autonomous, binding promises that guarantee the truth of specified facts—obligations of result whose breach is established by falsity alone, independent of the seller’s fault or good faith. Second, make indemnification the buyer’s sole and exclusive remedy for their breach, and calibrate it precisely: baskets, caps, de minimis thresholds, survival periods, and a defined claims procedure, so that the remedy is contractual rather than left to the general law. Third, waive expressly, to the extent permitted by mandatory law, the statutory remedies that local law would otherwise supply—rescission, price reduction, and hidden-defect or redhibitory actions—so that no tribunal can reach for them by analogy, as the Australis majority did. Fourth, confront sandbagging head-on: state whether, and to what extent, the buyer’s pre-closing knowledge or due-diligence findings affect its right to indemnification, rather than leaving that question to civil-law doctrines of good faith and fault.

Conclusion

The Australis saga is less about Chile than about a mismatch that recurs wherever common-law drafting rests on civil-law foundations. Confronted with R&Ws that Chilean law does not recognize as a distinct institution, the majority filled the gap with the Civil Code’s price-reduction provisions. Chile’s arbitration-friendly reputation should endure: the annulment marks the outer limit of party consent, not a review of the tribunal’s reasoning on the merits.

The lesson is not unique to Chile. Most civil-law codes lack a bespoke cause of action for breach of R&Ws yet supply their own default remedies—the actio quanti minoris and redhibitory actions descended from Roman law—so the same threshold contest, and the same extra petita exposure, can surface under French, Spanish, and other continental and Latin American laws. Parties who import representations, warranties, and indemnities into a civil-law contract should therefore either choose a governing law that already recognizes them or spell out, in the contract itself, what those clauses mean and what their breach yields.