One-sided contract term of the day (1): warranty of legal effect

This is the first of an occasional series highlighting IP Draughts’s “favourite” one-sided provisions in contracts.  These provisions are often found in contracts where there is an imbalance of power between the parties, as in many financing transactions, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).

Today’s one-sided term is:

The Supplicant represents and warrants that the terms of this Agreement are legally binding upon it.

The risk being addressed here is that the other, one-sided terms of the contract are not enforceable, perhaps because they are so extreme that a court could not bring itself to enforce them, or because despite the Patron’s “no expense spared” attempts to make the contract watertight, his lawyers have overlooked some loophole.

Sometimes, the clause goes on to state that it does not apply if the Supplicant is in liquidation, as liquidators have certain rights to reject “onerous contracts”.

IP Draughts is not sure how it helps the Patron to have a contractual promise from the Supplicant that the terms are binding, as if the contract as a whole is not binding, then presumably that promise will also not be binding.  Perhaps there may be circumstances in which an individual term is not binding but the above promise is binding.  More likely, the clause may give a remedy in tort for misrepresentation, which does not depend on the contract being valid and enforceable.

Often such a term appears in a contract where there are many one-sided terms, and the Supplicant may not have the appetite (or the financial resources) to argue about every one of them.  Sometimes, the Supplicant will choose to focus on the most immediately-unacceptable terms, and let through a large number of others.  He may feel that he would be “bashing his head against a brick wall” if he tried to re-balance the document as a whole.

When IP Draughts has been advising a Supplicant who is generally willing to accept such a term, he has sometimes carved out an exception for breach of competition laws, where it may be very difficult to predict whether there is a “Euro defence”, particularly in technology-related contracts where market shares may be unclear.

IP Draughts scoring for extremeness: 8/10

2 Comments

Filed under Commercial negotiation, Contract drafting

2 responses to “One-sided contract term of the day (1): warranty of legal effect

  1. Vance Koven

    Isn’t the greater irony of this provision that the Supplicant is incapable of representing what is, after all, a legal conclusion? The only thing it can conceivably do is warrant it, in which case the only remedy is contractual, and if the contract as a whole is unenforceable, then neither is the warranty.

    And there you are, out of your difficulty at once!

  2. Whoa! I can’t believe you actually see that. Talk about extreme. (Nice illustrations….)

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