Representations and warranties of seller: Overview, definition, and example
What are representations and warranties of the seller?
Representations and warranties of the seller refer to statements and assurances made by the seller in a transaction, typically included in a purchase or sales agreement. Representations are factual statements about the seller or the asset being sold, while warranties are promises that these facts are true and will remain true for a specified period. These provisions protect the buyer by ensuring transparency and providing recourse if the representations or warranties are inaccurate or breached.
For example, in a business sale, the seller might represent that the business’s financial statements are accurate and warrant that the company has no undisclosed liabilities.
Why are representations and warranties of the seller important?
Representations and warranties are important because they establish trust, ensure transparency, and allocate risk between the buyer and the seller. For buyers, these provisions provide assurances about the condition of the asset or business being purchased and create a basis for legal recourse if the seller’s statements are false.
For sellers, these provisions help define the scope of their obligations, limit their liability, and foster confidence in the transaction. Including clear representations and warranties can reduce disputes and streamline the negotiation process.
Understanding representations and warranties of the seller through an example
Imagine a seller is transferring ownership of a manufacturing company. The seller represents that the company’s assets include all equipment necessary for operations and warrants that the equipment is in good working condition. If the buyer discovers after the sale that critical equipment is missing or non-functional, they may claim damages based on the breach of the seller’s warranties.
In another example, a seller of real estate represents that they have clear title to the property and warrants that there are no undisclosed liens. If a lien is discovered after the transaction, the buyer may seek compensation for damages or demand the lien’s resolution.
An example of a representations and warranties clause
Here’s how a representations and warranties clause for a seller might appear in an agreement:
“The Seller represents and warrants that: (i) it has good and marketable title to the Assets, free and clear of all liens and encumbrances; (ii) the financial statements provided are accurate and fairly present the financial condition of the business as of the date specified; and (iii) there are no pending or threatened legal actions against the Seller or the Assets being sold that would adversely affect the transaction.”
Conclusion
Representations and warranties of the seller are critical in transactions, providing assurances to the buyer about the condition and legality of the assets or business being sold. They promote transparency, allocate risk, and create a foundation for trust in the transaction.
By including detailed representations and warranties in agreements, businesses can protect their interests, reduce risks, and ensure that transactions are conducted fairly and transparently.
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.