In our series of posts about representations and warranties we have recently explored the nature and purpose of the “reps and warranties” clause—to use familiar legal shorthand. We now will examine some common representations and warranties in fashion agreements. For convenience, in these posts, we will use warranties to reference both representations and warranties—terms that, as a practical matter, are functionally equivalent in any event.
First, keep in mind that, when lawyers and fashion business people read the same contract, they rarely read the same clauses with particularity. In a fashion license, for example, it is quite typical for the business people to read the grant of rights, promotional obligations and financial clauses—and that may well be about all. The lawyers, meanwhile, are absorbed to the point of obsession over the warranties and the related indemnities clauses—because those terms can determine who wins and who loses, and for how much, in any litigation concerning the contract. So please forgive your lawyer for going OCD over the warranties; he or she is just doing the job the way that nature intended.
The typical first warranty is an affirmation of a party’s existence. That may seem rather unnecessary: if someone is signing the contract, would that not mean that the signatory exists, for that reason alone? The answer is no. Except in those rare cases of a person signing on behalf of his or her sole proprietorship or a partnership in which he or she is a general partner, the person signing is doing so on behalf of an entity that has a separate, albeit fictive existence. Corporations and limited liability companies, that is, are in effect virtual people. They have many of the rights (such as making money) and duties (such as paying taxes) as real people, and they do it without corporeal existence. These “persons” under business law are liable for what the real people who act on their behalf do for them, but those real people, whether employees, equity holders or other participants are, except in specific cases, not personally liable for the acts and omissions of the entity they serve or represent.
In the United States, the entity can only be such a legal “person” by being formed under the laws of a particular state, and it can only trade consistently within another state by being granted the right to do so. And you guessed it: each state involved extracts various fees and taxes for being the virtual location, in whole or part, of the premises and activities of the fictional person. For that reason, the entity will often be called upon to give a warranty that it has done all that is necessary to maintain its existence. The reason is that, if it has not done so, there may literally be no party able to perform under the terms and conditions of the contract that apply to that entity. A typical, if somewhat long form of a warranty of existence looks like this:
Fashion Company represents and warrants that it is a corporation duly organized and existing under the laws of the State of New York, is authorized to do business in the State of California, and has paid all fees, taxes and governmental charges in connection with the foregoing.
In short: the party making the warranty is affirming that it exists and can do business as promised—and that it is current on its obligations to those governmental authorities that grant those allowances. It is a simple promise to make, but it is just about the most important promise that one business entity can give another because, if it is wrong about any of that, it may not even be an entity capable of making any promises at all—in a contract or otherwise.
In contractual due diligence, it never hurts to investigate independently by checking with the databases of the governmental authorities in question that those promises are accurate. That is because, as cynics and pragmatists everywhere remind us, for some out there, “Promises are meant to be broken.”
Credit: Alan Behr
I was buying yet more consumer electronics of questionable utility (everyone needs a hobby) when the salesman recommended that I take the extended warranty. I told him no. As he was trained to do, he then launched into a grave speech about how badly I would be burned if what he had just sworn was the finest piece of technology in its class turned out to be complete crap—but only after the expiration of the manufacturer’s warranty. I explained, as I always do, that I have consistently refused extended warranties and have already won the bet: if all the consumer electronics of questionable utility that I buy from now until the end of my stay on earth should indeed turn into junk during the term of the extended warranties that I will likewise recklessly decline to purchase, I will have saved so much money from all such prior refusals that I will still come out ahead.
Warranty: In a consumer context, it is often the next most important thing (after the brand itself) that gives a potential purchaser confidence in what he or she is about to buy. In a legal context, however, the word has a more demanding set of meanings attached to it.
The clause we are discussing is typically headed “Representations and Warranties.” There has been some debate on what the distinction between a representation and a warranty might be (outside the context of insurance), if indeed there is one: Some believe that this is another of those situations in which lawyers have two words to describe the same thing and, afraid that one might be found incorrect, shove both of them into their contracts. (That is a form of the legal practice commonly known as “belt and suspenders” drafting.) About the best distinction between representations and warranties that has been made comes from the Section of Business Law of the American Bar Association: “Representations are statements of past or existing facts and warranties are promises that existing or future facts are or will be true.”
The main point is that, whatever you call them, the contractual form of what can loosely be called a guarantee is a statement of facts given for the other party to rely upon in agreeing to the covenants in the contract that govern the relying party’s conduct. If the party providing the warranty misstates the facts, grounds have been given for claims of misrepresentation and for breach of warranty.
In upcoming posts, we will explore the implications of that for agreements in the fashion, accessories and related businesses.
Credit: Alan Behr