“Representations and Warranties”—Once More, With Feeling

[Updated Sept. 20 12:30 p.m. EDT: I realized that I needed to provide a more succinct version of my analysis. If that’s what you’re looking for, check out this blog item, which I just posted.]

I’ve previously explained why the phrases representations and warranties and represents and warrants are pointless and confusing. And that applies whatever the governing law. My most detailed take on the subject is in MSCD, but I also addressed it in this Business Law Today article and in these four blog posts.

In their article on extra-contractual liability—the one I mentioned in this blog post—West and Lewis say “some modern commentators disagree about whether there is a difference between “representations” and “warranties.” My Business Law Article was one of the authorities cited.

But whatever measure of disagreement my views might have met with, no one has yet offered any public critique that even addresses, let alone rebuts, the elements of my analysis.

West and Lewis cite an authority that I hadn’t consulted previously—Simon M. Lorne & Joy Marlene Bryan, Acquisitions and Mergers: Negotiated and Contested Transactions § 3:57. I consulted it on Westlaw, thinking that its discussion of representations and warranties would allow me to test, once again, my own views.

Here’s what Lorne & Bryan says regarding the meaning of representations and warranties:

Preliminarily, it may be noted that the art of legal drafting has to some unfortunate degree divorced some words from their ordinary meaning. At least in the acquisition agreement, “representation” and “warranty” have suffered such a fate. Presumably, the term “representation” refers to statements made about the existence of a present or past state of facts; the term “warranty” refers to an agreement to protect the recipient against loss if circumstances are not as represented or as promised. In the customary acquisition agreement (and, now, in many other legal agreements), however, the two are typically treated interchangeably. Sellers, or buyers, sign an agreement in which they “represent and warrant” a litany of statements, some past, some present, and some future, with no distinction between which are truly representations and which are warranties. This confusion of language appears to have become generally accepted, the underlying assumption being that if the matter “represented and warranted” is false, there has been a breach, whichever word should have been used to describe what was actually meant.

Here’s what I think of that:

• As to the notion that “legal drafting has … divorced some words from their ordinary meaning,” I say Amen!
• As for the distinction offered, it sort of tracks that offered in the ABA Model Stock Purchase Agreement, but as I explain in MSCD there’s next to no support for it. Note in particular the weasel word “presumably”—that’s equivalent to saying, “Things are not as clear cut as I’d like you to think.”
• Practitioners do indeed treat representation and warranty as synonyms, and courts have acknowledged as much. So that equivalency would seem to represent part of the ordinary meaning of representation and warranty, and writing it off as “confusion” seems rash.

Lorne & Bryan then goes on to offer another distinction:

It may be conceptually useful in this context to provide a distinction between representations and warranties that is not customarily identified in an acquisition agreement. Consider “representations” (identified in quotation marks) to be those statements made by a party that the party has examined, considered, and believes to the best of its knowledge to be true, and “warranties” (similarly identified) to be those identified matters as to which the party making them is willing to accept financial responsibility if the matter is not as warranted, whether or not the party making the warranty has knowledge, should have, could have, etc.

As to why neither of the offered distinctions works, I’m not going to trot out the arguments I’ve made at length elsewhere. Instead, let me try to cut to the chase.

Contracts include, among other categories of language, statements of fact. You need to make it clear who is making any given statement of fact. You could say Acme states. You could say Acme asserts. You could say verily Acme doth say. It doesn’t really matter which verb you use, but I suggest that the path of least resistance is to use a verb that lawyers are already used to, a verb with a broad meaning—Acme represents.

But some commentators, following in the proud tradition of the 1625 English case of Chandelor v. Lopus, have suggested that what verb you use could affect your remedies. In other words, if Acme just represents as to a given statement of fact, then the other party could bring only an action for misrepresentation if that statement turns out to have been inaccurate; if Acme just warrants, the other party could bring only an action for breach of warranty; if Acme represents and warrants, then both bases are covered. The problem with this suggestion is, first of all, that from a semantics perspective it’s unworkable. That’s not the way people speak and write, and thank goodness—it would be akin to speaking in code. Furthermore, caselaw and the Uniform Commercial Code don’t support this “magic words” approach to representations and warranties.

A different distinction is that offered by the ABA Model Stock Purchase Agreement and by Lorne & Bryan, with essentially no support. Again, the distinction offered doesn’t match the way people speak and write. Compared with the remedies-based distinction, this distinction isn’t so much pernicious as beside the point.

Then you have the novel distinction offered in the second paragraph quoted above. It, too, imposes on each of representation and warranty a meaning that goes beyond their actual function. And it’s also, apparently, simply a distinction that Lorne & Bryan thinks would be appopriate rather than one that actually exists.

So I say, once again, use just representation and represents. If you have a problem with that, use whatever you want but don’t attach any magical significance to it. If you’re concerned about remedies, address the matter directly!

If I’m mistaken in any of this, I’d love to know about it. But before wading in, I recommend that first you consult the discussion in MSCD.