Recently, it has struck me that many business folks who “negotiate tons of IP, Software and Technology agreements” fail to understand the difference between covenants, representations and warranties that are “standard” in many such agreements. Not surprising. What is surprising is that many of their lawyers fail to appreciate the difference as well! So, for those of you tired of faking the funk, here is some (either fresh or refresher) “Contracts 101!”
Covenant = a promise of the parties by which one pledges that something is either done or shall be done.
Representation = a statement of fact induces a party to enter into the contract. The statement, made before or at the time of making the contract, regards a past fact or existing circumstance related to the contract which influences such party to enter the contract.
Warranty = an undertaking or stipulation that a certain fact in relation to the subject of the contract is or shall be as it is stated or promised to be.
Upon a false representation the defrauded party may elect to void the entire contract, and recover any sums paid, whereas upon a breach of warranty or breach of a covenant, the contract remains binding and damages only are recoverable for the breach. With respect to breach of covenants, whether that breach is “material” (i.e., a breach that destroys the value of the contract for the non-breaching party) and excuses the non-breaching party’s performance can be subjective and expensive to prove. Thus, the more specificity drafted into a contract (i.e., listing the specific, most-likely events that trigger a termination event), the better that contract protects the parties.
Happy contract drafting and reviewing!
