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← 6.1.2.a: Is It a Material Adverse Effect? Discussion of Frontier Oil v. Holly Corporation

6.1.4.a: The Implied Covenant of Good Faith and the Exercise of Contract Rights →

6.1.4: Note on Covenants

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Abstract

Sometimes the agreement becomes confused between the company's representations and its covenants. Conceptually, the two are quite different. The company represents facts, that is, existing statuses. When it "covenants" something, the obligation is promissory; the company is promising to do (or not do) an act in the future. In both cases, the company is liable for breach, but the damages are technically different. A misrepresentation entails tort damages while failure to perform a covenant opens up contract damages.[1] It is not unusual to find promissory statements mistakenly included in the representations and warranties section; viz., "The company's insurance policies are as listed on Exhibit A" (a representation) and "the company will maintain those policies in force" (an affirmative covenant). This is a problem principally for the draftsmen of the complaint when and if the agreement is involved in litigation. The covenants divide into two categories (affirmative and negative)