Representations and warranties of the seller: Overview, definition, and example
What are representations and warranties of the seller?
Representations and warranties of the seller are statements made by the seller in a contract, typically in a sale or purchase agreement, that affirm certain facts or conditions about the property, goods, or business being sold. These representations and warranties are assurances from the seller to the buyer that certain conditions exist and that specific actions or obligations have been met. They are legally binding and provide the buyer with a sense of security regarding the seller’s claims.
- Representations are factual statements or assertions made by the seller about the status of the property, business, or transaction. These statements may relate to the condition of the goods, legal ownership, financial status, or compliance with laws.
- Warranties are promises or guarantees that the representations are true and correct. If the representations are later found to be false or incomplete, the warranty provides a basis for the buyer to seek remedies such as damages or contract termination.
Why are representations and warranties of the seller important?
Representations and warranties of the seller are important because they protect the buyer from potential risks and liabilities associated with the transaction. By making these representations, the seller assures the buyer that they are providing goods or property that meet specific criteria, and the buyer is not inheriting hidden issues, defects, or legal liabilities.
For the seller, making clear and accurate representations can help avoid future disputes and legal liabilities. By including these assurances, the seller establishes credibility and confidence in the transaction.
For the buyer, representations and warranties are essential because they provide a legal foundation to seek recourse if the seller’s statements turn out to be false. They ensure that the seller is legally bound to meet the conditions described in the agreement.
Understanding representations and warranties of the seller through an example
Imagine a company selling its business to another company. The seller makes representations and warranties to the buyer, including a statement that all the company’s intellectual property rights (patents, trademarks, etc.) are owned by the seller and are free from any claims or disputes. The seller also represents that the company is in compliance with all relevant environmental laws and regulations.
If, after the sale, the buyer discovers that the seller did not own the intellectual property rights or that the business was in violation of environmental laws, the buyer can seek remedies based on the breach of the representations and warranties. These could include a claim for damages or the ability to rescind the sale.
An example of a representations and warranties clause
Here’s how a representations and warranties clause might look in a sale or purchase agreement:
“The Seller represents and warrants to the Buyer that: (i) the Seller is the sole legal and beneficial owner of the assets being sold and has full authority to transfer ownership; (ii) the assets are free from any liens, claims, or encumbrances; (iii) the Seller is in compliance with all applicable laws, regulations, and licensing requirements; (iv) there are no pending or threatened litigation, claims, or disputes affecting the assets.”
Conclusion
Representations and warranties of the seller are crucial elements in sale or purchase agreements, providing assurances to the buyer that the property, goods, or business being sold are in the condition and status claimed by the seller. These provisions not only protect the buyer from hidden risks but also offer legal remedies if the seller’s statements are found to be false or misleading. For both parties, including clear and comprehensive representations and warranties helps prevent future disputes and ensures that the transaction is based on accurate and agreed-upon terms.
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.