Representations, Warranties and Covenants

Many attorneys use representations, warranties and/or covenants as a single grouped concept, e.g., “represents, warrants and covenants” or “represents and warrants.”  Some tend to view them as synonymous terms.  However, they’re not meant to be interchangeable – each is separate and distinct from the other, has different temporal characteristics, and has different remedies.  Understanding the differences between them and using them appropriately can be important to ensure that the right remedies attach to the right terms in an agreement.  Using these terms properly also helps attorneys be as clear as possible in their agreements, which can be very important if non-attorneys are reading or reviewing them.

Representations are statements of past or present fact or circumstance.  It’s a contractual statement that a fact or circumstance is presently true, and/or has been true in the past.  An example of a representation is “the execution of this Agreement does not conflict with any obligation to which the party is currently bound.”  This is a present statement of fact — signing the agreement by that party will not result in a breach of another agreement.  Representations are generally included in an agreement to induce a party to enter into an agreement in the first place (without representations as to certain present circumstances and/or past facts, the other party wouldn’t execute the agreement), and are either true or not at the time the representation is made.  This is why breach of a representations gives rise to a remedy that breach of warranty or covenant does not – breach of a representation may give rise to a right by the non-breaching party to void the entire agreement, under such theories as fraudulent misrepresentation or fraudulent inducement to contract.  The non-breaching party may be able to recover “rescission” damages to put it in the position it was in prior to execution of the agreement (e.g., repayment of fees paid). The damages available for breach of a representation is an important reason why using “represents and warrants” or “represents, warrants and covenants” too liberally can lead to unintended consequences.

Warranties are statements of current and future condition.  It’s a contractual statement that a condition is, and/or will be, true for a period of time (often the term of the agreement).  An example of a warranty is “the software licensed hereunder conforms in all material respect to its documentation.”  This is a statement of current and future condition – the software licensed in the agreement are in conformance to the software documentation.  The statement may be true at the time the warranty is made, but may be breached during the course of the agreement (e.g., if a maintenance release breaks something).  In the event of a breach of warranty, the non-breaching party may be entitled to damages resulting from the breach, and in many cases a contract will provide for specific remedies in connection with a breach of warranty (e.g., commercially reasonable efforts to repair). However, unlike a representation, a breach of warranty does not give rise to a right to void the contract.

Covenants are promises of future action or inaction.It’s a contractual statement that a party will do, or will not do, something during a period of time (often the term of the agreement).  An example of a positive contractual covenant is “Party A shall issue a press release announcing the relationship within 30 calendar days of the Effective Date”; an example of a negative covenant is “Party A shall not issue a press release or make any public statement regarding the terms of the Agreement during the term of this Agreement.”  The action or inaction will occur in the future, not at the time the covenant is made.  In the event of a breach of a covenant, in addition to damages for breach of contract, if the covenant is material enough it could excuse the future performance of the non-breaching party (e.g., the breach of covenant frustrates the purpose of the agreement such that continued performance no longer matters).  Further, unlike the breach of a representation or warranty, the breach of a covenant may give rise to injunctive relief.