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Representations, Warranties, And Covenants In Corporate Contracts

by Lewis Hamilton

Representations, warranties, and covenants are some of the most critical clauses in any business or real estate contract, yet they are sometimes lumped together or their meanings are confused. Here are some of the basics you should know about the differences between representations, warranties, and covenants when you're looking through a potential contract before you sign something that could leave you with an obligation you don't want.

What's a Representation?

Representations are factual statements that are held out to be true by the person making the statement. Representation has to be made about something that was true in the past or is currently true in order to be valid. For example, one representation that you may see in a job contract when you're being hired as a company's new executive officer is a statement something like, "This agreement does not conflict with any prior or current obligation of the signatory." Representations are relied upon in many business transactions. For example, if you go to buy a car that is represented as the Trans Am used in Cannonball Run, you'd reasonably expect it to actually be the car that was used and not a facsimile. 

What's a Warranty?

A warranty in a business contract is a promise regarding a current and future condition. Most consumers are familiar with warranties when they purchase high-ticket items like washers, dryers, and stoves. Those items often come with warranties that guarantee that the item will work and promise repairs or a replacement if they don't. Warranties in many business contracts are similar. They often protect companies from defective products. For example, a freelance photographer might give a warranty that all of the photos he or she provides are original and not going to infringe on another company or photographer's intellectual property rights.

What's a Covenant?

A covenant is a promise about a future act (or a promise not to act). For example, a covenant might require a company to agree to withhold a press release about their new chief executive officer for 90 days in order to allow that person to make a graceful exit from his or her prior position. A common covenant in professional associations (like medical offices) involves doctors agreeing not to poach patients or employees for a period of time if they leave another practice.

Representations, warranties, covenants are very complex issues. A corporate lawyer can help you understand the complete meaning of any of the three in the contracts you have and the legal repercussions of their violation. For more informatino, visit these guys.