General Contract Clauses: Representations and Warranties (OH)

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Resource ID: w-009-1046

MARY K. NEWMAN, DINSMORE & SHOHL LLP, WITH PRACTICAL LAW COMMERCIAL TRANSACTIONS

Search the Resource ID numbers in blue on Westlaw for more. Standard Clauses providing general representations and warranties for a commercial sale of goods or services transaction under Ohio law. This resource also includes a disclaimer of other representations and warranties and acknowledgment of non- reliance sub-section. These Standard Clauses have integrated notes with important explanations and drafting tips.

DRAFTING NOTE: READ THIS BEFORE USING DOCUMENT

Representations and warranties are two induces a prospective purchaser to principal components of most commercial buy, or implied, where, considering contracts. Technically, they have different the relations between the parties, meanings: the nature of the transaction and the A representation: surrounding circumstances, a warranty is imposed by operation of law (Rogers v. zzis an assertion or statement of fact, Toni Home Permanent Co., 147 N.E.2d given by one party (maker) to induce 612, 616 (Ohio 1958)). another party (recipient) to enter into a contract or take some other In addition to inducing the recipient to action; enter into the contract, representations and zzmay apply to the past or present; and warranties are used to: zzmay be express or implied. Allow the maker to disclose information to avoid potential liability. A warranty: Allow the recipient to obtain information zzis a promise that a condition or an assertion of fact is true, supported by and assurances from the maker. an implied promise of indemnity if the Allocate risk between the parties by: condition or assertion is false; zzapportioning exposure to potential zzmay apply to the present and future losses and shifting risk from one party (see Solomon Sturges & Co. v. Bank to another; of Circleville, 11 Ohio St. 153, 169 (Ohio zzcreating a direct claim against 1860)); and the maker if representations zzmay be either express, where there is are inaccurate or warranties are a positive representation of fact that breached; and

zzserving as a basis for the parties’ seller or service provider and for the buyer indemnification obligations (see or service recipient, even though many Standard Clauses, General Contract standard representations and warranties are Clauses: Indemnification (OH) given mutually by the parties. (w-000-1141)). These clauses can be revised if the drafter Trigger a contractual termination right. prefers to make some of the representations In most commercial contracts, each and warranties mutual instead of including party represents and warrants to any separate sub-sections for each party. When given statement of fact concurrently and revising these clauses to create a mutual interchangeably. So, each statement of provision, if the contracting parties are fact serves as both a representation and a different types of legal entities (for example, warranty. Many agreements expressly limit if one is a corporation and the other is a the recipient’s remedies for inaccuracy or limited liability company (LLC)), the drafter breach of representations and warranties should generalize each of the entity-specific to either: references. Indemnification rights. These Standard Clauses are not Other express remedies. drafted in favor of either party. Counsel should customize these provisions to Therefore, despite their technical reflect: differences, in practice, any functional The facts and circumstances of the distinction between representations and particular transaction. warranties is, in most cases, irrelevant (see Practice Note, Representations, Each party’s relative bargaining position Warranties, Covenants, Rights, and and risk tolerance, including the effect Conditions: Functional Differences on the representations and warranties of between Representations and Warranties any indemnification or other provisions in (9-519-8869)). However, the distinction the agreement (for example, counsel may between representation and warranties may negotiate and provide certain warranties if have significance in specialized areas of the they do not survive the closing or are subject law (for example, insurance law) (see Care to favorable liability caps and baskets). Risk Retention Group v. Martin, 947 N.E.2d 1214, ¶ 62 (Ohio 2d Dist. 2010)). Types of Representations and Warranties In most commercial contracts, the parties For more information on representations make: and warranties, see Practice Note, Representations, Warranties, Covenants, Standard representations and warranties. Rights, and Conditions: Representations and Transaction-specific representations and Warranties (9-519-8869). For information warranties. on the relationship between representations Standard representations and warranties and warranties and indemnification and commonly relate to: other remedial and remedy-related contract provisions, see Practice Note, Relationship The party itself. Between Representations, Warranties, The validity and enforceability of the Covenants, Rights, and Conditions: contract. Relationship Between Representations and In a commercial contract, transaction- Warranties, Covenants, and Indemnification specific representations and warranties (7-519-8870). typically relate to the nature, type, quality, and condition of the goods, assets, or SCOPE OF STANDARD CLAUSES services central to the subject matter of These Standard Clauses are general the agreement. For example, a party may representations and warranties commonly warrant that a purchased good (for example, used in a variety of commercial contracts. a machine) is free from defects in material To allow for greater drafting flexibility, and workmanship, under normal use and they include separate sub-clauses for the service, for a specified period of time (see,

for example, Caterpillar Fin. Servs. Corp. v. on which the agreement is executed by the Harold Tatman & Son’s Ents., Inc., 50 N.E.3d parties. They typically relate to either: 955, ¶ 15 (Ohio 4th Dist. 2015)). Sellers and The present. service providers, who often have most of Periods or points in time that occurred in the performance obligations, typically make the past. more transaction-specific representations and warranties than buyers and service recipients. For example, an Ohio court found that representations at issue in the case were These Standard Clauses include standard made as of the signing date and, again, as representations and warranties and some of the closing date of the transaction (see optional transaction-specific representations Carnahan v. SCI Ohio Funeral Services, Inc., and warranties that may be appropriate for 2001 WL 242555, at *9 (Ohio App. 10 Dist.)). certain types of commercial agreements. They do not include product and service warranties, In some agreements, however, the parties which are specialized contractual provisions include language stating that the facts of the that combine the concept of a warranty representations and warranties will be true and a covenant (see Representations and in the future. These statements are actually Warranties or Covenants?). For information disguised covenants. The maker is effectively on product warranties under the Uniform promising to act or refrain from acting in a Commercial Code (UCC), see Practice Note, manner that will result in the future accuracy UCC Article 2 Express Warranties (OH): of the presently made statement. Examples Express Warranties Under UCC Article 2 of representations and warranties that are (in (w-001-7823). whole or in part) disguised covenants include statements that: For examples of product and service warranty provisions, see Standard A party will be in compliance with Documents: applicable laws throughout the term of a contract. General Purchase Order Terms and Conditions (Pro-Buyer): Section 15 Goods sold or services rendered during (3-504-2036). the term of the contract will meet certain quality standards. Product Reseller Agreement (Pro- Supplier): Section 17.02 (4-517-9793). A party will devote adequate resources to the sale and marketing of goods Professional Services Agreement: purchased for re-sale. Section 10.2 (9-500-2928). This technical distinction can have practical These Standard Clauses also do not include consequences. Legal, equitable, and express the numerous and detailed representations contractual remedies may be different for and warranties contained in M&A and inaccuracies or breaches of representations finance agreements. For examples of and warranties than they are for breaches representations and warranties included of covenants. For example, a breach of in acquisition agreements, see Standard representations may give a party the right Document, Asset Purchase Agreement to void a contract or rescission damages, (Pro-Buyer Long Form): Articles IV while a breach of covenants may give rise to (6-384-1736) and Article V (6-384-1736), and injunctive relief or specific performance. Standard Clauses, IP Representations: Stock Purchase (Pro-Buyer) (0-517-0657). For Parties to a commercial agreement should examples of representations and warranties consider the practical implications of included in loan agreements, see Standard including disguised covenants within the Clauses, Loan Agreement: Representations representations and warranties section and Warranties (0-383-3169). of the agreement (see Practice Note, Relationship between Representations, Representations and Warranties Warranties, Covenants, Rights, and or Covenants Conditions: Representation and Warranty or Representations and warranties are made Covenant? (7-519-8870)). These Standard on or “as of” a specific date, often the date Clauses are limited to true representations

and warranties and assume that all zzStandard Clauses, General Contract covenants are included in other sections of Clauses: Liquidated Damages (OH) the contract. (w-000-1171). When drafting or reviewing a commercial Right of termination. This is a provision contract, counsel should consider each that grants one or both parties the right to representation and warranty and whether terminate the contract for: it is appropriate to include a corresponding zzinaccurate representations or breached covenant. For example, representations warranties; and warranties that often support adding zzuncured covenant breaches; or corresponding covenants include: zzsometimes, for unsatisfied conditions. Compliance with law. (See Standard Clauses, General Contract Licenses, permits, and approvals. Clauses: Term and Termination (OH): Professional and workmanlike manner. Section 1.3 (w-001-7827)). Intellectual property (IP) rights. Cumulative remedies. This clause states the parties’ intention that the rights Related Clauses and remedies set out in the agreement In addition to discrete provisions for product are in addition to any other rights or and service warranties, related clauses remedies provided by law or equity and include: not in substitution for them (see Standard Clauses, General Contract Clauses: Indemnification. This is a remedial clause Cumulative Remedies (with Exclusive that creates an express obligation for one Remedies Carve-out) (OH) (w-001-7829)). party to reimburse the other party or pay directly for certain costs and other expenses Equitable remedies. This clause states typically arising from the indemnifying the parties’ intention to provide for party’s inaccuracy of representations, equitable remedies for breach of contract breach of warranties, and breach of in addition to or instead of monetary relief some or all covenants (see Practice Note, (see Standard Contract Clauses, General Indemnification Clauses in Commercial Contract Clauses: Equitable Remedies Contracts (OH) (w-006-3791) and Standard (OH) (w-001-7828)). Clauses, General Contract Clauses: Entire agreement. This clause (also Indemnification (OH) (w-000-1141)). known as a merger or integration clause) Limitation of liability. These clauses prevents the parties from being liable restrict the amount and kind of damages for any understandings, agreements, for which a party to the agreement may representations, or remedies other than be held liable. These limitations typically: those expressly set out in the agreement (see Standard Clauses, General Contract zzexclude incidental, consequential, Clauses: Entire Agreement (OH) punitive, and other indirect (w-008-2049)). damages; and zzlimit the overall monetary liability ASSUMPTIONS amount (also known as a cap) of a party under the agreement. These Standard Clauses assume that: (See Standard Clauses, General Contract The agreement is governed by Ohio Clauses: Limitation of Liability (OH) law. If the law of another state applies, (w-000-1253)). these terms may have to be modified to comply with the laws of the applicable Exclusive remedy. Clauses in this jurisdiction. category purport to give a party an exclusive remedy for a particular type of This is a commercial agreement for breach. See Standard Clauses: the sale of goods or services. These Standard Clauses are intended for use in zzStandard Clauses, General Contract a commercial agreement involving the Clauses: Indemnification (OH): sale of goods or services. They are readily Section 2.6 (w-000-1141); and

adaptable for other types of commercial parties are making their representations transactions, but should not be used in and warranties severally, jointly, or jointly specialized corporate or finance contracts and severally (see Standard Clauses, (for example, merger and acquisition General Contract Clauses: Joint and agreements, loan agreements, and Several Liability (OH) (w-000-1173)). security agreements), which contain more Both parties to the agreement are comprehensive standard representations corporations, LLCs, or other types of legal and warranties and many additional entities and not individual persons. Some transaction-specific representations and of the representations and warranties warranties. For more information and contained in the Standard Clauses (for examples of specialized representations example, those covering due organization and warranties, see: and qualification) are only applicable to a zzPractice Note, Stock Purchase legal entity and not to an individual person. Agreement Commentary: In addition, these provisions are not drafted Representations and Warranties for an individual signatory. If either party (6-381-0589); to the agreement is an individual person, zzStandard Document, Asset Purchase the relevant provisions must be modified to Agreement (Pro-Buyer Long Form): address this distinction. Article IV (6-384-1736) and Article V The parties to the agreement are US (6-384-1736); entities and the transaction takes place zzStandard Clauses, IP Representations: in the US. If any party is organized or Stock Purchase (Pro-Buyer) operates in, or any part of the transaction (0-517-0657); and takes place in a foreign jurisdiction, these terms may have to be modified to comply zzStandard Clauses, Loan Agreement: with applicable laws in the relevant Representations and Warranties foreign jurisdiction. (0-383-3169). All references to the “UCC” refer to the Product and services warranties, if any, Ohio Uniform Commercial Code. The will be handled in a separate provision information contained in these Standard or sub-clause. These provisions do not Clauses is specific to Ohio and refers to include product and service warranties, the Uniform Commercial Code enacted which may be added in a separate under Ohio law and not the model sub-clause within this section or set out in Uniform Commercial Code. a stand-alone provision of the agreement (see Standard Document, Product These terms are being used in a Reseller Agreement (Pro-Supplier): business-to-business transaction. These Section 17.02 (4-517-9793)). For more Standard Clauses should not be used in information on product warranties, see a consumer contract, which may involve Practice Note, UCC Article 2 Express legal and regulatory requirements and Warranties (OH): Express Warranties practical considerations that are beyond Under UCC Article 2 (w-001-7823) and the scope of this resource. Standard Document, General Purchase These terms are not industry-specific. Order Terms and Conditions (Pro-Buyer): These Standard Clauses do not account Section 15 (3-504-2036). for any industry-specific laws, rules, or The buyer or customer and seller or regulations that may apply to certain service provider are the only two parties transactions, products, or services. to the agreement. The parties should Capitalized terms are defined elsewhere revise the Standard Clauses if additional in the agreement. Certain terms are parties, like the seller’s affiliates, also capitalized but not defined in these have rights or obligations under the Standard Clauses because they are defined agreement. If there are multiple parties elsewhere in the agreement (for example, on one side of the transaction making Agreement, Buyer, Customer, Seller, representations and warranties, the Service Provider, Goods, Services, Law, parties should determine whether these Deliverables, and Intellectual Property).

BRACKETED ITEMS optional provisions or include alternative language choices, to be selected, added, or Bracketed items in ALL CAPS should be deleted at the drafter’s discretion. completed with the facts of the transaction. Bracketed items in sentence case are either

1. Representations and Warranties. 1.1 Representations and Warranties of the [Seller/Service Provider]. [Seller/Service Provider] represents and warrants to [Buyer/Customer] that:

DRAFTING NOTE: REPRESENTATIONS AND WARRANTIES OF THE SELLER/ SERVICE PROVIDER

The seller or service provider makes: Conditions: Qualifying Representations Standard representations and warranties, and Warranties (9-519-8869)). most of which relate directly or indirectly Limiting their survival period (see to the enforceability of the contract. Standard Clause, General Contract Additional transaction-specific Clauses: Survival (OH) (w-003-9085)). representations and warranties, which Designating express, exclusive relate to the subject matter of the contractual remedies for inaccuracy or transaction. breach, often limited to the recipient’s indemnification right (see Practice Note, Transaction-specific representations Representations, Warranties, Covenants, and warranties included in a particular Rights, and Conditions: Liability agreement depend on: Limitations and Express Contractual The nature of the agreement. Remedies (9-519-8869)). The relative bargaining power and risk Including a limitation on the overall tolerance of each party. monetary amount of a party’s liability for inaccuracy or breach (see Practice Note, The seller or service provider should try to Representations, Warranties, Covenants, limit the number of transaction-specific Rights, and Conditions: Liability representations and warranties included Limitations and Express Contractual in a particular agreement. It can also Remedies (9-519-8869)). restrict the scope and legal effect of representations and warranties in certain Usually the maker qualifies individual ways, including by: representations and warranties. In some Qualifying representations and warranties contracts, the maker qualifies all of its through: representations and warranties by including a general qualification in the lead-in language zzdisclosed exceptions; (for example, “Seller represents and warrants, zz materiality requirements; and to the best of its knowledge, ...”). The recipient zzknowledge qualifiers. should resist a blanket qualification and (See Practice Note, Representations, instead address appropriate limitations within Warranties, Covenants, Rights, and individual representations and warranties.

(a) it is a [corporation/limited liability company/[TYPE OF ENTITY]], duly organized, validly existing, and in good standing under the laws of the [STATE OF ORGANIZATION/ FORMATION];

DRAFTING NOTE: ORGANIZATION AND EXISTENCE

This representation and warranty affirms Valid existence. An entity validly the legal existence of the maker as a exists if it is has not been voluntarily or corporation, LLC, limited partnership (LP), or involuntarily dissolved (see, for example, other type of legal entity (not an individual Practice Notes, Dissolving a Corporation person). It is one of a series of related (OH) (w-000-1255) and Dissolving an LLC representations and warranties that address (OH) (w-000-0584)). the party’s legal capacity to enter into the In good standing. Requirements for good contract, which ultimately speaks to the standing vary by state but generally mean enforceability of the contract. Section 1.1(a) that the entity has: covers three distinct concepts: zzmade all requisite annual or Due organization. An entity is duly other periodic filings in its state of organized if: incorporation or formation; and zz it was properly incorporated or formed zzpaid annual franchise taxes and other by making all requisite filings and fees required by that state’s applicable taking other required actions (see, corporations, LLC or LP statute. for example, Practice Note, Forming zzOhio repealed the corporation and Organizing a Corporation (OH) franchise tax in 2014, but not-for-profit (w-000-0532) and Forming and corporations must file a “Statement of Organizing an LLC (OH) (w-000-1370)) Continued Existence” every five years in its state of formation; and with the secretary of state (R.C. 1702.59). zzonce it was formed, the shareholders or members took all steps required Typically, an entity that is not in good by state law (for example in Ohio, standing: as applicable, adopting regulations, Cannot bring a lawsuit in the courts of electing directors, managers, and that state. officers) to transform the bare-bones May have restrictions placed on its entity (known as a shell) into one that business operations. can legally function. In Ohio, courts have indicated that only the filing of May be subject to fines and penalties. the articles of the organization with the (See, for example, Benefit Management secretary of state is sufficient to create Consultants, Inc. v. Gencorp, Inc., 1996 WL a valid corporation (see The Promotion 267747, at *4 (Ohio App. 9 Dist.) (holding that Co./Special Events Div. v. Sweeney, a corporation whose articles of organization 782 N.E.2d 117, ¶¶ 19, 20 (Ohio 7th had been filed did not have the power to bring Dist. 2002)). suit after its charter had been cancelled).)

(b) it is duly qualified to do business and is in good standing in every jurisdiction in which such qualification is required [for purposes of this Agreement][,] [except where the failure to be so qualified, in the aggregate, [would/could] not reasonably be expected to adversely affect its ability to perform its obligations under this Agreement];

DRAFTING NOTE: QUALIFICATION

This representation relates to the maker’s legal entities and not to individual persons. capacity to perform under the contract. Foreign qualification is a legal concept that Similar to due organization, it only applies to applies to all entities that conduct business

in jurisdictions other than or in addition to The due qualification representation and their state of incorporation or formation (for warranty provides assurance that: example, owning property, renting an office The foreign entity is registered to do or warehouse, or having employees). State business in every foreign jurisdiction in law varies on the specific factors that require which that entity must be qualified. a foreign entity to qualify to do business In each jurisdiction where qualification in that state (see Corporation Law: State is required, the foreign entity properly Q&A Tool). Most state laws do not clearly qualified to do business by making designate the exact types and degrees of all requisite filings and taking other activity or presence that trigger the foreign necessary actions (for example, qualification requirement, but instead publication). list several determining factors that are considered by state authorities. The foreign entity is in good standing in each state of foreign qualification (which In Ohio, a foreign corporation engages in is a similar concept to good standing in business within a state when its agents the domestic state context (see Drafting have entered the state and engaged in Note: Organization and Existence)). carrying on and transacting through them some substantial part of its ordinary or Because of the difficulty in clearly customary business. Ordinary or customary determining whether foreign qualification business is usually continuous, which differs is required by individual jurisdictions, if the from merely casual, sporadic, or occasional maker of this representation and warranty transactions, and isolated acts. (First is active in several different states, counsel National Bank of Omaha v. Spirit Medical should consider including: Transport, 2017 -Ohio- 1468, ¶ 13, 2017 WL The first bracketed language that limits 1422884, at *2 (Ohio App. 2 Dist.).) qualification to those jurisdictions that affect the maker’s ability to perform under For more information on foreign the subject agreement. corporations under Ohio law, see State Q&A: Corporation Law: Ohio: Foreign The bracketed language at the end of Corporations (6-517-0739) and Qualifying Section 1.1(b), which carves out immaterial a Foreign Entity to Do Business in Ohio failures to duly qualify as a foreign entity. Checklist (w-000-1532).

(c) it has the full right, [corporate] power, and authority to enter into this Agreement[, to grant [Buyer/Customer] the rights and licenses set forth herein,] and to perform its obligations hereunder;

DRAFTING NOTE: AUTHORITY

This representation and warranty relates Taking all necessary actions to authorize to the capacity of a party that is a legal the specific transaction (for example, entity to enter into and perform under obtaining the approval of the board of the contract. It specifically addresses directors or board of managers (and whether the maker possesses the requisite shareholder or member approval if it authority to execute, deliver, and perform its is the type of transaction that requires obligations. Due authority includes: that approval) (see, for example, Having the authority to enter into a Standard Clauses, Board Resolutions: transaction of this nature under its Approving a Significant Commercial organizational documents. Contract (OH) (w-001-1274) and Member/

Manager Resolutions: Approving a and authority” would cover all applicable Significant Commercial Contract (OH) laws and regulations (for example, tax and (w-005-4260)). regulatory laws and regulations). Because both parties typically make the same The maker typically tries to limit the scope representation and warranty, the additional of requisite authority by including the language is usually acceptable to the bracketed term “corporate.” This limits the opposing party. representation to applicable state corporate laws and the party’s organizational The bracketed language covering authority documents. (In this context, “corporate” is to grant rights and licenses should be used not limited to laws affecting corporations, in agreements that include any license but is understood to refer to the state grants. Because it duplicates a provision entity laws affecting the applicable type of included in Section 1.1(j), this language legal entity that is party to the agreement.) should be excluded from Section 1.1(c) if the Without this limitation, “full right, power, contract otherwise includes it in Section 1.1(j).

(d) the execution of this Agreement by [each of] the individual[s] whose signature is set forth at the end of this Agreement, and the delivery of this Agreement by [Seller/Service Provider], have been duly authorized by all necessary [corporate] action on the part of [Seller/Service Provider];

DRAFTING NOTE: EXECUTION

This representation and warranty also authorizing the individual transaction (see, relates to the capacity of a party that is a for example, Standard Clauses, Board legal entity to enter into the contract. It Resolutions: Approving a Significant addresses specifically whether the person Commercial Contract (OH): Authorized or persons who signed the agreement Officers (w-001-1274) and Amendments and on behalf of the maker had the requisite Member/Manager Resolutions: Approving authority to bind that entity. a Significant Commercial Contract (OH): Authorized Officers and Amendments General authority to execute contracts (w-005-4260)). is often granted to particular officers in an entity’s organizational documents (for Similar to due authority, the maker example, in Ohio, commonly in regulations should try to include the bracketed word or in an LLC operating agreement). “corporate,” to limit the scope of its Authority to execute and deliver a particular representation and warranty to requisite contract may be granted to specific corporate authority (see Drafting Note: officers or representatives by the board of Authority). directors or managers in the resolutions

(e) the execution, delivery, and performance of this Agreement by [Seller/Service Provider] will not violate, conflict with, require consent under, or result in any breach or default under [(i) any of [Seller’s/Service Provider’s] organizational documents (including its [articles of incorporation and regulations/ articles of organization and limited liability company agreement/[APPLICABLE GOVERNING DOCUMENTS]]),] [(i)/(ii)] any applicable Law[,] or [(ii)/(iii)] [with or without notice or lapse of time or both,] the provisions of any [material] contract or agreement to which [Seller/Service Provider] is a party or to which any of its material assets are bound (”[Seller/Service Provider] Contracts”);

DRAFTING NOTE: NO VIOLATION OR CONFLICT

This representation and warranty (which Section 1.1(h) more specifically addresses is sometimes referred to as a non- whether the seller or service provider has contravention provision) also relates to the obtained any required licenses or permits capacity of a party to enter into and perform to operate its business as it relates to the its obligations under the agreement. It agreement (which is particularly appropriate provides the recipient assurance that if the maker operates in a regulated industry) entering into the agreement will not result in (see, for example, J.J.O. Constr., Inc. v. Baljak, claims or litigation that may interfere with or 2007 WL 2309741, at *1 (Ohio App. 10 Dist.) defeat the purpose of the entire transaction. (where a general construction contractor It requires the maker to assert that the brought suit against a subcontractor who did execution, delivery, and performance of the not hold required permits for the masonry agreement does not conflict with or violate: work despite contractual requirement that it The maker’s organizational documents obtain the permits)). (for example, in Ohio, the articles of If the type of transaction does not support incorporation and regulations for including the more specific language in corporations, and articles of organization Section 1.1(h), sub-clause (e)(ii) is drafted and LLC agreement for LLCs). broadly enough to provide assurance that Any applicable law (which should be performance does not violate applicable defined to include laws, regulations, and laws and regulations that require licenses or rulings of courts or other tribunals that permits to perform under the contract. affect the maker). Any contract to which the maker is a CONTRACTS party or which otherwise binds any of its Sub-clause (e)(iii) addresses whether material assets. entering into and performing under the contract triggers a breach of any other ORGANIZATIONAL DOCUMENTS contract binding the maker or its business, Sub-clause (e)(i) affirms that the agreement including whether a non-party’s consent will not conflict with the organizational is necessary. In the general commercial documents of the maker. It is bracketed context, the recipient’s primary concern because it may not be necessary to include often relates to whether the maker has this language in a standard sale of goods or undertaken exclusive obligations to a services agreement. Generally it is unlikely third party that would be breached by that an entity’s organizational documents performance under this contract (or the would prohibit or restrict this type of converse, if this agreement is exclusive and transaction. However, this provision should the maker has additional exclusive or non- not be controversial and is suitable for exclusive obligations to a third party). certain contracts. Therefore, it is included In some instances, the third-party contract in the Standard Clauses. If used, the list of anticipates potential exclusions to exclusivity organizational documents in parentheses if the obligee’s consent is obtained. In other should be customized to the facts of the instances, the exclusivity may be absolute particular entity (for example, an LLC in Ohio and instead require waiver or amendment to does not have articles of incorporation and perform for another party. In certain types usually does not have regulations, but does of agreements (for example, in a merger have an operating agreement). or acquisition agreement), there is often a discrete representation and warranty LAWS addressing required consents. This is largely Sub-clause (e)(ii) addresses the general because the sale-of-business transaction concept that there are no legal requirements may trigger consent requirements for the or judicial orders that would prohibit the assignment of contracts and other assets maker from entering into or performing its or if a change of control occurs. However, obligations under the contract. Optional for a sale of goods or services transaction,

the general language of sub-clause (e)(iii) The recipient should consider adding the is sufficient to address the failure to obtain bracketed language “with or without notice or consent or waiver. lapse of time or both,” to cover breaches and defaults that do not have automatic triggers The maker should try to include the but require notice or the passage of time to bracketed materiality qualifier which limits be deemed an actual breach or default. sub-clause (e)(iii) to material contracts.

(f) this Agreement has been executed and delivered by [Seller/Service Provider] and (assuming due authorization, execution, and delivery by [Buyer/Customer]) constitutes the legal, valid, and binding obligation of [Seller/Service Provider], enforceable against [Seller/ Service Provider] in accordance with its terms[, except as may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws and equitable principles related to or affecting creditors’ rights generally or the effect of general principles of equity];

DRAFTING NOTE: ENFORCEABILITY

This representation and warranty addresses or otherwise violates the law or the the recipient’s ability to enforce its contractual contractual or other rights of a non-party. rights against the maker. Enforceability relies The contract lacks adequate consideration. in large part on the accuracy of the other The contract covers an illegal subject standard representations and warranties matter or contains provisions that are because they relate to the maker’s legal generally unenforceable. For example, in capacity and its authority to enter into and Rinehart v. Martin, 2013 WL 6020781, at *3 perform its obligations under the agreement. (Ohio App. 11 Dist.), an attempt to sell two Facts and conditions that negatively affect cemeteries violated an Ohio prohibition enforceability include if: on distributing profits out of a cemetery The entity does not legally exist. Ohio corporation. courts, however, hold that a party holding itself as a valid corporation cannot use its In most contracts, the maker tries to lack of legal existence to avoid a contract qualify this representation and warranty by (see Lamancusa v. Big Little Farms Inc., including the bracketed language at the end 5 N.E.3d 1080, ¶ 21 (Ohio 11th Dist. 2013)). of Section 1.1(f). This language addresses the principle that, even if the agreement is A legally existing entity does not have the necessary right, power, or authority to otherwise enforceable: enter into the agreement. Bankruptcy and other laws affecting creditors’ rights may make the The individual executing and delivering the contract does not have the requisite agreement unenforceable (see Practice authority to bind the entity (see, for Notes, Automatic Stay: Lenders’ example, Brooks Capital Servs., L.L.C. v. Perspective (9-380-7953) and Executory 5151 Trabue Ltd., 2012 -Ohio- 4539, ¶¶ Contracts and Leases: Overview) 36-38, 2012 WL 6520232, at *8 (Ohio (8-381-2672). App. 10 Dist.) (where one member of Principles of equity may limit a manager-managed limited liability enforceability (see Practice Note, company did not have authority to Contracts: Equitable Remedies mortgage property of such company)). (0-519-3197)). For example, in Easton Telecom Servs., L.L.C. v. Corecomm Internet Entering into the contract is not permitted by the entity’s organizational documents Group, Inc., an Ohio court found that a liquidated damages cause constituted a

penalty as a matter of law, and therefore However, in certain transactions, because was unenforceable (216 F. Supp. 2d 695, sellers and service providers undertake 698-99 (N.D. Ohio 2002)). most of the duty to perform, as a matter of risk allocation, the buyer or service recipient Both parties will typically request the same may insist that the seller or service provider limitation, so it is commonly accepted. bear this risk.

(g) it is in [material] compliance with all applicable Laws and [Seller/Service Provider] Contracts relating to this Agreement, the [Goods/Services] and the operation of its business[; and/.]

DRAFTING NOTE: COMPLIANCE WITH LAW AND CONTRACTS

In contrast to sub-clauses (e)(ii) and (e)(iii), ink in competition with the plaintiff (see which address whether entering into and Mead Corp. v. Lane, 560 N.E.2d 1319 (Ohio performing the contract may cause a legal 4th Dist. 1988)). violation or breach of a third-party contract, Section 1.1(g) addresses: The maker should insist on qualifying this representation and warranty (see The maker’s general compliance with laws. Practice Note, Representations, Warranties, Its contractual obligations at the time of Covenants, Rights, and Conditions: execution. Qualifying Representations and Warranties (9-519-8869)) so that immaterial breaches For example, if a seller is in breach of an and violations do not cause inaccuracy and IP license that it requires to manufacture breach of the agreement. It could include the subject goods, if the license is the bracketed word “material” or instead terminated, the breach could ultimately add the following language to the end of result in an injunction against the sale of Section 1.1(g): the goods or in a product recall of goods in the marketplace. A similar situation “, except to the extent that any failure occurred in Ohio, where a corporation that to be in compliance, individually or manufactured and sold ink jet printing in the aggregate, [would/could] not systems filed for an injunction against a [reasonably] [be expected to] have a company formed by a former shareholder material adverse effect on [Seller’s/ of the plaintiff, seeking to prevent the newly Service Provider’s] ability to perform formed company from producing jet printing its obligations under this Agreement”.

(h) [it has obtained all [material] licenses, authorizations, approvals, consents, or permits required by applicable Laws (including the rules and regulations of all authorities having jurisdiction over the [[manufacture and] sale of the Goods/provision of the Services]) to conduct its business generally and to perform its obligations under this Agreement[; and/.]]

DRAFTING NOTE: LICENSES, PERMITS AND APPROVALS

This optional clause can be used in an to Section 1.1(e) because failure to have agreement if the seller or service provider obtained a necessary permit or license would operates in a regulated industry. It is related likely constitute a legal violation. Both parties

should consider the interrelationship of claim inaccuracy and breach under the more these two provisions and the effect that general provision, even if it has no claim qualifying or revising one of them may under the narrower one. have on the other. For example, if the seller or service provider negotiates materiality Similar to compliance with laws and qualifications to this representation and contracts, the maker should insist on warranty, it must ensure that the compliance qualifying this representation and warranty with laws provision is similarly qualified. If (see Drafting Note: Compliance with Law not, the buyer or customer may be able to and Contracts).

(i) [it has all of the requisite resources, skill, experience, and qualifications to perform all of the [Services/services] under this Agreement in a professional and workmanlike manner, in accordance with [best/generally recognized/commercially reasonable] industry standards for similar services[; and/.]]

DRAFTING NOTE: PROFESSIONAL AND WORKMANLIKE MANNER

This optional clause can be used in a limit the bracketed language to “generally services contract. It addresses the ability of recognized” or “commercially reasonable” the service provider to perform satisfactorily standards. In Ohio, commercially under the agreement. The customer reasonable efforts generally require a party should also negotiate a corresponding to make every effort to achieve the desired covenant (usually found within the services objective that a reasonable business warranty), in which the service provider entity would have made under similar agrees to perform all services at the same circumstances (see Castle Properties v. level of skill and expertise. The service Lowe’s Home Centers, Inc., 2000 WL provider should resist including a “best 309395, at *3 (Ohio 7th Dist.)). standards” standard and instead try to

(j) [it has the full right, power, and authority (by ownership, license, or otherwise) to use all [Intellectual Property/patents, copyrights, trademarks, or other intellectual property] [embodied in the Goods/used in performing the Services and embodied in the Deliverables[,]] [and to grant [Buyer/Customer] the rights and licenses set forth herein,] on the terms and conditions of this Agreement.]

DRAFTING NOTE: INTELLECTUAL PROPERTY RIGHTS

This optional representation and warranty Assurance that the maker has all IP rights should be used in any contract where required to create, manufacture, and the goods or services deliverables are distribute the goods or deliverables. comprised of or include IP components A basis for indemnification or other (which is likely to apply in many transactions) claims if the seller or service provider and it is not otherwise covered under the does not own or has not obtained all product or service warranty. It provides: necessary IP rights.

Additional protections regarding IP rights Adding a knowledge qualifier (see (including a discrete warranty of non- Practice Note, Representations, infringement) are typically included in the Warranties, Covenants, Rights, and product or services warranty. When drafting Conditions: Knowledge Standards or reviewing an agreement, counsel should (9-519-8869)). consider the language of both provisions to Limiting the territory of the representation avoid duplication and retain consistency. and warranty to the US, Ohio, or other For more information about IP rights, see specific jurisdictions agreed to by the Practice Note, Intellectual Property Rights: parties, which allows the maker to better The Key Issues (2-500-4365). manage its risk. Limiting the scope of the representation In some instances, a seller or service and warranty to registered IP. provider with a strong bargaining position Providing that the sole and exclusive may refuse to make IP representations remedy for inaccuracy or breach of and warranties. If this occurs, the buyer this representation and warranty is or customer should insist on including the maker’s indemnification obligation a discrete IP indemnification clause or for infringement claims (see Standard otherwise ensure that IP indemnification Documents, Product Reseller is covered by the general indemnification Agreement (Pro-Supplier): Section 18.6 clause. If achieved, at a minimum, the party (4-517-9793) and Professional Services is protected against third party claims Agreement: Drafting Note: Infringement for IP infringement. However, even with Indemnification by Service Provider indemnification protection, the buyer or (9-500-2928)). customer: Cannot assert a breach of contract claim The seller or service provider should based on the sale of goods or services consider requesting a reciprocal that infringe third-party IP rights. representation and warranty from the buyer May not be able to terminate the contract or customer if the buyer or customer is: for IP infringement, unless there is a Incorporating the goods or deliverables discrete termination provision that into its own products or services. specifically addresses this situation. Providing the seller or service provider with products or materials to be If the seller or service provider cannot delete incorporated into the products or this representation and warranty, it should deliverables. consider:

1.2 Representations and Warranties of the [Buyer/Customer]. [Buyer/Customer] represents and warrants to [Seller/Service Provider] that:

DRAFTING NOTE: REPRESENTATIONS AND WARRANTIES OF THE BUYER OR CUSTOMER

The buyer or customer commonly makes representations and warranties in the draft. many of the same standard representations However, if requested by the opposing and warranties made by the seller or service party, the buyer or customer typically provider. In some instances, if the buyer agrees to make some or all of the seller’s or or customer prepares the first draft of the service provider’s standard representations contract, it may exclude buyer or customer and warranties. Even if the buyer or

customer is only paying money for goods or However, in many types of standard services, the seller or service provider wants commercial contracts, primarily those that assurance that: involve an ongoing relationship between The buyer or customer has the requisite the parties, the facts and circumstances capacity to enter into and perform its of the transaction support a requirement obligations under the contract. that the buyer or customer make certain transaction-specific representations The contract is enforceable against the and warranties. These situations include opposing party. contracts where: Because the buyer or customer is expected to The purchase price paid for the goods or make the same standard representations and services is not purely monetary or is not warranties as the seller, it should consider paid on or before delivery. For example: this fact when drafting and negotiating zzin a sale of goods or manufacturing the seller’s standard representations and services contract, if the seller or service warranties. Similarly, the buyer or customer provider grants credit terms to the expects to include the same qualifications buyer, which allows for payment to be and other limitations negotiated by the seller. made days or months after delivery of When negotiated changes are made to the the purchased goods or manufactured representations and warranties in Section 1.1, products; or the drafter should make corresponding changes to Section 1.2. zzin a business acquisition agreement, if the consideration paid to the When drafting or reviewing buyer or seller includes the buyer’s stock or customer representations and warranties, a promissory note (see Standard the parties should consider the same factors Document, Stock Purchase Agreement discussed in the drafting notes to Section 1.1. (Pro-Buyer Long Form): Drafting Note: Additional buyer or customer considerations Representations and Warranties of are also included in the drafting notes to Buyer (4-382-9882)). some of the clauses in Section 1.2. The nature of the relationship (for example, an exclusive distribution TRANSACTION-SPECIFIC BUYER agreement) or the goods or services OR CUSTOMER REPRESENTATIONS themselves warrants assurance that the AND WARRANTIES buyer or customer will use or resell the In many commercial contracts, the buyer goods or services in a lawful manner or customer’s role in the transaction is that is not likely to injure the seller’s or limited to compensating the seller or service service provider’s legal position, business provider for the goods or services purchased operations, or commercial reputation. under the agreement. In these cases, Both parties are contributing raw especially if consideration is purely monetary materials, services, or both (for example, and is paid in advance or simultaneously an added-value reseller agreement with delivery, there is little need for the and certain types of manufacturing or buyer or customer to make any transaction- distribution agreements). specific representations and warranties.

(a) it is a [corporation/limited liability company/[TYPE OF ENTITY]], duly organized, validly existing, and in good standing under the laws of the [STATE OF ORGANIZATION/ FORMATION]; (b) it is duly qualified to do business and is in good standing in every jurisdiction in which such licensing and qualification is required [for purposes of this Agreement][,] [except where the failure to be so qualified, in the aggregate, [would/could] not reasonably be expected to adversely affect its ability to perform its obligations under this Agreement]; (c) it has the full right, [corporate] power, and authority to enter into this Agreement and to perform its obligations hereunder;

(d) the execution of this Agreement by [each of] the individual[s] whose signature is set forth at the end of this Agreement, and the delivery of this Agreement by [Buyer/ Customer], have been duly authorized by all necessary [corporate] action on the part of [Buyer/Customer]; (e) the execution, delivery, and performance of this Agreement by [Buyer/Customer] will not violate, conflict with, require consent under, or result in any breach or default under [(i) any of [Buyer’s/Customer’s] organizational documents (including [its articles of incorporation and regulations/articles of organization and limited liability company agreement/[APPLICABLE GOVERNING DOCUMENTS]]),] [(i)/(ii)] any applicable Law[,] or [(ii)/(iii)] [with or without notice or lapse of time or both,] any of the provisions of any contract or agreement to which it is a party or to which any of its material assets are bound [(”[Buyer/Customer] Contracts”)]; [and]

DRAFTING NOTE: NO VIOLATION OR CONFLICT

In many types of commercial contracts, both recipient wants specific assurance that, if parties make non-conflict representations the contract anticipates: and warranties regarding laws and An exclusive arrangement, the buyer organizational documents (for example, or customer is not party to a conflicting in Ohio, the articles of incorporation and agreement that would breach the regulations for corporations, and articles of exclusive agreement. organization and LLC agreement for LLCs). A non-exclusive arrangement, the buyer In some types of transactions sub-clause or customer is not party to an existing (e)(ii) is equally important to the seller exclusive arrangement. or service provider as it is to the buyer or customer. In contrast to agreements in the Include the optional defined term for M&A context, where the subject agreement Buyer or Customer Contracts when using is unlikely to present a potential conflict the bracketed language covering Buyer/ for the buyer of a business, in agreements Customer Contracts in Section 1.2(g). relating to the sale of goods or services, the

(f) this Agreement has been executed and delivered by [Buyer/Customer] and (assuming due authorization, execution, and delivery by [Seller/Service Provider]) constitutes the legal, valid, and binding obligation of [Buyer/Customer], enforceable against [Buyer/ Customer] in accordance with its terms[, except as may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws and equitable principles related to or affecting creditors’ rights generally or the effect of general principles of equity][; and/.] (g) [it is in [material] compliance with all applicable Laws [and [Buyer/Customer] Contracts] relating to this Agreement, the use [or re-sale] of the [Goods/Services] and the operation of its business][; and/.]]

DRAFTING NOTE: COMPLIANCE WITH LAW AND CONTRACTS

This optional compliance with law and to the sale of goods or services, especially contracts representation and warranty for if the arrangement is exclusive. Parties can the buyer or customer is appropriate for customize this language to expressly state many types of commercial contracts relating compliance with specific laws applicable to

particular sectors or industries, in addition the goods or incorporate the goods or to the general legal compliance included deliverables into products for export, the in the Standard Clause (see, for example, parties should also consider including Solid Waste Auth. of Cent. Ohio v. Firmgureen certain export-related representations Fuels of Ohio, 2010 WL 11553398 (Ohio C.P. and warranties (see, for example, Standard Sept. 27, 2010) (where parties to a contract Document, Sale of Goods Agreement regarding landfill gas collection specifically (Pro-Seller): Sections 9.2 (2-518-9260) and referenced compliance with the Federal 9.6 (2-518-9260)). Clean Air Act and permits issued under the Clean Air Act)). The bracketed language covering Buyer/ Customer Contracts is optional, as it If the terms of a particular transaction may not be appropriate for every type of permit the buyer or customer to export agreement.

(h) [it has obtained all [material] licenses, authorizations, approvals, consents, or permits required by applicable Laws (including the rules and regulations of all authorities having jurisdiction over the operation of its business as it relates to this Agreement).]

DRAFTING NOTE: LICENSES, PERMITS AND APPROVALS

This optional provision is another Firmgureen Fuels of Ohio, 2010 WL 11553398 representation and warranty that may (Ohio C.P. Sept. 27, 2010) (where parties to be appropriate for the buyer or customer a contract regarding landfill gas collection to make in certain types of commercial specifically referenced compliance with the contracts, especially if the buyer or customer Federal Clean Air Act and permits issued operates in a regulated industry (see, for under the Clean Air Act)). example, Solid Waste Auth. of Cent. Ohio v.

1.3 NO OTHER REPRESENTATIONS OR WARRANTIES; NON-RELIANCE. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION [NUMBER] [AND THE EXPRESS [PRODUCT/SERVICE] WARRANTIES CONTAINED IN SECTION [NUMBER]], (A) NEITHER PARTY TO THIS AGREEMENT, NOR ANY OTHER PERSON ON SUCH PARTY’S BEHALF, HAS MADE OR MAKES ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY, EITHER ORAL OR WRITTEN, WHETHER ARISING BY LAW[, COURSE OF DEALING, COURSE OF PERFORMANCE, USAGE, TRADE] OR OTHERWISE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED, AND (B) EACH PARTY ACKNOWLEDGES THAT IT HAS NOT RELIED UPON ANY REPRESENTATION OR WARRANTY MADE BY THE OTHER PARTY, OR ANY OTHER PERSON ON SUCH PARTY’S BEHALF, EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION [NUMBER] [AND UNDER SECTION [NUMBER OF SECTION WITH PRODUCT OR SERVICE WARRANTY]] OF THIS AGREEMENT.

DRAFTING NOTE: NO OTHER REPRESENTATIONS OR WARRANTIES; NON-RELIANCE

Section 1.3 (also known as a disclaimer of (or any other person on that party’s behalf) representations and warranties) expressly has made or is making any representations states that neither party to the agreement and warranties except for those included in

this section of the contract. The bracketed the general rule is that the concept of optional language near the beginning implied warranties does not apply to of Section 1.3 covers product or services services contracts (see Cincinnati Gas & warranties if they are separately located in Elec. Co. v. Gen. Elec. Co., 656 F. Supp. another section of the contract. 49, 67 (S.D. Ohio 1986) and Knorn v. Orkin Exterminating Co., 2000 WL 36728760 Section 1.3 also includes an (S.D. Ohio Feb. 8, 2000)). acknowledgement from the recipient (sometimes referred to as a non-reliance Consider including the bracketed language acknowledgment) that it has not relied in subclause (A) if Section 1.3 is also on any representation or warranty except intended to disclaim product or service for those expressly provided for under the warranties. contract. The maker of representations and The purpose of Section 1.3 is to restrict any warranties should be aware that, while claims based on inaccuracy or breach of disclaimers of reliance provisions are representations and warranties to those generally enforceable when included in made within the four corners of the written negotiated contracts between sophisticated agreement. This restriction serves to: business entities, some courts do not Support a contractual structure that enforce them, especially if: limits a party’s potential liabilities to those The disclaimer is broadly written (and not provided for under express contractual limited to specific matters). remedy provisions (which may help to The party relying on the disclaimer was insulate the maker from extra-contractual aware of the facts that were allegedly tort damages for misrepresentation misrepresented or omitted. (including punitive damages)). The UCC permits the disclaimer of both Counteract the potential effect of UCC Article 2, which provides for: express and implied warranties (R.C. 1302.29). For more information on: zzimplied warranties of title and non- infringement, merchantability, and How a seller can make an express fitness for a particular purpose (R.C. warranty and effectively disclaim 1302.25, 1302.27, and 1302.28 and see implied warranties, see Practice Note, Practice Note, UCC Article 2 Implied UCC Article 2 Express Warranties (OH): Warranties (OH) (w-001-0159)); and Pro-Seller Considerations: Limitation and Disclaimer of Express Warranties Under zzexpress warranties, which may be UCC Article 2 (w-001-7823). oral, written, or, in some instances, inferable from a party’s actions (for Disclaiming implied warranties, see example, the provision of a model or Practice Note, UCC Article 2 Implied sample of goods) and do not require Warranties (OH) (w-001-0159). the use of formal words (like “warranty” or “guarantee”) (see Practice Note, ENTIRE AGREEMENT CLAUSE UCC Article 2 Express Warranties A well-drafted entire agreement clause (OH): Express Warranties Under UCC includes language similarly stating that Article 2 (w-001-7823)). no representations and warranties are This consideration is not limited to made except for those expressed in the contracts for the sale of goods in all written agreement (see Standard Clauses, states. Even though UCC Article 2 General Contract Clauses: Entire Agreement generally applies only to the sale of (OH) (w-008-2049)). When drafting or goods, some courts have, in certain negotiating a sales or services agreement, circumstances, applied Article 2 principles the seller or service provider should not to services contracts. However, in Ohio, merely rely on the entire agreement clause,

but should include the express waiver (eliminating the potential for implied under Section 1.3. In addition to disclaiming warranties and unidentified but inferable all representations and warranties not express warranties). expressed in the agreement, the language Includes the acknowledgment of no included in Section 1.3: reliance. Identifies the precise representations and warranties that are being made

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