Warrant only facts (not law or opinion)

The contract drafting world [the what world?  Never heard of it, says Mr Pettifog] is currently debating Ken Adams’ decision to abandon represents as his single word of choice to replace the US lawyers’ conventional nonsense of saying “represents and warrants” (or, sometimes, “represents, warrants and undertakes”) in contracts.  Ken is the author of a leading US textbook on contract drafting, A Manual of Style for Contract Draftingwhich is published by the American Bar Association.  MSCD recommends use of represents.  Ken now thinks he was weak to alight upon represents, and that he did so because he thought a more radical solution,  not using any of these legalistic words, would be a step too far for lawyers who are in thrall to the “magic wordery” of the courts.

Ken now proposes to abandon represents and to use instead the phrase states the following facts, which is to be combined with a separate clause providing that the stater of the fact is liable in damages if the fact turns out not to be true.  Some commentators think that he has finally lost his marbles.  IP Draughts is still mulling over whether this proposal supports (some of) Ken’s stated objectives, ie using “standard English”, improving the clarity of the drafting and thereby making it less likely that parties will go to court over the meaning of the words used.

IP Draughts has a niggling concern that in everyday usage, “stating” something could be thought of as less than a promise for which the stater takes legal responsibility.  Even though this problem is solved with the separate clause that Ken proposes, is this any more straightforward than using the single word warrants which arguably has less everyday baggage than states; the former might be recognised by the non-lawyer as a technical word on which he should seek advice as to the legal effect of the word in the contract.

Interesting as this all is, it is not the main purpose of this blog posting.  Instead, the discussion of states on Ken Adams’ blog flushes out an issue that has been at the back of IP Draughts’ mind for some time: what is it sensible for a party to warrant?  Sometimes warranties (and for now, IP Draughts will refer to these pesky provisions as warranties) do more than state facts that are within the  warrantor’s knowledge.  When they do so, they often seek to allocate risk for the unknown or unknowable.  Is this a legitimate function of a warranty?

Let’s consider some examples, extracted from a published precedent for an aircraft lease (not drafted by us!):

In order to induce the Lessor to enter into the Agreements and to lease the Aircraft to the Lessee hereunder and as a condition precedent of the Lessor’s agreement to lease, the Lessee hereby represents and warrants that:

  1. it is a company duly incorporated in [     ] with limited liability and no order has been made or petition presented or resolution passed or is contemplated for winding up the Lessee;
  2. it has the power to enter into and perform its obligations under the Agreements and that it has taken all necessary corporate and/or other action to authorise the making, delivery and performance of the Agreements which constitute the legal, valid, binding and enforceable obligations of the Lessee; and
  3. the choice by the Lessee of [      ] law to govern this Lease and the submission by the Lessee to the jurisdiction of the English courts are valid and binding.

Leaving aside the legalistic, belt-and-braces wording in the introductory part of these warranties, and the use of represents and warrants, which parts of this text are sensible to warrant?  (Also leaving aside the cynical comment that if you want the money for your aircraft, you just have to sign the lease, warts and all.)

In IP Draughts’ view, it should be relatively straightforward to warrant the incorporation part of clause 1 as this is a factual matter; the second part of that clause, dealing with winding-up, is also factual, but should perhaps be revised to make it a knowledge-based warranty.

Similarly the first part of clause 2 should be do-able, up to the word “which”.  But is it sensible to warrant that the Agreements are legally enforceable on the Lessee?  This is not a statement of fact: it is a legal question.  IP Draughts notes that in US transactions one often sees the parties’ attorneys issuing opinion letters on just this point.  Ultimately, it can only be a matter of opinion as to whether obligations are legally binding, until a court (having jurisdiction and subject to any right of appeal) decides the matter.  Similarly, the warranty quoted at clause 3 is not a factual matter but a question of law, and completely outside the control of the Lessee.

Pushback can be very hard work

If the Lessee pushes back on these points in negotiations, the Lessor’s response may be that there is a potential risk to the Lessor that the Agreements are not binding on the Lessee or that the named courts will not accept jurisdiction, someone has to take these risks, and the Lessor wishes the Lessee to take the risks.  While IP Draughts can see the spreadsheet-logic of this position, he is not convinced that it is a suitable subject for warranties.  If such a risk-allocation measure is to be included (rather than just tell the Lessor to take his own legal advice, and point out that all transactions involve risk), it might be better expressed as an indemnity, perhaps in a separate agreement (because if this Agreement is not binding, perhaps the indemnity won’t be binding either).

In the case of IP contracts, an example of a warranty dealing with a legal question is “The Licensed IP is valid and enforceable”.  Many licensors would strongly resist such a warranty on commercial grounds.  Perhaps there is also a technical point to be made, that warranties should only deal with questions of fact, and all warranties that go beyond questions of fact should be deleted as a matter of principle.

Do you agree?

3 Comments

Filed under Contract drafting

3 responses to “Warrant only facts (not law or opinion)

  1. I have always liked “represents” as I tend to think of the warranties as the part of the agreement where any representations that have induced a party to enter into the contract are repeated. I generally explain it to clients this way, when trying to identify any non-standard warranties that should be included in the agreement. So maybe the fact/non fact distinction is not ideal. The warranties should address issues which are critical to a party’s decision to proceed and upon which they have valued the subject matter of the contract. For example, take warranties relating to non-infringement of IP. I don’t warm to such warranties, particularly if not limited to awareness, but if technology has been valued/sold on the basis or assumption that it is free of third party rights, then it may be appropriate for the vendor/licensor to give such a warranty, even though infringement is ultimately a question of law.

  2. Mark: My recent exploration of “language of belief” and “language of intention” have led me to the same place: the standard “valid and binding” language included in representations doesn’t constitute a statement of fact. Instead, we’re dealing with risk allocation. It’s interesting, and perhaps a little disturbing, how paying attention to semantics can make one question the established order.

    Regarding using “warrants,” according to the Uniform Commercial Code adopted by the different U.S. jurisdictions, a warranty can be both a statement of fact and a promise. Because “warranty” is, at least in the U.S., a more problematic word, in MSCD I opted for “represents.”

    So for you, “warrants” represents a kind of code, so that the client will realize that this is stuff that it needs help with. I’m opting for “states” because it has zero baggage: Just the facts, Ma’am. If there are any implications for remedies, I make them explicit.

    Ken

  3. Excellent points, Mark — especially “if this Agreement is not binding, perhaps the [warranty that the Agreement IS binding] won’t be binding either.” I’ve always wondered about the by-the bootstraps logic of that one.

    The last picture and its caption were great choices, too (and brought back memories).

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