Customer representations and warranties: Overview, definition, and example
What are customer representations and warranties?
Customer representations and warranties are statements or assurances made by a customer in a contract that confirm certain facts or conditions about themselves or their business. These statements are designed to provide the other party (typically a business or supplier) with confidence that the customer is in good standing, capable of fulfilling their obligations, and that no issues exist that could hinder the agreement. Representations are factual statements, while warranties are promises or guarantees regarding those facts.
For example, a customer might represent that they have the legal right to enter into a contract or warrant that their business is in compliance with all relevant laws and regulations. If the customer’s representations and warranties are found to be false, it can lead to legal consequences, including the right for the other party to terminate the contract or seek damages.
Why are customer representations and warranties important?
Customer representations and warranties are important because they help to protect businesses from risks associated with entering into agreements. They ensure that both parties have a clear understanding of each other’s status and capabilities, which minimizes the chance of disputes arising later in the relationship. For the business, customer representations and warranties provide legal protection by setting clear expectations and giving them a course of action if the customer breaches any of these statements.
For customers, making accurate representations and warranties helps establish trust and goodwill in the relationship. However, it's essential that customers understand the importance of being truthful, as misrepresentation or breach of a warranty can lead to legal and financial penalties.
Understanding customer representations and warranties through an example
Imagine a business that sells software to customers. As part of the contract, the customer makes several representations and warranties, such as confirming that they have the necessary licenses to operate their business, they will use the software only for lawful purposes, and that they have the financial capacity to pay for the software. If it later turns out that the customer misrepresented their financial position or used the software in violation of the license terms, the business may have the right to terminate the contract and seek damages.
In another example, a company enters into a distribution agreement with a customer who guarantees that they have the necessary permits to sell the product in their jurisdiction. If it later becomes clear that the customer didn’t have the required permits, the company could terminate the agreement based on the breach of warranty.
An example of customer representations and warranties clause
Here’s how a customer representations and warranties clause might appear in a contract:
“The Customer represents and warrants that: (1) it has the legal right and authority to enter into this Agreement, (2) it is in compliance with all applicable laws and regulations, (3) it has obtained all necessary licenses, permits, and approvals to carry out its business activities, and (4) all information provided to the Supplier in relation to this Agreement is true, accurate, and complete.”
Conclusion
Customer representations and warranties are vital components of contracts that provide clarity and protection for both parties. They help ensure that customers are legally and financially able to fulfill their obligations and that the business can rely on the customer’s statements. By including these representations and warranties in contracts, businesses can protect themselves from the risks of misrepresentation or non-compliance, and can take appropriate action if the customer fails to meet their commitments.
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.