I thought that after my recent post on using states instead of represents and warrants (here) I’d feel at peace. But it was not to be.
Instead, I felt a yearning, that something was missing. And I knew what I had to do. I set off on my quest, and in the Karakoram, on a ledge high on Gasherbrum IV, I found the wise man, sitting cross-legged. Yes, it was Glenn West, author of this sacred text on extra-contractual liability.
I asked Glenn what he thought of my post. Below is our exchange. At the risk of oversimplifying, Glenn is OK with the logic behind using states, but he suggests that what verb you use to introduce statements of fact is a sideshow compared with including in a contract a provision precluding extra-contractual liability. And he recommends that I devote attention to to the way drafters use statements of fact as a means of risk allocation.
For my part, I suggested to Glenn that even with possibility of addressing extra-contractual liability explicitly, there’s still value to squelching the magic-word approach. And yes, I’ll be devoting attention to the risk-allocation function of statements of fact. In other words, it’s possible to work simultaneous on different fronts.
And our exchange can serve as a reminder that Glenn and I have long been in agreement that the magic-word approach to represents and warrants lacks any caselaw or statutory support in the U.S. and is a misbegotten alternative to addressing remedies directly.
Now, on to the exchange:
Ken: I am bemused by your return to the “represents and warrants” debate. While I was never a fan of “represents” given its historical, extra-contractual connotation, neither “represents” nor “warrants is immutable; neither term has a fixed definition with fixed consequences for its usage. Substituting yet another term, like “states,” “promises” or “guarantees” will not change the outcome. In most states in the U.S., a statement of fact expressed in a contract upon which the counterparty relied to its detriment can form the basis of a tort claim for misrepresentation regardless of the moniker used to assert that purported fact. At the end of the day, a “warranty” can in fact constitute a “representation” in certain circumstances and a “representation” can also constitute a “warranty;” and since both can be “statements” or “promises” or even “guarantees” of existing fact, the answer cannot be found in choosing the right word for the lead-in to the factual assertions that form the basis for so many of our contracts, particularly when the intent behind those factual assertions is contractual risk allocation, rather than true factual assertions. It is for this reason that I advised in my Contracting to Avoid Extra-Contractual Liability article (page 1037, footnote 233) that we should all strive to eliminate the concept of “representations and warranties” in contracts altogether and instead agree on a list of “indemnifiable matters” for which the responsible party is liable in contract if the listed item proves untrue. But, as noted in that article, I was not really expecting anyone to jump on that bandwagon. So, instead I suggested that we quit worry about the language used to preface the factual assertions used in a contract, and instead state what is often meant but never expressed about those assertions (i.e., that they are merely risk allocation devices). So, at that same page 1037 of my article I suggested the creation of a new provision (which does not appear to have caught on as much as some of the other provisions I suggested in that article)—a provision that stated and limited the actual intent behind the factual assertions contained within the representations and warranties made in the contract (and I am certain that you could say it better):
Nature of Representations and Warranties. All representations and warranties set forth in this Agreement are contractual in nature only and subject to the sole and exclusive remedies set forth herein. No Person is asserting the truth of any representation and warranty set forth in this Agreement; rather the parties have agreed that should any representations and warranties of any party prove untrue, the other party shall have the specific rights and remedies herein specified as the exclusive remedy therefor, but that no other rights, remedies or causes of action (whether in law or in equity or whether in contract or in tort) are permitted to any party hereto as a result of the untruth of any such representation and warranty.
I am fairly confident that the existence of such a clause would make it very difficult for a court to create a tort remedy out of a contractual representation or warranty set forth in a contract containing such a clause. I caution, however, that the article to which I refer also suggests that this clause works best when it is part of a comprehensive set of clauses (also contained with the article) limiting remedies and reliance. Best wishes in your continued work in making all of us better draftspersons.
Glenn: Sorry for flogging this particular dead horse.
I sent states up as a trial balloon because I think it would be helpful to use terminology that isn’t prone to the misconceptions that surround represents and warrants.
You say that using states wouldn’t change the outcome, but I’m not seeking to change the outcome. All I want to do is eliminate the possibility of anyone’s attributing magic-word significance to the verb used to introduce statements of fact. Using states would help make it clear that the implications of an inaccurate statement of fact are whatever the law provides.
I concur that if you want to eliminate the possibility of a tort claim, you should be explicit about that in the contract. Someday when I need it for my own purposes, I’ll create my own version of your provisions precluding extra-contractual liability.
But even if you include such provisions in a contract, I’d still prefer to preclude any magic-word interpretation. For one thing, provisions precluding extra-contractual liability make sense for big deals, but not so much for commercial contracts. Since you can’t count on being able to include them, I think there’s value to promoting a rational way to have parties make statements of fact in a contract.
Ken: While I understand your underlying drafting issue, my concern is that no one assume that the word “states” avoids a construction that the stated facts were misrepresented to the counterparty rather than merely contractually warranted, with resulting damages being beyond the agreed limitations set forth in the contract. If your only concern is avoiding anyone attributing magic-word significance to the verb used to introduce the statements of fact, then I suppose “states” is as good a word to accomplish that as any (and as I indicated, I don’t believe there is significance to the chosen word standing alone).
But what has your stated objective actually accomplished? The concern over magic-word significance is exactly because the chosen word might have remedies significance; if the result of the inaccurate statement of fact is whatever the law allows, you haven’t really accomplished anything at all. There has to be a way to make it easier to get folks beyond the “represents and warrants” conundrum, which exists historically because folks wanted to have a choice of tort or contract remedies for factual assertions. In modern times, however, many warranties and representations are not in fact factual assertions by the party making them; rather they are factual predicates that the party receiving them has required be asserted by the other party as a risk allocation device (which include “facts” about which the party making such assertions may not even know are facts—e.g., legal enforceability of the agreement). Wouldn’t it be better to reverse the person making the statements and say something like:
The following statements are the factual predicates for Party A in this agreement. Party B hereby agrees (without asserting the truth of any of any such factual predicates for Party A) to be liable to Party A under this terms of this agreement if any such factual predicates for Party A are inaccurate.
Glenn: I’m OK with the remedies-neutral quality of “states.” You’re always going to need extra language to preclude extra-contractual liability, so for purposes of introducing statements of fact, why not do what is simplest?
I agree that if you include provisions that seek to preclude extra-contractual liability, they would trump any magic-word interpretation anyone might be tempted to apply to the one or more verbs used to introduce statements of fact. But even in that context, I think there’s something to be said for seeking to disabuse people of magic-wordery.
And there are plenty of everyday contracts where people aren’t going to be bothered to exclude extra-contractual liability. In the case of such contracts, there’s nothing to preclude magic-worders from sowing confusion.
I agree that drafters tend to have parties make statements of fact regarding matters they can’t control, and that it would make more sense to address such risk-allocation differently. But I don’t think that has any bearing on the more limited question of what verb to use to introduce statements of fact.
Ken: Since you have defined the problem you are seeking to address narrowly, your proposed solution to that narrow problem is certainly fine. I remain unconvinced, however, that the problem you seek to solve is a problem needing solving; particularly when the limited solution to the defined problem perpetuates the real problem. The real problem, at least in my view, is the potential contort issues that arise as a result of factual statements/assertions that are required to be made in modern contracting, with the attendant unintended consequences to the persons (often unsophisticated) who are required to make those factual assertions/statements. The real problem, in my view, is people assuming that by using a different verb as an introduction to factual assertions/statements, they can somehow avoid those tort-based consequences. You are a rebel, a voice crying in the wilderness for change. Don’t solve a straw man issue (with no real impact on the contracting process), demand and try to promote real contract change by addressing the underlying issue giving rise to the persistence of concern over the use of certain words and the assumption that the choice of a particular word actually affects the outcome (which it doesn’t). Put it on the back burner for now if you must, but consider my proposal as a possible solution to the true underlying problem. Glenn
Glenn: The problem is extra-contractual liability. The only sure way to preclude it is by means of a separate provision. A fake way to preclude it is by means of magic-wordery; the way to neutralize magic-wordery is by using a neutral verb to introduce statements of fact. Then beyond the issue of extra-contractual liability is the issue of use of statements of fact as a risk-allocation mechanism.
I’m game to tackle issues one, two, and three concurrently. Watch this space!
Meanwhile, thank you for engaging in this exchange. I think we’re charter members of a tiny club.