Thank you! Harrisonburg partner Jared Burden and the whole GreeneHurlocker firm are grateful for the great attendance of our business clients and colleagues at our “Top Five Risks When You Sign A Contract” session with our friend Tom Mendez of McGriff Insurance Services yesterday afternoon in our offices in the Smith House. And the after-party, our Open House celebrating the successes of our first year of our Harrisonburg office, was incredible fun and filled the art gallery downstairs. We are pleased to report that all those who attended shared our Holiday spirit and wishes for a prosperous New Year were frequent and heartfelt. We can’t wait for another time to get together, so watch for our next seminar announcement in the New Year. You can see the fun for yourself below.
Lawyers trade in words. It goes beyond dropping Latin phrases like ipsi dixit (“a dogmatic and unproven statement”) and nunc pro tunc (“now for then”) into legal briefs. It is part of the business law as well. Attorneys write into their contracts musty-looking words that are meaningful to them (like “hereby” and “therefor”) to telegraph something to the lawyers on the other side and to courts who might interpret the document years later.
Adherence to customs like this is tied to the fact that lawyers live in a world where the consequences of imprecision can be a serious matter. There are two ways to accomplish precision: write with rigorous terseness that no one can misunderstand or throw up a fence of words that hems in an unruly concept so tightly that it can’t escape.
Representations, warranties, covenants and conditions are found in most commercial contracts of any complexity, such as shopping center leases and an asset purchase agreement. These provisions are, or at least should be, sources of comfort to the parties to a contract, because they can greatly reduce the risk that arises from the unknown. But they are often glossed over by the principals in a deal – perhaps perceived as another lawyerly way of saying the same thing in four different ways.
The contractual basics of offer, acceptance and consideration are usually dispensed with at the top of the book – the first two or three pages of the contract. These provisions establish the “what” of the deal. A few pages in come the provisions in which the parties represent to each other that certain facts are true, warrant that a set of facts are accurate, covenant to do things and not do things, and state the conditions on their performance under the contract. These sections answer the question of “why.” The representations, warranties, covenants and conditions, and the indemnification and remedy provisions that interact with them, lay bare the reasons for the deal – the preconceptions of the parties. This is why these provisions are usually negotiated with a high level of precision, whether the method is the rigorous terseness or the high fence of words.
The four concepts are distinct but interrelated.
- A representation is an assertion of fact that is given by one party to another party to induce that party to enter into a contract, close on the contract, accept the risks inherent in the deal, or take some other action. If the representation of fact is untrue, it is inaccurate, and the remedies for misrepresentation set forth in the contract are available, which could include undoing the contract. The contract sets the remedies.
- A warranty is a promise that the facts asserted are true, which is impliedly supported by a promise to make it right if it isn’t true. If the warranted facts are untrue, it is a breach of contract, which, technically, is different than misrepresentation.
- A covenant is a promise made by a party to take certain action, or refrain from acting. Not doing as promised is a break of contract, and the contract will usually say specifically what the remedies are.
- A condition is a fact that must be true or an event that must have occurred before a party’s obligations or rights are triggered.
Representations and warranties, while technically different concepts, are so closely related to each other in practicality that it is excusable that the two words are written and spoken as a couplet, as with “over and done” and “peace and quiet.” Some commentators point out differences, such as that the former is about the past and the latter is about the future. At the end of the day, though, the distinctions are not important. Courts often ignore the difference between the two terms, and a contract usually provides the same remedies for both.
Quite a bit is going on with representations and warranties in a corporate acquisition agreement. They apportion risk. They create direct claims in the case of inaccuracy. They form the basis of the parties’ indemnification obligations. And, they are informational. The disclosure schedules that lay out the exceptions to the statements of fact will often increase the size of the document to the width of the Hamilton biography or beyond, because it’s in the schedules that the details of the to-be-acquired company are set forth, dialoguing with the legal, financial tax due diligence that the acquirer has undertaken.
Covenants are often intermingled with the representations and warranties – for example, when the party represents and warranties that certain facts will be true at some moment in time in the future. This is not usually a conscious choice, and for a variety of good reasons (often having to do with clarity as to what remedies apply to what breaches), mixing these concepts together should be avoided. It is best to keep the future – the realm of covenants — separate from the present and past – the realm of representations and warranties.
Conditions in a contract are critical because they provide the “outs” that a party needs to have in something as complex and nuanced as a corporate acquisition agreement or the contract to purchase an office complex. The list of things which must be true to finally and inalterably bind a party to close on such a deal is long, and among the most important of them will be that the reps and warranties are accurate as of the closing date and that all actions that the other party has covenanted to take have been taken.
Some say that the only time contracts are necessary is when everything is falling apart. If that is true, then representations and warranties, covenants, and conditions – and the thick disclosure schedules and indemnification and remedy provisions they spawn – are truly at the beating heart of the business deal.