What are the most important terms in a commercial contract? Different people have different perspectives, but most attorneys will tell you that it is actually the way that the terms in the contract work together that is most critical to protecting parties' interests in the event of a dispute.
This is especially true with regard to the legal terms - the "boilerplate" that usually appears after the substantive provisions of the contract. When it comes to mitigating risk and apportioning liability, the indemnification, representation and warranty provisions of a contract will usually take on a central role in informing the parties' strategies for commercial litigation.
Indemnification, Representations and Warranties
Let's start with an overview of the basic terminology. While these terms tend to get thrown around (and are often used interchangeably), indemnification, representations and warranties are all distinct legal concepts that have their own unique and important implications:
- Indemnification - An indemnification obligation is a duty for one contracting party to take on the other contracting party's third-party liability. Take, for example, a subcontractor's agreement to cover a general contractor for claims by the property owner arising out of the subcontractor's negligence. This is a classic example of an indemnification obligation.
- Representations - A representation is (or is supposed to be) a statement of fact. Contractual representations are intended to allow the parties to rely on their respective understandings of the present circumstances when entering into the agreement. For example, "ABC, Inc. has all necessary licenses to perform its obligations under this agreement," is an example of a common type of representation that frequently appears in construction agreements and other commercial contracts.
- Warranties - While representations reflect present circumstances, warranties are promises about the future. "ABC, Inc. will comply with all applicable laws and regulations in performing its obligations under this agreement." Unlike the representation example above, this example of a common warranty provision focuses on the parties' expectations following contract execution.
Ambiguity in Contract "Boilerplate" Can Lead to Litigation
Indemnification, representation and warranty provisions must all be carefully drafted taking into consideration how they could affect one another. For example, consider a contract that includes these two provisions:
- "ABC, Inc. will comply with all applicable laws and regulations in performing its obligations under this agreement."
- "XYZ Corp. will indemnify ABC, Inc. for all third-party claims arising out of this agreement."
What if ABC, Inc. gets sued because it violates the law? Would XYZ Corp. still be required to indemnify? What does it mean for a claim to "arise out of" the parties' contract? These are all very real - and very common - questions that can easily lead to costly disputes. When commercial parties run into issues that implicate the terms of their written agreements, understanding what these agreements say (and don't say) in is the first step toward making an informed decision about pursuing litigation.
Speak with a Business Litigation Attorney in Fort Lauderdale, FL
With offices in Fort Lauderdale, Michael L. Feinstein, P.A. represents commercial parties in complex business litigation throughout South Florida. If you are facing a commercial contract dispute and would like to discuss your situation with an attorney, call (954) 767-9662 or contact us online to schedule an initial consultation.