Absence of litigation: Overview, definition, and example
What is absence of litigation?
Absence of litigation refers to a contractual representation or warranty made by a party stating that there are no ongoing or threatened lawsuits, claims, or legal proceedings against them. This clause assures the other party that the party making the representation is not currently involved in any legal disputes that could materially affect their ability to perform under the contract.
For example, a seller in a business acquisition might represent that there are no lawsuits pending or threatened against the business being sold.
Why is absence of litigation important?
The absence of litigation clause is important because it provides confidence that the party entering into the contract is not exposed to significant legal risks that could disrupt the transaction or contract performance. It also protects the party receiving the warranty from inheriting any legal disputes that could result in financial or operational complications.
For businesses, confirming the absence of litigation can reduce the risk of unexpected liabilities or financial setbacks, and can help avoid delays or complications in completing deals.
Understanding absence of litigation through an example
Imagine a company is being acquired by another firm. The acquisition agreement includes an absence of litigation clause, where the seller confirms that there are no pending or threatened lawsuits that could affect the transaction. If the seller later discloses a pending lawsuit, the buyer may have the right to cancel the deal or seek compensation for potential damages.
In another example, a vendor providing services to a client may need to confirm that there are no legal proceedings against them that could affect their ability to deliver the agreed-upon services. This gives the client assurance that the vendor’s business operations are not jeopardized by ongoing legal issues.
An example of an absence of litigation clause
Here’s how an absence of litigation clause might look in a contract:
“The Company represents and warrants that, as of the date of this Agreement, there are no pending or threatened actions, suits, claims, or legal proceedings against the Company that could materially affect its business or financial condition. The Company agrees to notify the Buyer promptly if any such litigation arises prior to the closing of this transaction.”
Conclusion
The absence of litigation clause helps to protect parties from unforeseen legal risks that could impact the performance of a contract or the success of a transaction. By including this provision, businesses can provide assurances that they are entering into agreements free from significant legal disputes that could hinder the deal.
Including an absence of litigation clause in contracts provides a safeguard against unexpected liabilities and helps ensure that both parties can proceed with confidence and clarity.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.