Representations and warranties of the authority: Overview, definition, and example
What are representations and warranties of the authority?
Representations and warranties of the authority refer to the assurances made by a party (typically a signatory or representative) in a contract that they have the legal power and authority to enter into and bind the agreement. These representations confirm that the person or entity signing the contract has the necessary rights, permissions, and approvals from relevant parties (such as a board of directors, shareholders, or government agency) to execute the contract on behalf of the company or organization. The "representation" is the statement of fact, and the "warranty" is a guarantee that the fact is true and can be relied upon.
Why are representations and warranties of the authority important?
These representations and warranties are important because they ensure that the party entering into the agreement has the legal authority to do so. This protects all parties involved, as it guarantees that the agreement is valid and legally enforceable. Without these assurances, there could be a risk that one of the parties did not have the appropriate authority to sign the contract, potentially leading to disputes, invalid contracts, or legal challenges. For businesses, ensuring that the representatives have the proper authority is crucial for protecting the company and ensuring compliance with legal and corporate governance requirements.
Understanding representations and warranties of the authority through an example
Imagine a company enters into a partnership agreement with another business. The company’s CEO signs the agreement, but before proceeding, the partner wants to be sure that the CEO is authorized to bind the company to the agreement. The CEO provides a representation and warranty that they have been duly authorized by the company’s board of directors to enter into the agreement. If it turns out that the CEO was not authorized to sign the contract, the company could be held liable for damages resulting from the invalid contract, but the partner would be able to seek recourse based on the representation and warranty made by the CEO.
In another example, a business is acquiring another company. The seller makes representations and warranties to the buyer that the person signing the sale agreement on behalf of the company has the necessary authority from the company’s shareholders and board of directors. If the person signing the agreement did not have such authority, the buyer could seek to rescind the transaction or demand compensation for any damages resulting from the unauthorized signing.
An example of representations and warranties of the authority clause
Here’s how a clause about representations and warranties of the authority might appear in a contract:
“The Party represents and warrants that it has the full power, legal capacity, and authority to enter into and execute this Agreement, and that the individual signing this Agreement on its behalf has been duly authorized by the Party’s board of directors or other governing body to do so. The Party further warrants that this Agreement, once executed, will be binding and enforceable.”
Conclusion
Representations and warranties of authority are key elements in ensuring that contracts are legally binding and valid. They provide assurance that the individuals signing agreements on behalf of a company or organization have the legal right and authority to do so. This protects all parties by reducing the risk of disputes or invalid contracts and ensures that the business is acting within its legal framework. For businesses, it is essential to verify and clearly state the authority of the signatories to avoid legal complications down the line.
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.