Contractual Agreement & Legal Services

Well, generally speaking, a claim for breach of a covenant may be for damages or specific performance. When a breach of a covenant is “material” (i.e.,a breach that destroys the value of the contract for the non-breaching party), however, it excuses the non-breaching party’s performance. This often is subjective and can be expensive to prove in later litigation. (Thus, the more specificity drafted into a contract – i.e.,a listing of the specific and most-likely events that trigger a termination event – the better that contract protects the parties.)

Upon a false representation (or misrepresentation), however, the defrauded party may elect to void the entire contract and recover any sums paid. When a breach of warranty occurs, the damages recoverable are the difference in the value as warranted (i.e.,how they should have been) and the value as received. This is because “representations” should be statements made by a party after investigation and with a belief that such statements are true, and “warranties” should be statements a party makes while willing to accept financial responsibility if the statement turns out to be untrue, regardless of whether they actually (or should have) investigated.

In sum, upon a breach of a covenant or breach of warranty, the contract remains binding and damages only are recoverable for the breach; whereas, upon a misrepresentation, the defrauded party may elect to void the entire contract. When you consider the differences in available remedies (and applicable statutes of limitations), it is important to understand whether a covenant, representation or warranty should be made during the drafting of each clause in the contract.

The commonly-held paradigm that “representations” cover past and existing statements, and “warranties” cover existing and future statements is as solid as a published patent application’s claims before a first Office action. That is probably why it has become commonplace for contract drafters to use the form: “Party A represents and warrants[insert statement(s) of fact].” But, what does that mean? One could argue that the defrauded/non-breaching party would then have a choice as to an action for (fraudulent, negligent and innocent) misrepresentation, or an action for breach of warranty if the statement turns out to be untrue. But not all commentators and courts may agree with that conclusion. Surprisingly, the leading contracts hornbook I used in law school is silent on this issue!

The fact of the matter is that using “represents and warrants” may not affect the choice of action an aggrieved party may bring in some circumstances and jurisdictions. But, those of you who have read my previous post on using both words (and digits) to express numbers, know that I dislike archaic practices that no one bothers to question. By the same token, one commentator has observed that: “[T]hese usages often render the modern contract an utter chore to draft, read and interpret. They also encourage a general heedlessness as to meaning, thereby increasing the odds that a given piece of contract prose will contain a drafting flaw that results in a dispute or deprives a client of an anticipated benefit.” The solution? In the context of an IP license, one could always use the broader terms “representations” or “represents,” and avoid “warranties” or “warrants” because these latter terms may imply an obligation. Then, similar to my advice with respect to covenants, one may consider being more specific with respect to the aggrieved party’s remedy if a factual assertion proves untrue (e.g.,termination, money damages, substitution, indemnification, etc.).>