Buyer’s representations and warranties: Overview, definition, and example
What are buyer’s representations and warranties?
Buyer’s representations and warranties refer to the statements and assurances made by the buyer in a contract, confirming certain facts, conditions, or circumstances related to the transaction. These representations and warranties are legally binding, and they serve to provide the seller with assurances that the buyer is capable of fulfilling their obligations under the contract.
Typically, these representations cover aspects such as the buyer’s authority to enter into the agreement, financial standing, compliance with applicable laws, and the absence of any legal barriers to the transaction. They are used to protect the seller from risks and ensure that the buyer is acting in good faith and in a way that aligns with the terms of the agreement.
Why are buyer’s representations and warranties important?
Buyer’s representations and warranties are important because they help establish trust and provide a sense of security for the seller. By making these representations, the buyer is assuring the seller that they meet certain legal and financial criteria, which can help prevent disputes or complications later on. For the seller, these warranties act as a safeguard, allowing them to rely on the buyer’s declarations before proceeding with the transaction.
For businesses, these representations ensure that the buyer is legally capable of completing the transaction and that there are no undisclosed liabilities or issues that could derail the deal. They also play a role in the negotiation process, as any misrepresentation or failure to meet these warranties could result in penalties, a breach of contract, or a demand for indemnity.
Understanding buyer’s representations and warranties through an example
Imagine a situation where a company is selling its business to another company. As part of the sale agreement, the buyer makes a series of representations and warranties. These might include confirming that they have the financial capability to complete the transaction, that they are not involved in any pending litigation, and that they have full authority to enter into the agreement.
For example, a buyer’s representation might state that they have the financial resources to pay the purchase price, while a warranty might assure the seller that the buyer is not currently in default under any other contractual obligations. If any of these representations are found to be false after the agreement is executed, the seller may be entitled to seek legal remedies or damages.
An example of a buyer’s representations and warranties clause
Here’s how a buyer’s representations and warranties clause might look in a contract:
“The Buyer represents and warrants to the Seller that: (i) the Buyer has the full legal authority to enter into and perform this Agreement; (ii) the Buyer has the financial resources to complete the transaction as outlined in this Agreement; (iii) the Buyer is not currently subject to any bankruptcy proceedings, judgments, or other legal actions that could impact its ability to perform; and (iv) the Buyer’s entry into this Agreement does not violate any existing contracts or laws to which it is subject.”
Conclusion
Buyer’s representations and warranties are critical components of a contract that protect the seller and provide assurances regarding the buyer's ability to fulfill their obligations. These statements help mitigate risks, clarify the buyer’s financial and legal status, and ensure that both parties are operating on a foundation of trust. Clearly defining these representations and warranties in the contract is essential to prevent misunderstandings and to provide a legal recourse in case the buyer fails to meet the agreed-upon terms.
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.