Obligations binding
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Representations and Warranties Anatomy™
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You may see assiduous types striking out a representation or warranty that its own contractual obligations are “legal, valid, binding and enforceable in accordance with their terms”.
The grounds for resisting such an obvious and evidently harmless statement will be the technical one that “the question of whether a contract is enforceable or not is one of law, not fact, and therefore is a fit subject for a legal opinion, not a factual representation. I, the client, on whom this contract will — or, who knows? will not — be binding, am not qualified to opine on that.
Phooey and nonsense.
When she deals, a merchant takes outright ownership of her business affairs. This includes their legal consequences. She takes legally significant actions all day, on every day. We all do. She may be advised by her lawyers, on especially tricky ones, when she does, but the statement that a merchant who stands ready to take the undeniable value presented to her a new contract, but is not prepared to swear on her mother’s favourite cotton jumper that the obligations she is promising to give in return for that benefit — you know, literally promising to give — will be enforceable to the full extent of the law, is patently absurd.
Now there was once a time the JC would have nodded along and said, yes, this is representation that transgresses the very first rule of representations and warranties, which is that they are meant to be about matters of private, present fact, known to the representor but not the representee, but about which the representee cares a lot, and which might colour its decision to enter the contract in the first place.
but the practical facts of the matter is that “obligations binding” are part of the commonplace, in boilerplate up and down the land, and while there are tendentious theoretical arguments to resist giving such a representation, there are absolutely no good practical ones.
It is true that the validity, enforceability and bindingness of a contract is a matter of law; but it is a pretty fundamental one that one should know about oneself without recourse to an external legal adviser. The gossamer latticework of international, and national regulation being what it is, one’s regulatory status, which parts of whose regulatory perimeter you fall in or out of ought to be clear enough to you, but will be by no means obvious to your counterparty, and it is a sign of basic nose-breathing competence that you should know it, and be able to confidently say it to your counterpart should she ask about it.
It in theory requires an opinion, from one qualified to give one — and that is a reasonable conclusion for a third party to draw, if there really is no other way of getting to the bottom of the matter — but not a first party. First parties need to know what one they are and are not permitted do, so save themselves from winding up in the slammer, and it won’t do — as lawyers from as august an institution as Goldman Sachs have been known to — to be unprepared to make that statement about their own firm, unsupported by written evidence from Sullivan and Cromwell to a counterparty who asks them.
The obligations binding representation offends another principle of contractual representation, too: it is a pre-contractual statement as to a legal state of affairs which, by definition, has not yet come about. The “bindingness” of the contract is not a present fact at the time this representation is made. Representations as to the expected state of the world in the future are not generally called “representations”. They are called “promises”.
There is a slight paradox about it all the same: a warranty, or representation, about a notionally current state of affairs, presents some kind of existential state of undecidability that not even Kurt Gödel can let us out of. For if this warranty is wrong, then the contract it lives in, QED, is invalid — that is to say, for all intents and purposes, does not exist, including this warranty. So precisely when you need to rely on it, you find it has vanished like some kind of that Schrödinger’s cat.
Which, we think is why it is also styled a “representation”.