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“Representations and Warranties” and “Indemnity” clauses have the potential to impose large liabilities and damages, so attention should be paid to what they are saying before signing anything.
In last week’s “Common Contract Clauses” post, we discussed some of the common terms in publishing or distribution agreements. This week, we are going to look at two contract clauses that are in many agreements, the “Representations and Warranties” and the “Indemnity” clauses. These sections of the contract have the potential to impose large liabilities and damages, so attention should be paid to what they are saying before signing anything.
The two words are often used interchangeably, and the difference in meaning is subtle if not nonexistent. Essentially, they are statements of facts that the contracting party is allowing the other party to rely on without any duty to investigate further. So, for instance, if you represent or warrant that you own the intellectual property rights to a distributor, you had better own it. If not, you are promising to protect the other party against their loss if the warranty isn’t true.
So, if you license the rights to a distributor and the true owner of the rights then sues the distributor, you are promising to cover the damages that have to be paid to the true owner. So, make sure you have your ducks in a row and that you aren’t representing or warranting anything that you’re not completely sure is true!
Some common components of this clause are as follows:
Seller represents and warrants that it has the full legal right, power, and authority to enter into and perform this agreement.
Seller represents and warrants that it is a corporation duly incorporated, duly organized, validly existing, and in good standing under the laws of the state of Delaware.
Each party represents and warrants that it is not a party to any agreements that might conflict or interfere with, limit, be inconsistent with, or otherwise affect any of the provisions of this agreement.
So, when contracting, don’t gloss over this section – you could be opening yourself up to liability if the representations aren’t accurate.
An indemnity clause is one where a party agrees to protect the other party from liability against third parties. This means that, if you agree to indemnify the other party to the contract, and a third party sues that other party, you could be agreeing to reimburse damages and attorneys’ fees that are incurred in the lawsuit. The particular scope of the clause can range from broad to narrow. In some clauses, you could be agreeing to cover the sole negligence of the other party (which would be bad for you, as their negligence is not your fault). Other narrower clauses would only cover instances where you are solely or partly negligent. The clause can also specify certain categories that are indemnified, such as intellectual property rights issues or confidentiality breaches.
It is important to understand exactly what you are promising to do in an indemnity agreement. The potential liability could be huge, as attorneys’ fees and damages can add up to a large amount in a long enough lawsuit. Your attorney should be able to draft or modify the indemnity clause (or do away with it entirely) to suit your needs. As in any contract, anything is negotiable with the other party!
Next week, we will look at some of the “boilerplate” sections that usually come at the end of the agreement, such as choice of law, dispute resolution, and so-called “merger” clauses.
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