One of my clients recently sought my advice on these questions. They were negotiating an agreement with a new third party consultant, and during the back and forth, the consultant requested seemingly mild edits to my client’s standard clause.
As drafted, the clause required the consultant to “represent, covenant, and warrant” that it has not bribed, and would refrain from bribing, government officials. The consultant wanted to remove the words “covenant” and “warrant.” Though a seemingly benign request, I advised them that “covenant” should stay, while I acknowledged that a reasonable argument could be made that “warrant” didn’t belong in the clause to begin with. To understand my advice, we have to go back to contract law basics.
Let’s start with representations. A representation is a contractual promise that relates to past events and circumstances and the state of affairs at the time the parties sign the contract. A representation is a form of inducement – in other words, it’s a statement by one party made for the purpose of convincing the other party to enter into the contract. So, had my client agreed to the consultant’s edits, leaving in only the term “represent,” the anti-corruption clause would simply constitute a statement that: (i) the consultant had not bribed any government officials in the past; and (ii) it was not presently engaging in such activities at the precise moment in time when the parties signed the agreement.
These are, of course, good things to know. A consultant’s willingness to provide an anti-bribery representation gives us a modicum of comfort about their past and present behavior (it goes without saying that a robust due diligence review would augment the representation). Moreover, if my client later finds out that the consultant paid bribes prior to or at the time of contract signing – rendering the consultant’s representation inaccurate – my client would have grounds for rescinding the contract. Rescission is a remedy that amounts to canceling the contract, and unwinding the parties’ relationship as if it never existed in the first place – think of it as an annulment. In addition, in some instances, a breach of a representation can also amount to fraud, which is a criminal offense. But, a simple representation has no future or ongoing effect.
Now let’s turn to covenants. A covenant is simply a contractual promise to engage in or refrain from engaging in certain specified actions during the agreement.
Unlike a representation, a covenant is only forward-looking; it does not address past actions or the state of affairs at the time the parties ink the deal. Instead, it is how the parties agree to behave going forward during the term of their contractual relationship.
Covenants are, therefore, the basic building blocks of contract performance. If a party violates a covenant, the other party usually has a right to terminate the contract for breach and recover damages. That’s why I advised my client that the word “covenant” had to remain in its anti-corruption clause. It formed a promise that the consultant would not bribe government officials over the course of the parties’ relationship. If my client had agreed to remove “covenant,” and at some point during the agreement term the consultant paid bribes to a government official, my client wouldn’t have a breach of contract claim.
Finally, let’s consider warranties. Warranties do not address the past. Though, like representations, they pertain to the circumstances at the time of contract signing, and, like covenants, they are future-looking and apply during the term of the parties’ relationship. However, in contrast to covenants, warranties do not govern how the parties behave during the contract term; rather, a warranty addresses prevailing conditions or the state of affairs.
This is a rather technical distinction, but an important one, and an example will illustrate the point. Third-party agreements typically include provisions indicating that none of the third party’s owners is a government official, and that none of its owners will seek or accept government positions during the term. The first part of that sentence – that none of the owners is a government official – is a warranty. It is a description of a state of affairs. By contrast, the second part of the sentence – that none of its owners will seek or accept government positions during the term – is a covenant.
It prohibits a certain kind of behavior.
But, if the third party warrants that none of its owners is or will be a government official, then this is a present and future warranty, or a statement of the present state of affairs and a commitment that such state of affairs will not change.
This is why I told my client that the term “warrant” could, as a technical matter, come out of this particular anti-bribery clause without diminishing its effect. The future-looking purpose of the clause was to prohibit certain conduct on the part of the consultant – don’t bribe government officials. One does not warrant future behavior – a promise about future behavior is the purpose of a covenant. That said, separate anti-corruption warranties form important parts of any third party contract, such as warranties that none of the third party’s owners or key personnel is or will be a government official (as noted above), and that the third party maintains (has and will have) the requisite licenses and permits to render the services in question. For the sake of completeness, if a party violates its warranty, the other party usually has a right to declare breach of contract and recover damages, rather than rescission.
It’s important to note that there are numerous exceptions or limitations to the concepts described above. Nevertheless, a basic understanding of representations, covenants, and warranties can help avoid inadvertent mistakes that might limit the effectiveness of compliance clauses. Moreover, readers should be aware that in some legal circles, these terms are falling out of favor, with some asserting the better approach is to replace them with simplified, everyday terms, such as “agrees” or “promises.”
The problem with such a simplified approach is that U.S. courts do not have a consistent view on this issue; some judges may still wish to see appropriate uses of representations, covenants, and warranties in contracts. I therefore advise clients to take a belts-and-suspenders view to this issue by adding “agree” to their anti-corruption clauses. This should help cover the bases, and it has the added benefit of reducing potential confusion among those not steeped in traditional contract jargon.