Representations and warranties: Overview, definition, and example
What are representations and warranties?
Representations and warranties are assurances made by one or more parties in a contract about the truthfulness of certain facts or the state of certain conditions at the time the agreement is executed. Representations are statements of fact, while warranties are promises that these facts will remain true during the contract's performance or that specific obligations will be fulfilled.
For example, a seller in a sales agreement might represent and warrant that the goods being sold are free from defects and comply with applicable laws.
Why are representations and warranties important?
Representations and warranties are important because they establish trust and accountability between the parties. They ensure that all parties have accurate information and that certain promises are upheld, reducing the risk of disputes or misunderstandings.
For SMBs, these provisions provide protection by creating a legal remedy if one party makes false statements or fails to fulfill their promises. They also help clarify each party’s responsibilities and expectations upfront.
Understanding representations and warranties through an example
Imagine a software development company enters into an agreement with a client to deliver a custom application. The company’s representations and warranties might include statements such as:
- The software will comply with industry standards.
- The company has all necessary rights to use the code and tools involved in the development.
- The software will not infringe on any third-party intellectual property rights.
If these assurances prove to be false, the client could seek damages for breach of contract.
In another example, in a business acquisition agreement, the seller might represent and warrant that the company being sold has no undisclosed debts and that its financial statements are accurate. If undisclosed debts are later discovered, the buyer may have legal recourse to recover damages.
An example of a representations and warranties clause
Here’s how a representations and warranties clause might appear in a contract:
“The Seller represents and warrants that: (a) the goods are free from defects in material and workmanship; (b) the goods comply with all applicable laws and regulations; and (c) the Seller has full legal authority to enter into this Agreement and transfer ownership of the goods.”
Conclusion
Representations and warranties are key provisions in contracts that ensure the accuracy of statements and the fulfillment of promises. They establish accountability and provide remedies if the assurances are false or breached.
For SMBs, including well-defined representations and warranties in contracts protects their interests, ensures clarity, and reduces the risk of disputes. These clauses foster trust and transparency, creating a stronger foundation for successful business relationships.
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.