Relationship Between Representations, Warranties, Covenants,

Rights, and Conditions

Practical Law Practice Note 7-519-8870

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Date: 12 October 2021 at 8:35 am

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Relationship Between Representations, Warranties,

Covenants, Rights, and Conditions
by Practical Law Commercial Transactions

Practice notes | Maintained | United States

A Practice Note discussing the interplay between representations, warranties, covenants, rights, and
conditions in commercial contracts. This Note describes the principal ways in which these key
contractual building blocks work together to form principal operative and remedial provisions,
focusing on indemnification and related remedial clauses. This Note includes drafting and negotiating
tips.

Functional Interactions Between the Principal Building Blocks of a Commercial

Contract
Basic Interactions Between the Contractual Building Blocks
Mutual Statements of Fact

Representation and Warranty or Covenant?

Disguised Covenants
Product and Service Warranties

Covenants or Rights?
Condition or Covenant?
Relationship Between Representations and Warranties, Covenants, and
Indemnification
General Considerations for Both Parties
Considerations for the Maker of Representations and Warranties
Considerations for the Recipient of Representations and Warranties
Additional Considerations Relating to the Scope of Indemnification

Interaction Between Indemnification and Other Remedial Provisions

Related Provisions
Supporting Indemnification as an Exclusive Remedy
Selection of Governing Law and Enforceability

Most practitioners are aware of the principal structural components of a commercial contract, which are also
referred to as building blocks. They include:

• Representations and warranties. A representation is an assertion of fact, given by one party (maker) to
induce another party (recipient) to enter into a contract or take some other action (see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions: What Is a Representation?). A warranty

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is a promise that an assertion of fact is true, supported by an implied promise of indemnity if the assertion
is false (see Practice Note, Representations, Warranties, Covenants, Rights, and Conditions: What Is a
Warranty?).

• Covenants. A covenant (also known as an agreement) is a promise made by a party (obligor) to take
certain actions or to refrain from taking certain actions (see Practice Note, Representations, Warranties,
Covenants, Rights, and Conditions: What Is a Covenant?).

• Rights. A right is the inverse of a covenant. It is the benefit of the obligor’s promise to act or refrain from
acting that is owed to the opposing party (obligee) (see Practice Note, Representations, Warranties,
Covenants, Rights, and Conditions: What Is a Right?).

• Conditions. A condition is a fact that must be true or an event that must have occurred before a party’s
obligations or rights under the agreement are triggered (see Representations, Warranties, Covenants,
Rights, and Conditions: What Is a Condition?).

For more information on representations and warranties, covenants, rights, and conditions, see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions.

Parties to a commercial contract can better achieve their legal and business objectives if they consider the
functional differences between these components and how they relate to one another within the framework of
the agreement. This Note discusses the interrelationship between each of the key contractual building blocks
and how they work together to form the principal operative and remedial provisions of a commercial contract,
including indemnification and related remedial clauses.

Contract interpretation is governed by applicable state law. This Note contains information that is general and
not jurisdiction-specific. All references to the UCC refer to the model Uniform Commercial Code. The UCC
enacted in a particular state may be different than the model code.

Functional Interactions Between the Principal Building Blocks of a

Commercial Contract
Parties to a commercial contract should consider:

• The fundamental ways in which representations, warranties, covenants, rights, and conditions relate and
interact with one another to establish each party’s rights and obligations.

• How these contractual building blocks are “cemented together” by definitions and other mutually asserted
statements of fact.

• How the failure to account for functional differences between each of the building blocks can affect each
party’s exposure to damages or available remedies if the contract is breached.

Basic Interactions Between the Contractual Building Blocks

In a typical commercial contract, representations, warranties, covenants, rights, and conditions interrelate in the
following fundamental ways:

• Representations and warranties are given by one party to the other and may be reciprocal. Each statement
of fact serves as both a representation and a warranty (see Practice Note, Representations, Warranties,
Covenants, Rights, and Conditions: Representations and Warranties). Most agreements expressly limit the
recipient’s remedies for inaccuracy or breach of representations and warranties to indemnification rights
or other express remedies. Courts generally disregard the technical differences between representations

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and warranties. Therefore, any functional distinctions between representations and warranties are usually
irrelevant in practice (see Practice Note, Representations, Warranties, Covenants, Rights, and Conditions:
Functional Differences Between Representations and Warranties).

• Covenants and rights are the direct inverse of one another. Together they define each party’s obligations
and entitlements (see Practice Note, Representations, Warranties, Covenants, Rights, and Conditions:
Covenants and Rights).

• Conditions trigger a party’s covenants or rights (see Practice Note, Representations, Warranties,
Covenants, Rights, and Conditions: Conditions).

• Representations, warranties, and covenants serve as a basis for:

• the aggrieved party’s indemnification rights;

• the non-compliant party’s indemnification obligations;

• the aggrieved party’s contractual termination rights; and

• other types of contractual, legal, and equitable remedies available to the aggrieved party.

Mutual Statements of Fact

Representations and warranties, covenants, rights, and conditions are connected, and their scope is limited or
expanded, by a contract’s definitions and other statements of fact to which the parties have mutually agreed. A
mutual statement of fact is declaratory and informational. It does not operate independently, but functions by
clarifying, expanding, or limiting the meaning of pertinent representations and warranties, covenants, rights, and
conditions that relate to or incorporate the definition or other statement.

Certain types of mutual statements of fact (for example, choice of law provisions) function more as mutually
agreed statements of policy reflecting the parties’ intent, rather than ones of fact. For example, even if the
parties select a certain state’s law to govern the contract, the courts ultimately decide which state’s law applies
if a dispute arises.

Examples of mutual statements of fact include:

• Definitions.

• Price lists and fee schedules.

• Term provisions (see Standard Clause, General Contract Clauses: Term and Termination: Section 1.1).

• Selection of governing law (see Standard Clause, General Contract Clauses: Choice of Law).

• Acknowledgment that monetary damages are inadequate to fully compensate a non-breaching party (see
Standard Clause, General Contract Clauses: Equitable Remedies).

• Notice provisions (see, for example, Standard Clause, General Contract Clauses: Notice).

• Acknowledgment of an independent contractor relationship between the parties (see Standard Clause,
General Contract Clauses: Relationship of the Parties).

• Cumulative remedies provisions (see Standard Clause, General Contract Clauses: Cumulative Remedies
(with Exclusive Remedies Carve-Out)).

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Representation and Warranty or Covenant?

In a standard commercial contract, representations and warranties are made on or “as of” a specific date, often
the date on which the agreement is executed by the parties. They generally relate to facts and circumstances
occurring at the time they are made but sometimes also relate to periods in the past. For example, a
representation and warranty about the accuracy of financial statements is made on a particular date but relates to
the period covered by the financial statement.

Disguised Covenants
Some agreements include language in their representations and warranties stating that the assertions of fact will
be true in the future. For example, a representation and warranty may state that “the Seller is and throughout the
Term will be in compliance with all applicable laws.”

The future-looking aspect of this statement is not a representation or warranty but is rather a covenant that is
labeled “representation and warranty.” The maker is promising to act or refrain from acting in a manner that
will cause the presently made statement to be and remain accurate in the future (see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions: Timing of Representations and Warranties).

Counsel should evaluate each of the statements included in the representations and warranties section of the
contract to determine if all or portions of them:

• Require future performance.

• Would be more appropriate if they were made to require future performance.

If so, the statement is or should be a covenant. Parties may want to clearly distinguish representations and
warranties from the covenants to ensure that a court applies the appropriate remedies. In general:

• The contract may designate different exclusive remedies or survival periods (or both) for inaccuracy or
breach of representations and warranties than it does for breach of covenants.

• If the contract does not include exclusive remedies, common law and equitable remedies may differ for
inaccuracy or breach of representations and warranties than for breach of covenants (see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions: Remedies for Inaccuracy or Breach of
Representations and Warranties and Remedies for Breach of Covenants).

Unless a contract expressly designates the same exclusive remedy for all breaches of the agreement, a court may
award damages that are inconsistent with the expectations of the parties. For example, a court may:

• Award punitive damages, which are sometimes appropriate for intentional misrepresentation but not
generally available to remedy covenant breaches.

• Refuse to award equitable remedies, such as specific performance, which may be available for a breach of
covenant but not for inaccuracy or breach of representations and warranties.

To distinguish covenants from representations and warranties, parties can:

• Move disguised covenants to a more appropriate section of the contract.

• Revise the language of disguised covenants to make it clear that they are covenants and not
representations or warranties.
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Product and Service Warranties

Product and service warranties are specialized contractual provisions that combine the concepts of a
representation and warranty and a covenant. Services agreements, contracts for the sale of goods or equipment,
and equipment leasing transactions typically contain separate product or service warranties in addition to
standard transactional representations and warranties. These warranty provisions commonly:

• Create limited express warranties that apply to all goods or equipment sold, services provided, or
equipment leased during the term of the agreement.

• Designate specific contractual remedies for breach of express warranties.

• Modify or disclaim some or all implied warranties.

For more information on express and implied warranties under the UCC, see Practice Notes, UCC Article 2
Express Warranties: Express Warranties Under UCC Article 2 and UCC Article 2 Implied Warranties.

For examples of a standard product warranty, see:

• Standard Clause, General Contract Clauses: Product Warranty and Disclaimers.

• Standard Document, General Purchase Order Terms and Conditions (Pro-Buyer): Section 15.

• Standard Document, Sale of Goods Agreement (Pro-Seller): Section 14.

For examples of consumer product warranties, see Standard Documents, Full Consumer Product Warranty and
Limited Consumer Product Warranty.

For an example of an service contract, also referred to as an extended warranty or protection plan for new
consumer goods, see Standard Document, Service Contract (Extended Warranty).

For more information on equipment lease warranties under UCC Article 2A, see Practice Note, Equipment
Leasing: UCC Article 2A Express and Implied Warranties.

Covenants or Rights?
Covenants and rights are direct opposites and derive from one another (see Practice Note, Representations,
Warranties, Covenants, Rights, and Conditions: Types of Covenants and Rights). In a contract, covenants and
rights can each be:

• Expressly stated in the body of the contract.

• Inferable from expressly stated rights or covenants of the opposing party.

Parties should recognize that there can be different practical and legal implications if an obligation is expressly
stated in the body of the contract than if it is inferred from an expressly stated right. Carefully constructed
expressly stated covenants serve each party better than covenants that are derived from expressly stated rights
because they:

• Clearly define that party’s obligations.

• Avoid potential ambiguity when determining if an obligation has been satisfied or breached.

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Therefore, counsel should focus on drafting express covenants that comprehensively define the obligations of
each party instead of drafting express rights.

With a fully defined express covenant, the obligee’s concurrent right is:

• Implied.

• Enforced by the obligee’s ability to claim breach if the obligor does not fully satisfy its obligations.

Condition or Covenant?
Contracting parties may select almost any set of facts to serve as contractual conditions (see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions: Types of Conditions). Facts or events parties
use as conditions can be:

• Outside the control of either party to the contract (for example, performance of a specified act by a
non-party to the contract or a weather condition).

• Within the control of one or both parties to the contract (for example, the performance of a specified act
by one of the parties).

Provisions that require one or both parties to perform an act or refrain from performance are often ambiguous
because they can function as covenants, conditions, or both. If the contractual language does not clearly define
whether the provision is a condition or a covenant (or both), a court is likely to construe it as a covenant.

The difference is that failure to satisfy a condition normally results in a loss of rights (including, in certain
situations, termination of the agreement), while failure to support a covenant usually just triggers a claim for
breach (unless that covenant also functions as a condition). Courts are generally averse to forfeiture of rights.
Therefore, they are likely to construe an ambiguous condition as a covenant and not a condition.

If the parties intend for a condition requiring performance to be construed as a condition and not as a covenant,
they should draft the provision to eliminate any potential ambiguity. This is especially significant if a party
wants to limit its potential liability to a loss of rights under a transaction (or to loss of the transaction itself) in
contrast to facing a potential breach claim for failure to perform.

Conversely, if a party wants to ensure that it has a concurrent claim for breach and not just an excuse of
performance, the contract should include both:

• A condition.

• A matching covenant.

For example, if a contract for the sale of goods includes, as a condition to the buyer’s payment obligation, the
requirement that the buyer has received the applicable goods, it is not sufficient to rely on this condition to
ensure timely delivery. The buyer should consider adding a separate covenant requiring the seller to deliver all
goods within a certain period after accepting the buyer’s purchase order. Otherwise, the buyer has no breach
claim for late delivery, only the right to withhold payment.

Relationship Between Representations and Warranties, Covenants, and

Indemnification
A commercial contract almost always contains an indemnification provision as an express remedy (whether or
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not it is designated as the exclusive remedy) for:

• Inaccurate or breached representations and warranties.

• Breaches of some or all covenants.

(See Practice Note, Indemnification Clauses in Commercial Contracts.)

When drafting and negotiating a contract, counsel should consider:

• The numerous ways that representations, warranties, and covenants interact with one another.

• How representations, warranties, and covenants relate to the indemnification provision.

• How the interaction of representations, warranties and covenants, and their interrelationship with
indemnification limit or expand that party’s remedial rights and obligations.

General Considerations for Both Parties

When structuring the relationship between representations, warranties, covenants, and indemnification, each
party should consider the following:

• Specificity of remedies. Each party should review the other remedial and remedy-related provisions that
can be incorporated into the contract and consider how they affect the operation of the indemnification
provision (see Box, Related Provisions).

• Exclusivity of remedies. Each party should determine whether:

• indemnification should be designated the exclusive remedy for inaccuracies or breaches of

representations and warranties; and

• indemnification, liquidated damages, or a combination of both should be designated the exclusive

remedy for breaches of covenants.

• In each case, the parties should consider any recommended exceptions to exclusivity of the chosen
remedies.

• Limitation on remedies. Each party should consider whether the contractual indemnification provision
(see Standard Clause, General Contract Clauses: Indemnification) should be:

• limited to losses from claims made by a third party against the indemnified party (known as third-party
claims) or also include claims that the indemnified party has against the indemnifying party (known
as direct claims);

• subject to caps, baskets, and other liability limitations, which may not apply to claims that are not
covered by indemnification; and

• subject to carve-outs for certain types of losses (for example, intellectual property breaches and losses
due to an indemnified party’s gross negligence, recklessness, or intentional wrongdoing).

• Applicability of tort principles. Each party should determine whether it wants to preserve or avoid the
applicability of tort principles (which depends on governing state law), including whether the court is
likely to:

• award extra-contractual tort remedies (for example, punitive damages) for misrepresentation; or
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• require proof of actual reliance to recover for inaccuracies and breaches of representations and
warranties.

• (See Direct Claims for Inaccuracies and Breaches of Representations and Warranties.)

Considerations for the Maker of Representations and Warranties

The maker of representations and warranties (often the seller or service provider in a commercial transaction)
commonly tries to:

• Limit the impact of representations and warranties (see Limiting the Impact of Representations and
Warranties).

• Limit the scope of indemnification (see Limiting the Scope of Indemnification).

• Limit other contractual remedies (see Limiting Other Remedies).

• Avoid the potential application of tort remedies (see Avoiding the Application of Tort Remedies).

Limiting the Impact of Representations and Warranties

Makers of representations and warranties limit the impact of representations and warranties by:

• Qualifying representations and warranties (see Practice Note, Representations, Warranties, Covenants,
Rights, and Conditions: Qualifying Representations and Warranties).

• Limiting survival of representations and warranties (see Practice Note, Representations, Warranties,
Covenants, Rights, and Conditions: Survival of Representations and Warranties).

• Including anti-sandbagging provisions to prohibit the recipient from making claims for breach or
inaccuracy of any representations or warranties known by the recipient to be untrue when made (see
Practice Note, Representations, Warranties, Covenants, Rights, and Conditions: Anti-sandbagging
Provisions).

• Designating indemnification as an exclusive remedy for inaccuracy or breach of representations and

warranties (see Additional Considerations Relating to the Scope of Indemnification).

Limiting the Scope of Indemnification

Makers of representations and warranties limit the scope of indemnification by:

• Restricting indemnification rights only to final, non-appealable judgments and actual inaccuracies and
breaches (instead of those merely alleged).

• Adding:

• materiality and other qualifiers;

• caps and baskets; and

• exclusions for certain types of claims (for example, losses due to the indemnified party’s gross
negligence, recklessness, or intentional wrongdoing).

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(See Standard Clause, General Contract Clauses: Indemnification.)

Limiting Other Remedies

If indemnification is not designated the exclusive remedy for all inaccuracies and breaches of representations
and warranties (for example, if it covers only third-party claims), makers of representations and warranties
attempt to limit other remedies by:

• Including a limitation of liability provision (see Standard Clause, General Contract Clauses: Limitation of
Liability), which commonly:

• provides for an overall contractual liability cap; and

• waives incidental, consequential, punitive and other indirect damages.

• Resisting carve-outs to caps and liability limitations.

Avoiding the Application of Tort Remedies

Makers of representations and warranties attempt to avoid the potential application of extra-contractual tort
remedies for misrepresentation by:

• Structuring the contract to restrict remedies for inaccuracy or breach of representations and warranties to
limited, express contractual remedies.

• Including related contractual provisions intended to support the enforceability of this structure.

(See Direct Claims for Inaccuracies and Breaches of Representations and Warranties and Box, Supporting
Indemnification as an Exclusive Remedy.)

Considerations for the Recipient of Representations and Warranties

The recipient of representations and warranties (often the buyer or service recipient in a commercial
transaction) commonly tries to:

• Maximize the effect of representations and warranties (see Maximizing the Effect of Representations and
Warranties).

• Maximize the scope of indemnification (see Maximizing the Scope of Indemnification).

• Minimize the scope of liability limitations (see Minimizing the Scope of Liability Limitations).

• Insist on joint and several liability for multiple makers (see Providing for Joint and Several Liability).

Maximizing the Effect of Representations and Warranties

Recipients of representations and warranties maximize the effect of representations and warranties by:

• Retaining broadly worded representations and warranties, and resisting those that are overly qualified or
limited (see Practice Note, Representations, Warranties, Covenants, Rights, and Conditions: Limiting the
Scope and Effect of Representations and Warranties).

• Negotiating a sufficient survival period for representations and warranties (see Practice Note,
Representations, Warranties, Covenants, Rights, and Conditions: Survival of Representations and
Warranties).
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• Preserving the right to rely on representations and warranties known to be inaccurate by:

• resisting inclusion of an anti-sandbagging provision (see Practice Note, Representations, Warranties,

Covenants, Rights, and Conditions: Anti-sandbagging Provisions); and

• trying to include a sandbagging provision (see Practice Note, Representations, Warranties, Covenants,
Rights, and Conditions: Note on Sandbagging).

Maximizing the Scope of Indemnification

Recipients of representations and warranties maximize the scope of indemnification (see Standard Clause,
General Contract Clauses: Indemnification) by:

• Defining losses subject to indemnification broadly to include alleged breaches and pre-judgment losses.

• Resisting further materiality and other qualifications.

• Reinforcing qualified and otherwise limited representations and warranties for purposes of
indemnification by including a clause (sometimes referred to as a materiality scrape or a materiality
read-out) that eliminates materiality, material adverse effect, and other similar qualifications for
indemnification purposes (see Standard Clause, Purchase Agreement: Materiality Scrape).

• Excluding claims relating to selected representations and warranties from caps and baskets.

• Covering, as separate indemnifiable matters, liability for types of losses that the maker is unwilling to
include within its representations and warranties (often because the maker knows that the statement of
fact is not true).

Minimizing the Scope of Liability Limitations

Recipients of representations and warranties minimize the scope of liability limitations by:

• Insisting on appropriately sized liability caps (see Standard Clause, General Contract Clauses: Limitation
of Liability).

• Excluding certain categories of losses from the application of liability caps and from waivers of
incidental, consequential, punitive, and other indirect damages (see Standard Clause, General Contract
Clauses: Limitation of Liability). These categories often include:

• indemnification for third-party claims;

• losses due to a party’s gross negligence, recklessness, or intentional wrongdoing;

• intellectual property breaches and violations; and

• breaches of confidentiality obligations.

Providing for Joint and Several Liability

If there are multiple parties making the same representations and warranties and undertaking any of the same
obligations, recipients commonly insist that multiple parties be jointly and severally liable for all inaccuracies
and breaches (see Standard Clause, General Contract Clauses: Joint and Several Liability).

Additional Considerations Relating to the Scope of Indemnification

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In most commercial transactions, indemnification is designated the exclusive remedy for all losses arising out of
third-party claims based on inaccuracies or breaches of representations and warranties (see Standard Clause,
General Contract Clauses: Indemnification: Section 2.6). In some agreements, the parties also designate
indemnification as the exclusive remedy for losses arising out of:

• Direct claims for inaccuracies or breaches of representations and warranties (see Direct Claims for
Inaccuracies and Breaches of Representations and Warranties).

• Direct and third-party claims for breaches of some or all covenants (see Direct and Third-Party Claims
Relating to Breaches of Covenants).

In certain types of transactions (for example, in M&A transactions that close (noting that there are other express
remedies that may apply pre-closing)), indemnification is commonly selected as the exclusive remedy for all
losses (from direct and third-party claims) arising out of inaccuracies or breaches of representations and
warranties, and many or all breaches of covenants (see Key Negotiating Points in Private Acquisition
Agreements Comparison Chart: Indemnification). In other types of commercial transactions, the parties make
this decision based on the unique facts and circumstances of the particular transaction.

Direct Claims for Inaccuracies and Breaches of Representations and Warranties

When deciding whether to include direct claims for inaccuracy or breach of representations and warranties
within the scope of indemnification, each party should consider certain key factors, including:

• Recovery of attorneys’ fees. A party’s ability to recover attorneys’ fees often differs under an
indemnification claim from what is available under a common law suit for breach of contract or
misrepresentation. Under a contractual indemnification provision, the indemnifying party is liable for the
recipient’s attorneys’ fees if:

• the indemnification provision includes the duty to defend; and

• covered losses include attorneys’ fees (see Standard Clause, General Contract Clauses:
Indemnification).

• Most indemnification provisions include both the duty to defend and attorneys’ fees within the definition
of covered losses. Otherwise, attorneys’ fees are not typically recoverable unless the contract includes an
attorneys’ fee provision (see Standard Clause, General Contract Clauses: Litigation Costs and Expenses)
and the recipient prevails in litigation.

• Application of liability cap. Some commercial contracts include a general liability cap (see Standard
Clause, General Contract Clauses: Limitation of Liability. Others include a discrete liability cap
applicable to indemnification claims (see Standard Clause, General Contract Clauses: Indemnification:
Section 2.3). In many agreements with a single overall liability cap, indemnification claims are carved out
from the application of the cap (see Standard Clause, General Contract Clauses: Limitation of Liability:
Section 1.3). If the contract includes only a general liability cap, parties must consider whether to carve
out indemnification claims (third-party only or both direct and third-party) from the liability cap. If direct
claims are indemnifiable, the non-breaching party may be able to recover amounts beyond the contract’s
liability cap if:

• the indemnification provision does not include a discrete cap; and

• indemnifiable matters are carved out from the general contractual liability cap.

• Recovery for incidental, consequential, punitive and other indirect damages. Similarly, in limitation of
liability provisions, parties typically negotiate whether to exclude the right to receive incidental,

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consequential, punitive and other indirect damages (see Standard Clause, General Contract Clauses:
Limitation of Liability: Section 1.1). When direct claims are included within the scope of indemnification,
the recipient may be able to recover incidental, consequential, punitive, and other indirect damages for
those claims, even if there is otherwise a general disclaimer of these types of damages, if:

• the indemnification provision does not include a discrete waiver of these types of damages; and

• indemnification is carved out from any general contractual waiver-of-indirect-damages provision.

• Likewise, if incidental, consequential, punitive and other indirect damages are not waived but are
otherwise subject to the liability cap, a party may be able to recover these types of damages beyond the
capped amount if indemnification is carved out from the liability cap and incidental, consequential,
punitive, and other indirect damages are within the scope of indemnified losses.

• Adding back or reinforcing eliminated or qualified representations and warranties to the indemnification
provision. In some contracts, a party is unwilling to make representations and warranties (or is willing to
make only highly qualified representations and warranties) about certain subject matters (for example,
non-infringement of intellectual property rights) because it does not want to be subject to damages
(including punitive damages) for misrepresentation. If the recipient accepts this position, it commonly
tries to negotiate an alternative indemnification right so that it receives some protection against covered
losses relating to these eliminated or qualified representations and warranties.

• Excluding potential tort liability. The maker is more likely to be insulated from extra-contractual tort
damages (including punitive damages) for misrepresentation if the indemnification provision:

• covers direct claims; and

• is the exclusive remedy for all inaccuracies and breaches of representations and warranties.

• To support the likelihood of judicial enforcement of this exclusive remedial structure, counsel should
consider how the indemnification provision interacts with the other remedial and remedy-related
provisions (see Box, Supporting Indemnification as an Exclusive Remedy).

Direct and Third-party Claims Relating to Breaches of Covenants

When deciding whether to include breaches of some or all covenants within the scope of indemnification, the
parties should consider many of the same factors applicable to indemnification for direct claims for inaccuracy
or breach of representations and warranties (see Direct Claims for Inaccuracies and Breaches of Representations
and Warranties), including:

• Recovery of attorneys’ fees.

• Application of a liability cap.

• Recovery for incidental, consequential, punitive, and other indirect damages.

In addition, each party should consider:

• Indemnifying for eliminated or limited covenants. Obligors are sometimes unwilling to undertake
absolute performance of particular obligations, especially if performance requires satisfaction of facts or
events partially or fully outside the control of the obligor. However, as with representations and
warranties (but less common), the obligee may be able to negotiate an alternative indemnification right in
some of these instances for losses relating to its action or inaction. Indemnification may cover losses from
direct claims, but, more commonly, obligors limit indemnification for these types of losses to those from
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third-party claims.

• Specific performance and other equitable remedies. If indemnification is designated an exclusive remedy
for some or all covenant breaches, the obligee is less likely to be able to obtain specific performance or
other equitable remedies (see Practice Note, Contracts: Equitable Remedies).

• Co-obligor liability. If there are co-obligors, the indemnification provision often provides for joint and
several liability. Unless the contract also includes a general co-obligor liability provision designating joint
and several liability for all co-obligor undertakings (including non-indemnity-related undertakings), the
obligee may be better protected if covenant breaches fall within the scope of indemnification.

Interaction Between Indemnification and Other Remedial Provisions

In addition to indemnification, most commercial contracts include many other provisions that expressly address or relate to
remedies for breach or other non-compliance. These provisions, together with indemnification, form the contract’s overall
remedial structure. When drafting or negotiating any particular agreement, counsel should ensure that all of these
provisions are drafted consistently and unambiguously to support the desired remedial framework.

Related Provisions
Remedial provisions related to indemnification include:

• Limitation of liability (see Standard Clause, General Contract Clauses: Limitation of Liability).

• Liquidated damages (see Standard Clause, General Contract Clauses: Liquidated Damages).

• Right of termination (see Standard Clause, General Contract Clauses: Term and Termination: Section 1.3).

• Cumulative remedies (see Standard Clause, General Contract Clauses: Cumulative Remedies (with Exclusive
Remedies Carve-Out)).

• Equitable remedies (see Standard Clause, General Contract Clauses: Equitable Remedies).

• Attorneys’ fees (see Standard Clause, General Contract Clauses: Litigation Costs and Expenses).

Other remedy-related provisions include:

• Entire agreement (see Standard Clause, General Contract Clauses: Entire Agreement).

• Disclaimer of extra-contractual representations and warranties and no-reliance (see Standard Clause, General
Contract Clauses: Representations and Warranties: Section 1.3).

• Waiver (see Standard Clause, General Contract Clauses: Waivers).

• Choice of law (see Standard Clause, General Contract Clauses: Choice of Law).

• Choice of forum (see Standard Clause, General Contract Clauses: Choice of Forum).

Supporting Indemnification as an Exclusive Remedy

If parties to a commercial contract agree to make indemnification the exclusive remedy for all damages under or relating to
the agreement, their intention is for a court to enforce the exclusive remedy and not apply extra-contractual contract and

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Relationship Between Representations, Warranties,..., Practical Law Practice...

tort remedies. To try to achieve this goal, the parties commonly construct a remedial structure that:

• Designates indemnification as the exclusive remedy for all direct and third-party claims arising out of:

• inaccuracy or breach of representations and warranties; and

• breaches of any covenants.

• In most contracts, this is achieved by broadly defining the scope of indemnification (see Standard Clause, General
Contract Clauses: Indemnification: Section 1) and designating indemnification as the exclusive remedy for all
covered claims (see Standard Clause, General Contract Clauses: Indemnification: Section 2.6).

• Excludes a cumulative remedies clause (to avoid contradicting the exclusive remedies provisions) (see Standard
Clause, General Contract Clauses: Cumulative Remedies (with Exclusive Remedies Carve-out)).

• Excludes an equitable remedies clause (to avoid contradicting the exclusive remedies provisions) (see Standard
Clause, General Contract Clauses: Equitable Remedies).

• May include a no-equitable-relief clause (see Standard Clause, General Contract Clauses: No Equitable Relief).

• Includes a carefully drafted entire agreement provision that expressly mentions representations and warranties (see
Standard Clause, General Contract Clauses: Entire Agreement).

• Includes a disclaimer of extra-contractual representations and warranties and disclaimer of reliance provision (see
Standard Clause, General Contract Clauses: Representations and Warranties: Section 1.3).

• Excludes carve-outs for misrepresentation, fraud, or intentional misconduct from indemnification or other limitation
of liability clauses (see Standard Clause, General Contract Clauses: Limitation of Liability: Section 1.3).

• Has a broadly drafted choice of law clause (see Standard Clause, General Contract Clauses: Choice of Law) with
selected governing law of a state that is likely to enforce this structure.

Selection of Governing Law and Enforceability

Enforceability of a contract’s exclusive remedy structure depends on applicable state law. Parties should consider the
relative flexibility and limitations of applicable state law when drafting a particular agreement.

If the obligor and maker of representations and warranties is trying to limit recovery to an express contractual
indemnification right, counsel should make sure to comprehensively and unambiguously support this structure throughout
the agreement, including the selection of governing law from a state that is likely to enforce it.

Variations on state law also affect the ability of the obligee and recipient of representations and warranties to receive its
contractual benefit of the bargain, most often in relation to recovery for inaccuracies or breaches of representations and
warranties. Different state approaches include:

• Requiring an aggrieved party to prove actual reliance as a condition to recover for breach or inaccuracy of
representations and warranties (for example, Minnesota).

• Focusing on the contractual nature of these claims and only requiring proof that the breach or inaccuracy occurred
(for example, Massachusetts).

• Taking a hybrid approach (for example, New York). The court may not require reliance, but instead hold that a
recipient of representations and warranties that had knowledge obtained from the maker of any inaccuracies or
breaches waived its right to sue for those inaccuracies or breaches unless the contract expressly preserved this right

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Relationship Between Representations, Warranties,..., Practical Law Practice...

(for example, through a sandbagging provision (see Practice Note, Representations, Warranties, Covenants, Rights,
and Conditions: Note on Sandbagging)).

To support judicial enforcement of a selected remedial structure, parties should broadly draft the choice of law clause to
apply the governing law to all matters arising out of and relating to the agreement, even if they are not explicitly a matter
of contract law (see Standard Clause, General Contract Clauses: Choice of Law: Drafting Note: Extra-Contractual
Matters).

END OF DOCUMENT

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