[Revised 11:00 p.m. EDT, May 23, 2012, to add that you should say “states the following facts.” Further revised 8:30 a.m. EDT, May 24, 2012, to change it to “states that the following facts are accurate”]
You may have noticed that over the past year or so I’ve been exploring problems caused by using terms of art in contract language. See, for example, this January 2012 post on the verb guarantee.
In that regard, my biggest leap has been when I concluded that using will be liable instead of shall indemnify would allow you to circumvent the misconceptions surrounding the notion of indemnification. (See this February 2011 blog post.)
Well, it’s time for another such leap. I now propose that the clearest way to have a party make a statement of fact in a contract is to use states instead of represents and warrants or even represents. Let me explain why.
Origins of the Magic-Word Approach
For complex reasons rooted in legal history, inaccurate statements of fact can give rise to alternative remedies—tort-based fraud and negligent misrepresentation claims and contract-based breach-of-warranty claims. (Glenn West provides an excellent discussion of this topic in this article.) Depending on the governing law, the different remedies can have different procedural requirements, so which remedy is available can have important consequences for a claimant.
In an example of the bloody-minded literalism that typifies much legal thought, it came to be believed that for a statement of fact to give rise to a claim for misrepresentation, it has to be a representation, and for it to be a representation, it has to be referred to as such in the contract at issue. Similarly, for a statement of fact to give rise to a claim for breach of warranty, it has to be a warranty, and for it to be a warranty, it has to be referred to as such in the contract. I refer to this as the “magic-words approach.” (For more on the concept of “magic words,” see this 2010 AdamsDrafting blog post.)
The hallmark of that approach is the 1625 English case Chandelor v. Lopus. It involved a dispute between the buyer and the seller of a bezoar stone—a kind of concretion found in the gut of certain animals and believed by some to have occult qualities. The seller “affirmed” that the item in question was in fact a bezoar stone, but it turned out that it wasn’t. The court held that the buyer couldn’t bring against the seller a claim for breach of warranty, as the seller hadn’t stated that he was “warranting” that he was selling a bezoar stone.
The Magic-Words Approach Is Counterintuitive
In standard English, the verb used to introduce a statement of fact serves only to identify who is making the statement and the manner in which they’re making it. You could use any number of verbs, and in whatever tense is appropriate: Says. Proclaimed. And so on.
The magic-words approach is inconsistent with standard English, in that it freights with added significance the verb, or verbs, used to introduce a statement of fact. Only readers initiated into the cult would think that the verbs used could have implications for remedies.
The Magic-Words Approach Is Confusing
Because the magic-words approach is inconsistent with standard English, commentators and practitioners don’t know what to make of it.
Pure magic-wordery would simply have representation mean a statement of fact that can support an action for misrepresentation and warranty mean a statement of fact that can support an action for breach of warranty. But commentators aren’t comfortable with such a bald statement. Instead, they try to work into their definitions the components of the applicable cause of action. But from the perspective of the contract drafter, the results are bewildering. For example, in this December 2011 post I discuss Bryan Garner’s convoluted treatment of representations and warranties. I have no idea what a drafter is meant to make of it.
And I wager that if you were to ask one hundred practitioners selected at random what the significance is of represents and warrants, a majority of them would be at a loss to respond, and the answers you do get would be all over the place.
The Magic-Words Approach Doesn’t Work in the U.S.
Beyond the confusion it creates, the magic-words approach has zero support in the U.S. No court has bought into it. Instead, many cases show that judges don’t attribute magic-word significance to the verb used to introduce a statement of fact. I wrote about one such case in the post that immediately precedes this one (here).
And section 2–313(2) of the Uniform Commercial Code states that “It 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.”
So as I’ve said before, from the U.S. perspective, game over, case closed: The magic-words approach is counterintuitive, confusing, and doesn’t work.
What about other jurisdictions? As discussed in this 2009 AdamsDrafting post, Glenn West pointed out to me a 2005 English case that endorses the magic-words approach. Does that validate the magic-words approach? Hardly—it simply reaffirms that many English judges and practitioners are in thrall to the magic-words approach, to the detriment English contracts practice. (Don’t hate on me, Mark Anderson!)
And it’s not as if English practitioners are all on board with the magic-words approach. For example, I cite in MSCD 12.312–315 this 2007 briefing paper by Jones Day’s London office; it downplays the relevance of the magic-words approach.
So even in England, uncertainty prevails.
What Not to Do
Endorsing the magic-words approach constitutes an utter abdication of a contract drafter’s power and responsibility.
Anyone drafting a contract can structure the deal as they see fit. In particular, they can specify any limitations on remedies. Do you want to try to preclude the possibility of a tort claim against a contract party? If so, you should include in the contract a provision that directly attempts to accomplish that goal. Glenn West offers at the end of the article I link to above some language excluding extra-contractual liability; I expect I’ll come up with an MSCD-style version at some point.
Electing instead, or in addition, to tinker with magic words used to introduce statements of fact is indefensible, even if the jurisdiction in question happens to offer shreds of support for the magic-word approach.
It’s not necessarily the case that using represents and warrants, and representations and warranties, in a given contract would land anyone in trouble. But the confusion it creates comes at a cost. Getting rid of represents and warrants would make it simpler for parties to address remedies in a way that makes sense, and would make contracts shorter and simpler.
What to Do Instead
In MSCD I recommend that you use just represents (and representation), as represents is a simpler and more versatile word than warrants (and warranty).
But on reflection, that represented (ha!) a loss of nerve on my part. I thought it would be simpler not to teach very old dogs an entirely new trick; I thought drafters would find it more palatable to simply drop and warrants rather than use an entirely new verb.
But that doesn’t take into account that you don’t need profession-wide consensus on contract language. Each drafter is free to employ—in fact, should employ—those usages that are clearest and free of unhelpful doctrinal implications.
Furthermore, if any magic-worder is going to get freaked out by a word, it would likely be represents, given the magic-word association with the prospect of tort claims. (Although in this post I suggest a rough-and-ready version of language that could be used to neutralize the magic-words approach in any jurisdiction in which it has a toehold.)
So bearing that in mind, I recommend that to introduce statements of fact in a contract, you use states. Other alternatives, such as asserts and confirms, carry unnecessary rhetorical baggage. But because one can also state opinions, you should make it clear that you’re stating facts.
Simply saying states the following facts rather than states as follows would accomplish that, but I want to add one more component: an assertion that the facts are accurate. That would serve to establish that there’s a remedy if any facts are inaccurate and would spare you having to have a separate remedies tie-in. (That’s something I discuss in the following section.) So the formula I’m currently contemplating is states that the following facts are accurate. But it’s not set in stone!
The Effect of Statements of Fact
[Revised 8:30 p.m. EDT, May 23, 2012, to eliminate from the proposed language the notion of reliance, which would scream “Tort!”]
Because it might not be clear to many lawyers and judges what the remedies implications are of a party’s making statements of fact in a contract, you could conceivably add the following to the boilerplate, with the bracketed language being my way of acknowledging that the contract might or might not exclude extra-contractual liability:
[A remedy] [The exclusive remedy] for inaccurate statements of fact made by a party in this agreement is a claim for damages under this agreement.
But given that my proposed representations lead-in formula states that the facts are accurate, I think this remedies provision would be unnecessary. After all, you don’t need to put in a contract something saying that the remedy for failure to comply with obligations is a claim for damages.
Glenn West? Are you out there? What do you think? (Until I signal otherwise, this part of the analysis is very much a work in progress.)
The only impediment to using states the following facts is sheer inertia. After all, any conversation regarding substantive objections would have to go like this:
A: We can’t use “states that the following facts are accurate”! What happened to “represents and warrants”! How are the remedies meant to work!
B: You might want to check the section entitled “Remedies.” If you have a problem with what it provides, let me know and we’ll discuss revising it. Otherwise, what would using “represents and warrants” accomplish?
A: Uh … .
But I’m not expecting a mass switch to states, just as I’m not expecting everyone to start using is liable for instead of shall indemnify. And using represents remains an improvement over represents and warrants. So I’m not uncomfortable that, for example, my book The Structure of M&A Contracts will for the time being continue to advocate represents. But I want to get the idea of using states out there. And I expect it to feature in the third edition of MSCD, unless readers shoot the idea down in flames.
Why the Delay?
Some readers might be wondering, What the freak took you so long? In particular, longtime reader Chris Lemens recommended this approach in this 2009 comment. Well, let’s just say that my views have been—to use a word that’s been in the news lately—evolving, and thinking about the case discussed in the immediately preceding post is what put me over the edge.