No violation or default: Overview, definition, and example
What is no violation or default?
"No violation or default" is a contractual representation or warranty stating that a party’s entry into the agreement does not breach any other agreements, laws, or obligations, and that they are not currently in default under any existing commitments. This clause provides assurance that entering into the new contract won’t conflict with the party’s other legal or contractual obligations.
For example, a business signing a loan agreement might confirm that doing so does not violate its existing loan covenants or other binding commitments.
Why is no violation or default important?
This clause is important because it ensures that both parties are free to enter into the agreement without legal or contractual conflicts. For the other party, it provides protection by confirming that there are no undisclosed risks, such as lawsuits, defaults, or violations, that could affect the performance of the contract.
In financing or M&A transactions, this representation helps ensure that the business is in good standing with its existing obligations, which is critical for maintaining trust and avoiding future disputes or liabilities.
Understanding no violation or default through an example
Imagine a company seeking a new loan from a bank. As part of the loan agreement, the company represents that signing the agreement will not violate any terms of its existing loans. If the company already has a loan that prohibits taking on additional debt, signing the new agreement without disclosing this would breach the "no violation or default" clause.
In another scenario, a business entering into a supply agreement might include this clause to assure the supplier that no other contracts, legal obligations, or ongoing disputes will interfere with its ability to fulfill the terms of the agreement.
An example of a no violation or default clause
Here’s how a no violation or default clause might appear in a contract:
“The Party represents and warrants that the execution, delivery, and performance of this Agreement do not and will not result in any violation of, or default under, any law, regulation, contract, or obligation to which the Party is bound.”
Conclusion
The "no violation or default" clause provides confidence that both parties can perform their obligations under the contract without conflict or risk of default. It protects against undisclosed legal or contractual issues that could disrupt the agreement. For businesses, including this clause ensures transparency and accountability, fostering trust and reducing potential risks in contractual relationships.
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.