Existence and power: Overview, definition, and example
What is existence and power?
Existence and power refer to representations in a contract where a party confirms its legal status, existence, and authority to enter into and perform obligations under the agreement. This clause typically applies to businesses, ensuring they are duly organized, validly existing, and possess the necessary power to execute and deliver the contract.
For example, a corporation entering into a loan agreement might represent and warrant that it is legally incorporated and authorized to borrow funds under its governing documents.
Why is existence and power important?
Existence and power are important because they provide assurance to the other party that the entity has the legal standing and authority to enter into the agreement and fulfill its obligations. This reduces the risk of unenforceable agreements and protects the interests of both parties.
For businesses, this representation helps establish credibility and legal certainty in transactions. For counterparties, it ensures they are dealing with a valid and authorized entity, minimizing potential disputes or challenges to the agreement’s enforceability.
Understanding existence and power through an example
Imagine a company enters into a supply agreement with a manufacturer. As part of the agreement, the manufacturer represents that it is a legally registered business, in good standing, and has the authority to manufacture and sell the goods specified in the contract. If the manufacturer were not legally valid or lacked authority, the contract could face enforceability issues.
In another example, a limited liability company (LLC) signs a real estate lease. The lease agreement includes an existence and power clause stating that the LLC is duly formed, validly existing under state law, and authorized to lease the property. This provides assurance to the landlord that the LLC has the legal capacity to enter into the lease.
An example of an existence and power clause
Here’s how an existence and power clause might appear in a contract:
“Each Party represents and warrants that: (i) it is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation; and (ii) it has the full power and authority to enter into, execute, and perform its obligations under this Agreement.”
Conclusion
Existence and power clauses provide essential legal assurances in contracts, confirming that the parties involved are validly existing entities with the authority to execute the agreement. For businesses, these clauses promote trust and transparency, reducing risks of unenforceability or disputes. Including a well-drafted existence and power provision ensures legal certainty and smooth execution of contractual obligations.
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.