The Phrase "Represents and Warrants" Is Pointless and Confusing

About the Authors:

Kenneth A. Adams is author of A Manual of Style for Contract Drafting (3d ed. 2013) and gives seminars throughout the U.S. and internationally. He can be contacted at kadams@adamsdrafting.com. This article is derived from the author’s article Eliminating the Phrase Represents and Warrants from Contracts, 16 Tenn. J. Bus. L. 203 (2015), a copy of which is available here.

In the United States, courts and most practitioners attribute no particular significance to use of the phrase represents and warrants to introduce statements of fact. By contrast, some commentators suggest that the phrase has implications for remedies or pertains to the timeframe of the facts in question. In fact, the phrase is pointless and confusing.

This article will show that to avoid confusion, you should do two things. First, use states to introduce statements of fact in a contract. And second, if you want to exclude particular remedies or make sure that they’re available, do so explicitly instead of relying on what is inscrutable and unreliable code.



Usage

In business contracts, represents or warrants or both are used to introduce statements of fact by parties – statements relating to matters that they broadly control or that fall within the scope of their operations. (A different function is served by use of the verb warrants and the noun warranty on their own, without represents and representation, regarding goods in a contract for the sale of those goods. That’s beyond the scope of this article.)

Remedies for Inaccurate Statements of Fact

Determining what represents and warrants each mean requires considering the remedies available under U.S. law for inaccurate statements of fact in a contract.

Due to how the common law has developed, if a party’s statement of fact turns out to have been inaccurate, the counterparty might be able to bring a tort-based claim for misrepresentation, a contract-based claim for breach of warranty, or both.

In that context, the simplest meaning of representation is that it’s a statement of fact that might support a claim for misrepresentation. And the simplest meaning of warranty is that it’s a statement of fact that might support a claim for breach of warranty.

The Remedies Rationale

Some U.S. commentators have attempted to attribute significance to each verb in represents and warrants. They fall into two camps, one offering what this article calls the “remedies rationale,” the other offering what this article calls the “timeframe rationale.”

Whether a contract party is able to bring a claim for misrepresentation or a claim for breach of warranty for an inaccurate statement of fact made by the other party can have significant practical implications. According to the remedies rationale, a drafter can ensure that a statement of fact is treated as a representation, as a warranty, or as both by introducing that statement of fact with represents, warrants, or both, respectively, or by identifying that statement as a representation, a warranty, or both. The most vocal advocate of the remedies rationale is Tina L. Stark, in her book Drafting Contracts: How and Why Lawyers Do What They Do 15, 137–38 (2d ed. 2014).

The remedies rationale comes in two flavors, which this article calls “permissive” and “restrictive.” Under both the permissive remedies rationale and the restrictive remedies rationale, explicitly describing a statement of fact as a representation, a warranty, or both, by means of an introductory verb or otherwise, is sufficient to make it so.

Where the permissive and restrictive rationales differ is how they treat a statement of fact that isn’t introduced by represents or warrants, or both, or otherwise explicitly characterized as a representation, a warranty, or both. Under the permissive version, such a naked statement of fact could still be deemed a representation or warranty, respectively, depending on the nature of the statement itself. By contrast, the restrictive version holds that a statement of fact will support a claim for misrepresentation only if it is introduced with represents or is referred to as a representation, and a statement of fact will support a claim for breach of warranty only if it is introduced with warrants or is referred to as a warranty. So under the restrictive version, failure to use represents, warrants, or both, or to otherwise explicitly characterize a statement of fact as a representation, a warranty, or both, should prevent that statement from being deemed a representation or a warranty, or both, respectively.

In a comment to a blog post by this author (here), Stark has stated that she doesn’t suggest that using represents or warrants is the only way to make something a representation or warranty. That means she in effect endorses the permissive remedies rationale.

By contrast, Bryan Garner in effect endorses the restrictive remedies rationale. In the entry for representations and warranties in Garner’s Dictionary of Legal Usage 775 (3d ed. 2011), Garner suggests that if a statement of fact is introduced by only warrants and not represents, it wouldn’t constitute a representation supporting an action for misrepresentation: the drafter would be in a position to limit what sort of claims could be brought for an inaccurate statement of fact regardless of the nature of that statement of fact.

Both flavors of the remedies rationale fall short in several respects.

It Seeks to Apply to All Kinds of Contracts

First, represents and warrants is used in every kind of contract. It’s well known that the law of warranties applies to the sale of goods, but even if you also take into account the role of the law of warranties in negotiable instruments, bank deposits and collections, letters of credit, documents of title, and investment securities, all sorts of contracts that use represents and warrants would fall outside the scope of the law of warranties as it’s generally understood. It follows that treating as a warranty any contract statement of fact introduced by warrants or referred to as a warranty would require extending the law of warranties to statements of fact to which the law of warranties as it is generally understood wouldn’t apply. There’s no principled basis for doing so.

It Seeks to Override Actual Meaning

Second, caselaw and, with respect to warranty, the Uniform Commercial Code specify the elements of a claim for misrepresentation and a claim for breach of warranty. Allowing drafters to designate what constitutes a representation or a warranty just by saying so would render those requirements irrelevant.

Imagine that a contract contains the following sentence: Acme represents that it shall promptly replace defective Equipment. Even though it uses represents, that sentence imposes an obligation, so according to caselaw on the elements of a claim for misrepresentation, it wouldn’t constitute a representation supporting a claim for misrepresentation. It would elevate form over substance to suggest that use of represents would be enough to make that sentence a representation.

It would be equally bizarre to conclude, as the restrictive remedies rationale requires, that an intended remedy isn’t available because it’s not introduced by the appropriate verb. For example, if a party’s statements of fact are introduced by neither represents nor warrants, according to the logic of the restrictive remedies rationale the counterparty would have no remedy, regardless of the nature of those statements. It would be hard to justify that.

It’s Not Supported by the Law

Third, this author has found no U.S. caselaw supporting the notion that if you use represents in a sentence, what follows will as a matter of law constitute a representation supporting an action for misrepresentation, regardless of what the sentence says, or that if you use warrants in a sentence, what follows will as a matter of law constitute a warranty supporting an action for breach of warranty, regardless of what the sentence says.

As for the restrictive version of the remedies rationale, there’s no meaningful support for the notion that to constitute a representation, a statement must be introduced by represents or referred to as a representation, and to constitute a warranty, a statement must be introduced by warrants or referred to as a warranty. Instead, there’s caselaw to the opposite effect, in that use of represents or representations in a contract hasn’t precluded some courts from holding that the statement in question is actually a warranty. And section 2-313(2) of the Uniform Commercial Code states that “[i]t is not necessary to the creation of an express warranty that the seller use formal words such as ‘warrant’ or ‘guarantee’ or that he have a specific intention to make a warranty.”

Semantically, It Makes No Sense

Fourth, the semantics of the remedies rationale makes no sense. To permit the verb to have remedies implications, or to require it do so, is to impose on the verb a semantic function it doesn’t have in standard English. It’s unreasonable to expect readers to make that connection.

It’s Doesn’t Explain Current Practice

And fifth, what is the simplest explanation for prevalence of use of represents and warrants outside of the context of statements of fact relating to goods? It isn’t that after considering potential remedies if a dispute occurs, contract parties opt to make it explicit that inaccurate statements of fact could give rise to an action for misrepresentation or an action for breach of warranty, or both.

Instead, if contract parties are presented with three options with ostensibly meaningful implications – represents, warrants, or represents and warrants – yet overwhelmingly opt for represents and warrants regardless of the nature of the transaction, the simplest explanation is that they don’t recognize that they’re making a choice.

That impression is reinforced by the way mergers-and-acquisitions contracts generally provide for indemnification as the exclusive remedy yet overwhelmingly use represents and warrants. If use of represents and warrants is an empty gesture there, economy of hypothesis suggests that it’s an empty gesture elsewhere. It also follows that there’s no reason to attribute significance to use of either represents or warrants alone.

So it’s reasonable to conclude that in the United States, the remedies rationale for use of represents and warrants is of no practical relevance.

The Timeframe Rationale

The clearest articulation of the timeframe rationale for using represents, warrants, or both is that offered by the Section of Business Law of the American Bar Association in the ABA’s Model Stock Purchase Agreement with Commentary (2d ed. 2011), which uses the phrase represents and warrants. At page 77, it says, “Representations are statements of past or existing facts and warranties are promises that existing or future facts are or will be true.” If you take that at face value, it follows, according to I Business Acquisitions 170 (John W. Herz & Charles H. Baller, 2d ed. 1981), that “[a] party can, for instance, represent and warrant that as of a prior date his net worth was $75,000; he can also warrant that as of a future date his net worth will be that amount.”

If one looks hard enough, one can find caselaw and other commentary that endorses the timeframe rationale. But the timeframe rationale suffers from flaws that render it untenable as an explanation of how one should use represents and warrants in contracts.

It Seeks to Apply to All Kinds of Contracts

First, as with the remedies rationale, the timeframe rationale is inconsistent with the law of warranties, because it suggests that a statement of fact can be a warranty not just in contracts for the sale of goods and other contracts to which the law of warranties has been held to apply but in any kind of contract.

It’s Not Supported by the Law

Second, one requirement of an action for misrepresentation is indeed that a party have made a false representation as to fact with regard to a past event or present circumstance, but not a future event – when a statement as to future circumstances is made there is no way to determine when it is made whether it’s accurate or not. But nothing in the law of warranties suggests that to be a warranty a statement of fact must pertain only to existing or future facts. Instead, the Uniform Commercial Code § 2-313 says that “[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain” is sufficient to create an express warranty.

Semantically, It Makes No Sense

And third, even if the law of warranties were to apply to every contract, and even if warranties were to pertain only to existing or future facts, the timeframe rationale would still fail because as a matter of semantics, it doesn’t make sense.

For the timeframe rationale to apply to contract language, a drafter would have to choose the verb that introduces a statement of fact based on the nature of that fact. As the ABA’s Model Stock Purchase Agreement suggests, that would be “a drafting nuisance” – drafters would have to use represents or warrants to introduce a given statement of fact, depending on whether that fact is a past or existing fact or a future or existing fact, respectively. But more to the point, that exercise would be a charade. It would be evident from a statement of fact itself whether it’s a past fact, existing fact, or future fact, so taking the time to make sure that the verb used to introduce that statement of fact matches its content would add no value. And the timeframe rationale suggests the bizarre result that if a statement of past fact were introduced by warrants instead of represents, it wouldn’t constitute a past fact and so couldn’t be used to support an action for misrepresentation.

So as an explanation for why contracts use the phrase represents and warrants, the timeframe rationale is as lacking as the remedies rationale.

A Solution

The main problem with the verbs represents and warrants, used together or apart, is that some think, despite lack of any plausible basis for doing so, that they imply particular remedies. One can expect that those who embrace or tolerate the remedies rationale despite its weaknesses will continue spreading confusion. That could lead to time wasted in negotiations, as well as time and money wasted in contract disputes that could have been avoided.

Furthermore, by using represents or warrants or both to introduce statements of fact, one unnecessarily injects jurisprudence terms of art into contracts. That makes contracts less clear, even for those who aren’t inclined to see the verbs as having remedies implications.

There’s a simple two-part solution: use states to introduce facts and address remedies directly.

Using States

The first part of the solution aims to eliminate confusion: Don’t use represents, warrants, or the phrase represents and warrants to introduce statements of fact.

It would be best to introduce statements of fact using the simplest verb available, namely states. Other alternatives, such as asserts and confirms, carry unnecessary rhetorical baggage. Use of states suggests use of the corresponding noun phrase statement of fact instead of representation and warranty.

When introducing a series of statements of fact, it would be best to use as the introductory phrase [Party name] states that the following facts are accurate, if only to ensure that you have a full independent clause before the colon that follows. One wouldn’t need to signal that an inaccurate statement of fact can give rise to a remedy, just as one doesn’t need to signal that failure to comply with an obligation gives rise to a remedy.

Using states to introduce statements of fact would be a complete break with current practice. But the test of drafting usages isn’t profession-wide consensus – they’re not subject to a popular vote. Anyone who drafts or reviews contracts has the power, and the responsibility, to express the transaction as clearly as possible, even if doing so requires embracing change. But it makes sense to preempt resistance by explaining in a cover note, perhaps as part of a general explanation of contract usages, why a given draft uses states. (Go here for a blog post by this author discussing use of such a cover note.)

Lawyers on one or both sides of a transaction might be concerned that states has unknown implications for remedies. You could allay those fears by adding to a contract the following: The verb used to introduce a statement of fact in this agreement does not affect the remedies available for inaccuracy of that statement of fact.

A drafter stuck with using represents or warrants or both could also use that sentence. That situation might arise if using states would meet too much resistance or provoke too much discussion. That’s more likely to be the case when you propose revising the other side’s draft to use states as opposed to using states in your own draft.

Addressing Remedies Directly

The second part of the solution to problems posed by represents and warrants aims to establish clear meaning: If remedies are an issue, address remedies explicitly. Putting one’s faith instead in the smoke-and-mirrors of any combination of represents and warrants is nothing short of irresponsible.

Expressing the equivalent of represents or warrants or both would be straightforward. Instead of using represents and warrants to introduce statements of fact, a drafter who embraces the remedies rationale could achieve the same effect by stating that each party may bring a claim for misrepresentation, a claim for breach of warranty, or both if the other party makes inaccurate statements of fact. And instead of using just warrants, a drafter who embraces the restrictive remedies rationale could achieve the same effect by stating that each party waives any right to bring a claim for misrepresentation if the other party makes inaccurate statements of fact; one could also make it explicit that each party may instead bring a claim for breach of warranty. (The mirror-image of that provision would express the restrictive-remedies-rationale equivalent of using just represents.)

Electing one remedy over the other might offer advantages. For example, a claimant might prefer being able to bring a misrepresentation claim over a breach-of warranty claim if doing so offers a longer statute of limitations or seems likely to permit a claim for a greater amount damages, even if the claimant would have to meet a greater burden to prevail.

But for five reasons, the utility of such provisions is uncertain.

First, the likelihood of being able to enforce such provisions is mixed. Saying that a party may bring a particular kind of claim doesn’t guarantee that a court would find that a party had met the requirements for that kind of claim. But courts in the United States generally accept that parties may exclude remedies by contract, subject to a fairness or reasonableness standard.

Second, such provisions are limited in scope. A simple statement that a party waives any right to bring a claim for misrepresentation presumably leaves a claimant seeking to impose extra-contractual liability plenty of room for mischief.

Third, rote limiting of remedies might not make sense for a given transaction.

Fourth, for many contract parties, considering the potential sources of dispute and the remedies implications of any such dispute could be distracting, time-consuming, and ultimately speculative.

And fifth, if a party wishes to control remedies, it might well elect to do so more simply and assertively by providing for indemnification or liquidated damages or by imposing limits on liability, bearing in mind that doing so effectively poses a different set of challenges.

But all those issues are beyond the scope of this article. What’s relevant for present purposes is that instead of using represents, warrants, or both with the aim of including or excluding particular remedies, it would be clearer to express the intended meaning explicitly, although it’s a separate question whether doing so would be worthwhile.

Additional Resources

For other materials on this topic, please refer to the following. 

ABA Web Store

A Manual of Style for Contract Drafting, Third Edition (Book) (Book + E-Book)
With A Manual of Style for Contract Drafting, Third Edition, Kenneth A. Adams has created a uniquely in-depth survey of the building blocks of contract language. This manual focuses on how to express contract terms in prose that is free of the archaisms, redundancies, ambiguities, and other problems that afflict traditional contract language. With exceptional analysis and an unmatched level of practical detail, Adams highlights common sources of confusion and recommends clearer and more concise alternatives.

Advertisement

Web_IssuePDF_big
Web_Section_Home
Web_LastLaugh
cartoon

The September issue of Business Law Today will feature topics and advice for business lawyers such as smart contracts, what structured negotiation can offer business attorneys, shareholder activism, and more.

Do you have a great idea for a BLT article? Would you like to see more of a featured column? Let us know how we can make Business Law Today the best resource for you and your clients. We welcome any suggestions. Please send us your feedback here.

Business Law Section Annual Meeting
September 14-16, 2017
Chicago, IL

Miscellaneous IT Related Legal News (MIRLN) 6 - 26 August 2017 (v20.12)

BLT is a web-based publication drawing upon the best of the Section's resources, including featured articles and other information from around the Section. Stay informed on the latest business law practice news and information that will benefit you and your clients.