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  • Writer's pictureLaura J. McPhee

Decoding the Fine Print: The Role of Representations, Warranties, and Covenants in Contracts

By: Laura J. McPhee and Thomas O'Leary


When businesspeople discuss contracts, the terms "representations", "warranties", and "covenants" are sometimes used interchangeably. However, each describes a distinct type of provision with a distinct purpose for ensuring that contracting parties fulfill their obligations and receive their bargained-for consideration. In this blog, we consider these distinct types of terms and the role they play in both common transactions and complex agreements.


Representations: Temporal Statements of Fact

Representations are assertions made at a given time, reflecting the condition or the history of an asset or party. For instance, a seller might represent that a property has no pending legal issues. In financial contexts like loan agreements, borrowers provide representations about themselves and their assets to convince lenders to extend funds. These are foundational claims which a party relies on to enter a transaction. Importantly, representations focus on past or present facts but do not guarantee future conditions. Where representations are later found untrue, the party that relied on those representations is entitled to exercise contractual remedies, often including the ability to seek damages or even recission of the entire contract.


Warranties: Guarantees of Future Quality, Performance, or Condition

Contractual warranties are contractually binding undertakings which take representations a step further by guaranteeing future accuracy. They often carry a promise of a cure, repair or replacement (i.e. an indemnity) in the event of breach. A breach of warranty occurs when a warranty is not fulfilled, allowing the party that relied on the warranty to exercise their contractual remedies, often including the ability to seek damages. 


Covenants: Promises of Future Action

Covenants, unlike representations and warranties, deal with future actions by the party covenanting. They are commitments to do or abstain from doing something, such as a seller's promise not to engage in competitive activities. These can be vital for maintaining conditions agreed upon during the transaction and protecting the value of the bargain for the beneficiary of the covenant. A breach of a covenant occurs when a party fails to abide by the terms of the covenant. When a breach occurs, the party that was to benefit from the covenant may seek damages, specific performance and/or injunctive relief in response. 


Practical Implications and Contracting Pitfalls

Understanding these distinctions is crucial for accurately recording, interpreting, and enforcing the bargain made between the parties. They define the obligations extended and due in a variety of different ways and significantly impact grounds for legal recourse in the case of a breach. Confusion as to the nature and function of these types of contractual clauses can lead to ambiguity, uncertainty, and legal disputes. Intended protections may not be enforceable or may give rise to limitations of remedies that were not intended nor desired by the parties. Serious stuff!


Conclusion

Regardless of business context, recognizing and correctly using representations, warranties, and covenants can significantly impact the security and enforceability of a contract. Contracts should clearly distinguish between (i) the past and present assurances provided by representations, (ii) future assurances of quality, performance, and condition as provided by warranties, and (iii) covenants promising future actions. Parties to a contract and their advisors must pay keen attention to these elements to safeguard their interests and ensure clarity and fairness, and to avoid unpleasant surprises when breaches occur.

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