Effect of investigation: Overview, definition, and example
What is the effect of investigation?
The effect of investigation refers to how a party’s right to rely on representations, warranties, or disclosures in a contract is impacted by their own due diligence or prior knowledge. This clause clarifies whether a party can still make claims for misrepresentations or breaches even if they conducted an investigation before signing the agreement.
For example, in a business acquisition, a buyer may conduct due diligence on the seller’s financial records. The effect of investigation clause determines whether the buyer can later claim misrepresentation if issues arise that were or could have been discovered during the investigation.
Why is the effect of investigation important?
The effect of investigation is important because it defines how due diligence affects legal rights under a contract. It helps manage risk by clarifying whether prior investigations impact a party’s ability to later claim a breach of warranty or misrepresentation.
For sellers, this clause can limit liability by stating that a buyer cannot claim misrepresentation for issues they discovered (or could have discovered) during due diligence. For buyers, negotiating to preserve their right to bring claims despite prior investigations ensures stronger legal protection.
Understanding the effect of investigation through an example
Imagine a private equity firm acquiring a software company. The firm conducts an in-depth financial and operational investigation before closing the deal. Later, the buyer discovers unreported tax liabilities. If the contract contains an effect of investigation clause stating that prior due diligence does not waive claims for misrepresentation, the buyer can still take legal action against the seller.
In another case, a real estate developer purchases land for a commercial project. The seller’s contract includes a clause stating that any defects or zoning restrictions discovered during the buyer’s inspection cannot be grounds for future claims. Since the developer conducted its own investigation, it cannot later sue for misrepresentation regarding those issues.
An example of an effect of investigation clause
Here’s how a clause related to the effect of investigation might appear in a contract:
“No investigation or due diligence conducted by or on behalf of [Buyer] shall limit, reduce, or affect [Buyer’s] right to rely on the representations and warranties made by [Seller] in this Agreement, nor shall such investigation serve as a waiver of any claims for breach of such representations and warranties.”
Conclusion
The effect of investigation clause defines whether a party’s prior due diligence impacts their right to claim a breach of contract or misrepresentation. It plays a crucial role in managing risks in mergers, acquisitions, real estate deals, and other transactions.
By clearly outlining how investigations affect contractual rights, businesses can avoid disputes and ensure fair risk allocation between parties.
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.