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How to Draft Appropriate Contract Provisions

A. Representations: a statement of fact to induce another party to enter into a contract.

B. Warranty: a promise that the statement is true; intended to relieve the promise (Buyer) from having to determine if the facts are true.

A. Representations: a statement of fact to induce another party to enter into a contract.

B. Warranty: a promise that the statement is true; intended to relieve the promise (Buyer) from having to determine if the facts are true.

* Practice Tip: Representations and warranties are not a substitute for including, in the contract, an indemnity, a specific liability allocation, or for undertaking due diligence through a site assessment! But they do help identify and quantify the environmental liabilities, allocate risks or adjust the purchase price; they help the Seller organize its disclosures and records and help the Buyer focus its due diligence.

C. Covenant: a promise by a party to perform certain tasks or refrain from taking certain actions, e.g., to correct environmental problems uncovered during the due diligence period, obtain No Further Action Letters or other government approvals, close inactive tanks, or do remediation.

D. Indemnity: an indemnity is a full and complete shifting of liability to another party: e.g., a party may be entitled under common law to indemnify when it incurs the obligations of another or may contractually agree or obtain a right to indemnification.

Issues:

Scope is often a troubling issue: e.g., some will be linked to a breach of the environmental reps and warranties; but from Buyer’s perspective, better to have stand-alone environmental indemnity that states those specific conditions under which the Seller must indemnify the Buyer.

* Practice Tips: Harmonize environmental indemnities with a general indemnity: an example of a problem arising from disharmonious indemnities is where in the general indemnity “Seller will indemnify the Buyer for liabilities not expressly assumed” but where the environmental indemnity states, “Seller agrees only to indemnify Buyer to those conditions set forth in due diligence reports.” Leads to litigation.

Determine (if you’re Buyer) if there are pre-existing indemnity agreements affecting the assets it is buying, e.g., did the Seller agree to assume certain liabilities when it acquired the business it is now selling, or did an earlier seller to your Seller retain environmental liabilities?

Do not rely on warranties and representations (a helpful starting point) as a substitute for due diligence (to save time and money)! A thorough property assessment prior to purchase helps avoid problems, which is easier and cheaper than litigating after the fact.

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