You might recall that one of the rationales for use of the phrase represents and warrants is that it allows you to specify what remedies are available, namely an action under the contract for breach of warranty, a tort action for misrepresentation, or both.
In an as-yet-unpublished article, I demonstrate that using represents or warrants or both doesn’t make sense. I go on to say that if you’re worried about remedies, you should address the issue directly.
But here’s what I think about electing among default remedies. (To avoid confusion, by “default remedies” I mean, as Vance notes in his comment, not the remedies for default, which could be contractual or extra-contractual, but the remedies the law would provide in the absence of anything to the contrary in the contract.)
Where a cause of action would otherwise not be available, you can’t make it available just by saying so. In effect, you’re limited to precluding one or other cause of action. My question is, does anyone really think that’s a worthwhile thing to do? When you’re putting together a commercial transaction, your focus in on the deal. Why spend time trying to figure out exactly what might go wrong and whether you want to prevent the other side from bringing one or other cause of action against you? Wouldn’t that involve too much speculation and wallowing in elements-of-a-claim minutiae?
In particular, if you’re really worried about remedies, you’d likely construct your own, instead of worrying about how breach-of-warranty or misrepresentation claims might play out. You’d specify that indemnification is the exclusive remedy. Or you’d provide for liquidated damages.
Any thoughts? (I suggest that you not use this as an opportunity to revisit represents and warrants. In due course you’ll be able to read my article about that.)
8 thoughts on “Do We Care About Default Remedies?”
A highly negotiated commercial contract (eg. an M&A contract) without a “represents and warrants” section is a useless piece of paper.
You misunderstand me; perhaps you haven’t read any of my writings on represents and warrants. My point is that it’s standard in M&A contracts to specify that indemnification is the exclusive remedy. That eliminates any question of precluding one or other of the default remedies: both are rendered irrelevant.
I’m not suggesting that you eliminate statements of fact from M&A contracts. Instead, the issue is how you refer to them. But as I noted in the parenthetical I added at the end of this post, I’m not looking to revisit the R&W can of worms in this post.
I spend a lot of time on default remedies. Simply because we need to limit our liability.In the manufacturing industry, especially aerospace, if the buyer or supplier defaults, there should be specified remedies.
Lisa: I think I might have created some confusion. By “default remedies” I didn’t mean remedies for default. See Vance’s comment; I also revised my post to try to make it clearer. Ken
Knowing the default remedies (by which I mean not the remedies for default, which could be contractual or extra-contractual, but the remedies the law would provide in the absence of anything to the contrary in the contract) is important, but that’s only so you’ll know whether and how to vary them in the contract, and as you say, this is best done explicitly in a remedies provision. Sometimes it gets spread out over the contract in places where you say “X will not be liable for…”
Thanks for pointing out the potential confusion; I’ve supplemented my post accordingly.
I tend to agree that it is pointless to worry about whether a claim would be successful if made, because any decent lawyer is going to be able to plead something. The reason to address remedies in the agreement is to ensure that litigation only occurs within set boundaries. Indemnification as an exclusive remedy is one way to do that. Another is to just allow whatever cause of action are the default ones available, then impose exclusions and limitations on liability.
Under the latter approach, for example, you would not worry about whether the claim was for fraud or breach of contract or whatever. You would just worry about specific risks that one party or the other is undertaking (e.g., “We’re not liable for claims against you arising from your false statements of fact, even if we also caused them.”), excluding certain types of damages (e.g., “We’re not liable for punitive damages assessed against you.”), or capping damages (e.g., “We’re not liable for any damages in excess of $1,000,000.”).