Representations and warranties of buyer: Overview, definition, and example
What are representations and warranties of buyer?
Representations and warranties of the buyer are statements made by the buyer in a contract to assure the seller about specific facts, conditions, or circumstances related to the buyer’s ability to perform its obligations under the agreement. These statements typically include assertions about the buyer’s financial capacity, authority to enter into the agreement, and compliance with applicable laws.
For example, in a purchase agreement, the buyer might represent and warrant that they have sufficient funds to complete the transaction and that the execution of the agreement does not violate any laws or other agreements.
Why are representations and warranties of buyer important?
Representations and warranties of the buyer are important because they provide the seller with assurances that the buyer is capable of fulfilling their contractual obligations. These provisions also serve as a basis for legal remedies if the buyer’s representations or warranties are found to be false or inaccurate.
For businesses, clearly defining the buyer’s representations and warranties helps mitigate risks, ensure transparency, and build trust between the parties in the transaction.
Understanding representations and warranties of buyer through an example
Imagine a company sells a division to a buyer. The purchase agreement includes a representation by the buyer that they have obtained all necessary financing to complete the acquisition. If this representation proves false, the seller may terminate the agreement or seek damages for breach of contract.
In another example, a real estate purchase agreement includes a warranty by the buyer stating they are not involved in any pending lawsuits that could prevent them from completing the transaction. This reassures the seller that the buyer has no legal impediments to fulfilling their obligations.
An example of a representations and warranties of buyer clause
Here’s how a representations and warranties of buyer clause might look in a contract:
“The Buyer represents and warrants to the Seller as of the Effective Date and the Closing Date that: (i) the Buyer has full legal capacity, power, and authority to enter into this Agreement and perform its obligations hereunder; (ii) the execution, delivery, and performance of this Agreement by the Buyer do not and will not conflict with or violate any applicable laws or agreements; (iii) the Buyer has sufficient funds available to consummate the transactions contemplated by this Agreement; and (iv) there are no actions, suits, or proceedings pending or, to the Buyer’s knowledge, threatened, that could materially affect the Buyer’s ability to perform its obligations under this Agreement.”
Conclusion
Representations and warranties of the buyer provide assurances to the seller about the buyer’s ability and readiness to fulfill their obligations under the agreement. They reduce risks, ensure transparency, and create a framework for accountability in the transaction.
By including clear representations and warranties of buyer provisions in agreements, businesses can protect their interests, build trust, and ensure smoother execution of transactions.
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.