Representations and warranties of purchaser: Overview, definition, and example
What are representations and warranties of purchaser?
Representations and warranties of purchaser refer to the statements and assurances made by the purchaser (buyer) in a contract, which confirm certain facts or conditions to be true at the time of the agreement and throughout the transaction. Representations are statements of fact, while warranties are promises that certain conditions will continue to be true during the life of the agreement. These representations and warranties help ensure that both parties are entering into the contract with accurate and truthful information. If any of these representations or warranties are later found to be false or misleading, the purchaser may be liable for breach of contract.
For example, a purchaser in a business acquisition might represent that they have the legal authority to enter into the agreement or that they are not currently involved in any pending legal proceedings that would affect the deal.
Why are representations and warranties of purchaser important?
Representations and warranties of the purchaser are important because they establish a foundation of trust and transparency in the transaction. They provide the seller with assurances about the buyer’s qualifications, financial capacity, and ability to fulfill the terms of the agreement. Additionally, they protect the seller from potential risks arising from undisclosed issues, and they clarify the obligations of the buyer.
For businesses, clearly defined representations and warranties help prevent disputes and ensure that the transaction proceeds smoothly, based on accurate and reliable information.
Understanding representations and warranties of purchaser through an example
Imagine a purchaser is acquiring a company. As part of the transaction, the purchaser provides representations and warranties that they have the financial resources to complete the purchase, that there are no conflicts of interest, and that they will not engage in actions that would harm the acquired company. These representations and warranties provide the seller with confidence in the purchaser's ability to fulfill the agreement.
In another example, a purchaser might represent that they are in compliance with applicable laws and regulations, including environmental laws, and that they have not violated any contracts or agreements that would affect the sale.
An example of a representations and warranties of purchaser clause
Here’s how a representations and warranties of purchaser clause might look in a contract:
“The Purchaser represents and warrants to the Seller that: (i) The Purchaser has the full legal authority to enter into and perform this Agreement; the Purchaser has the necessary financial resources to complete the purchase as outlined in this Agreement; (iii) The Purchaser is not subject to any pending legal actions that would prevent or impair the performance of this Agreement; (iii) the Purchaser will comply with all applicable laws and regulations related to the acquisition of the Company.”
Conclusion
Representations and warranties of the purchaser play a vital role in ensuring transparency and trust in transactions. They provide both parties with critical information and assurances regarding the buyer’s ability to complete the deal and honor the terms of the contract.
For businesses, including comprehensive representations and warranties clauses in contracts helps reduce risks, prevent future disputes, and ensure that both parties have a clear understanding of their obligations and the conditions under which the agreement is made.
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.