Accuracy of representations and warranties: Overview, definition, and example
What is accuracy of representations and warranties?
Accuracy of representations and warranties refers to the truthfulness and correctness of the statements made by one party in a contract regarding certain facts or conditions, typically in the context of business transactions or legal agreements. These representations and warranties are assurances that specific conditions, facts, or circumstances are true as of a particular date or at the time of the agreement’s execution. The accuracy of these representations and warranties is critical because they form the basis upon which one party relies when entering into the agreement, and any misrepresentation can lead to legal consequences.
For example, a seller of a business may represent that all financial records are accurate and complete, and the buyer relies on these statements to assess the business’s value.
Why is accuracy of representations and warranties important?
The accuracy of representations and warranties is important because they ensure that the parties to the agreement are entering into the transaction with a full and accurate understanding of the relevant facts, conditions, and obligations. If any representations or warranties are inaccurate, it may lead to legal claims, disputes, or the termination of the agreement.
For the party making the representation (e.g., the seller in a transaction), providing accurate representations helps maintain trust and avoid claims for breach. For the other party (e.g., the buyer), it ensures they are not misled or exposed to unnecessary risk.
Understanding accuracy of representations and warranties through an example
Imagine a company enters into an acquisition agreement where the seller represents that its financial statements are accurate and reflect the true condition of the company. After the sale, the buyer discovers significant discrepancies in the financial statements, which were not disclosed by the seller. The buyer may have the right to seek damages or cancel the deal based on the inaccurate representations and warranties provided by the seller.
In another example, a contractor signs an agreement to provide construction services and represents that all necessary permits and licenses are in place. If the contractor’s representation is found to be inaccurate (e.g., they failed to obtain the required permits), they may be in breach of the agreement and liable for any resulting damages or delays.
An example of an accuracy of representations and warranties clause
Here’s how an accuracy of representations and warranties clause might appear in an agreement:
“The Seller represents and warrants to the Buyer that, as of the date of this Agreement, all financial statements and records provided to the Buyer are accurate, complete, and in accordance with generally accepted accounting principles (GAAP). The Seller further warrants that there are no material misstatements or omissions in any of the representations or warranties made herein, and that all such statements are true and correct to the best of the Seller’s knowledge.”
Conclusion
The accuracy of representations and warranties is a critical element of any business contract or legal agreement. It ensures that the parties have a clear and truthful understanding of the facts and conditions relevant to the agreement. For businesses, ensuring the accuracy of these statements reduces the risk of disputes and legal challenges. For the other party to the agreement, it ensures that they are protected against misrepresentations or inaccuracies that could harm their interests. Including clear and enforceable clauses regarding the accuracy of representations and warranties is vital for maintaining trust and ensuring the success of the transaction.
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.