You may recall my September 2009 post regarding my correspondence with Glenn West on that deathless subject, the phrase representations and warranties. (If you’re new to this subject, you may want to consult this handy 558-word summary of my analysis.) Well, Glenn couldn’t leave well enough alone—today I received from him an email on the subject, which he sent to me and to Tina Stark, professor at Emory Law School. (Longtime readers of this blog may recall that Tina has offered some thoughts on this subject.)
Here’s Glenn’s email:
In cleaning up my office, after writing my latest article on extra-contractual liability, I was reminded of the attached English case [pdf] (which I originally cited in my M&A Lawyer article on Sandbagging [pdf]). To Tina’s point that the use of the word “representation” to flag a factual assertion may carry with it different remedies than the use of the word “warranty,” this case offers support. To Ken’s point that the word is not as important as making sure that the remedies are specifically limited in either event, this case also offers support (and is certainly the approach I take). As indicated in my article, because I believe convention is a long way from allowing contract drafters to avoid the use of both words, I am not sure the debate matters. But, I couldn’t resist pointing this case out since neither of you has referred to it to my knowledge. In either event, I am now convinced that you are both right (or both wrong). As lawyers, words do matter, but we should not rely simply upon ancient distinctions, we should say what we mean clearly. Note the following quotes from the case:
The first issue to which I turn concerns the nature of the representations themselves. Section 4.1 contained a large number of representations and warranties on the part of Western Star. (Corresponding representations and warranties on the part of MAN in relation to the sale of MAN Australia were contained in section 4.3.) In each case the same statement was expressed in terms of both a representation and a warranty. It was accepted that insofar as these statements were expressed as warranties they involved a promise on the part of the maker that they were correct and that if shown to be incorrect for whatever reason the promisee would be entitled to obtain an indemnity under section 12.1(b) which would be measured primarily by reference to the value of the promise. This was referred to for convenience as a ‘contractual’ measure of damages, though it should be noted that the definition of ‘Damages’ in section 1.1 may enable the promisee to recover a wider range of losses for a breach of warranty than he would be entitled to under the general law. The statements were also expressed as representations, however, and it is inherent in the nature of a representation that it is liable to induce the person to whom it is made to take some action on the faith of it. If the representation is false, therefore, any loss suffered by the representee is likely to have been caused by his acting in reliance on it. In principle, therefore, one would expect him to be entitled to recover what was described as a ‘reliance’ measure of loss rather than a contractual measure of loss. … This reflects the essential distinction between a representation and a warranty.” [At printout page 29.]
By drafting the clauses in question as both representations and warranties the parties have attached different characteristics to the statements they contain which, depending on the circumstances, may give rise to different consequences and different measures of loss. Far from suggesting that the indemnity available to the injured party is restricted in every case to the measure of loss appropriate to a breach of warranty, section 12.1(b) makes it clear that it extends to any loss flowing from the inaccuracy of a representation. [At printout page 41.]
Here’s the email I sent Glenn in response:
Glenn: You sure know how to rattle a guy’s cage! One minute, I’m basking in holidays bonhomie; next minute, I’m gnawing my hind leg over represents and warrants ….
I’m sure you’re feeling pleased with yourself for having been able to point me to the Man Nutzfahrzeuge case, as I’ve previously said that I haven’t been able to find any such caselaw. Unsurprisingly, I find this case both frustrating and irrelevant. I know that you and I agree on this issue, but I’m unable to restrain myself from using this as an opportunity to vent.
Let’s deal with the frustrating bit first. All this case does is confirm that at least one English judge endorses the “magic words” interpretation of the significance, for purposes of remedies, of use of the phrase represents and warrants.
The “magic words” approach to contract language sees in a given word an occult meaning that goes beyond the everyday meaning of the word—even the everyday legal meaning. In this case, the “magic words” approach would have a verb that links a party to a factual assertion—as in Acme represents that the Assets are not subject to any Liens—do double duty by also having implications on the remedies available if that factual assertion turns out to have been inaccurate.
The “magic words” approach to contract language is antithetical to clear drafting. If you ask a random group of U.S. lawyers why they use represents and warrants, I know from experience that few or none would offer the “magic words” explanation. And it’s a safe bet that of those willing to trot out a “magic words” explanation, none of them would have explained it to the person at risk of being charged with having that meaning in mind—namely the client.
Even if the “magic words” approach were to meet with greater acceptance, that doesn’t make it a good idea. It reflects a Rube Goldberg approach to articulating meaning, and as such it will always be inferior to saying directly what you mean to say.
I’m not surprised that this case comes from an English court—many English practitioners and judges appear to be in thrall to the “magic words” approach to contract language, more so than their U.S. counterparts. In particular, English judges periodically offer up opinions that are spectacularly lacking in semantic acuity. (I’m thinking in particular of the English caselaw on best endeavours, a topic discussed here and here in this blog.) As we’ve discussed, U.S. courts haven’t endorsed the “magic words” view of represents and warrants.
I’ve done little research of this issue under English law, but what poking around I’ve done indicates that the “magic words” approach doesn’t hold sway. In MSCD I cite a briefing paper by Jones Day’s London office that comes to a conclusion consistent with my own. (I also mentioned it in this April 2007 blog post.) So even in a jurisdiction sadly amenable to the “magic words” approach, that approach is conducive to confusion.
The Man Nutzfahrzeuge case stands for the proposition that in England, I run the risk of having a semantically-challenged judge see remedies implications in the verbs used with factual assertions.
To that I say, So what! A judge will only have a say in the matter if I create confusion. So if in a contract there’s any risk of confusion regarding verbs used with factual assertions, I’ll go out of my way to avoid it by doing one or both of (1) being explicit as to remedies and (2) including the following provision, which I just dreamed up:
The one or more verbs used to indicate that a party is making any given factual assertion are to have no bearing on whether for purposes of determining remedies that assertion is to be considered a representation, a warranty, neither, or both.
In the U.S., the risk of confusion wouldn’t be sufficient to warrant using this provision unless you aren’t explicit as to remedies and are really risk-averse.
You say that you “believe convention is a long way from allowing contract drafters to avoid the use of both words.” Given that using represents and warrants is pointless and confusing and that the “magic words” approach is so lacking in merit, I’m up for the challenge. Of course, the magic-worders have inertia on their side. But I’m confident of the power of a winning argument if it’s articulated coherently and is readily accessible. In that regard, I’ll keep doing what I can.