Monday, December 13, 2021
I spent a bunch of the day today reading an excellent draft paper written by one of my 3L students. The paper is about fraud carveouts in no seller indemnity deals backed by representations and warranties insurance. But this post is not about that. It is about a question I asked the student (and myself) in connection with my review of the paper about how to classify or label certain provisions she was describing.
The standard structure of an M&A agreement includes articles clearly labeled as including representations and warranties, covenants, and conditions. However, other articles are not as transparent in advertising their contents. An article entitled "Indemnification" typically does include an express agreement (sometimes mutual agreements) to indemnify that would easily be classified as a covenant. But that article also may include an exclusive remedy provision, restricting recourse for a breach of representation or warranty to the indemnification. An example would be as follows (courtesy of Law Insider):
Sole and Exclusive Remedy. From and after the Closing, the indemnification provisions of this Article XII shall be the sole and exclusive remedy of each Party (including the Seller Indemnified Parties and the Purchaser Indemnified Parties) (i) for any breach of any Party’s representations, warranties, covenants or agreements contained in this Agreement or (ii) otherwise with respect to this Agreement or the transactions contemplated hereby with respect to the Company, other than in the case of (i) and (ii) instances of fraud or intentional misconduct or claims for non-monetary relief with respect to the enforcement of Section 6.02 or 8.03. In furtherance of the foregoing, each Party hereby waives, to the fullest extent permitted under Applicable Law, any and all rights, claims and causes of action it may have against another Party hereunder or under Applicable Law with respect to the claims described in clauses (i) and (ii) above, other than instances of fraud or intentional misconduct or claims for non-monetary relief with respect to the enforcement of Section 6.02 or 8.03.
The first part of this provision is treated as an enforceable agreement between the parties even though it reads somewhat more like an acknowledgement, affirmation, or promise. Indeed, the provision expresses an understanding between the parties. So it also is likely best classified as a covenant. The last part is a waiver.
But what about some of the provisions included in the M&A article entitled "Miscellaneous" (or sometimes "General" or the like)? Let's take an integration clause like this one (also courtesy of Law Insider):
Integration Clause. This Agreement, including all attachments and exhibits hereto, supersede[s] all prior oral or written agreements, if any, between the parties and constitutes the entire agreement between the parties with respect to the work to be performed.
Or an non-reliance provision like this one (again, courtesy of Law Insider):
Non-Reliance. Each Party acknowledges that in agreeing to this Agreement it has not relied on any oral or written representation, warranty or other assurance, except as otherwise set forth in this Agreement, and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a Party for fraud.
How might we classify and label those provisions? Neither reads like a covenant--an actionable, enforceable, agreement or promise. Each provides atmosphere or context.
All of this worry about classification and labeling may not be worth much in the end. Apart from accurate descriptions in expository writing, do we really care how these contract provisions are classified and labeled? Certainly, it helps us to have labels that we can attach to performance and compliance descriptors in discussing contract enforcement (e.g., representations and warranties are accurate and complete or breached; covenants are complied with or there is a failure of compliance). But maybe there is not much else in a label . . . . Admittedly, I have not researched the matter or thought through any significant legal ramifications; I am just sharing reactions and impressions based on my review of a student paper. As a result (and as always), your views and ideas are welcomed.