Representations and warranties true and correct: Overview, definition, and example
What does "representations and warranties true and correct" mean?
The phrase "representations and warranties true and correct" refers to a provision commonly found in contracts, where one party makes a statement of fact (a representation) and guarantees (a warranty) that the information provided is accurate, complete, and not misleading. This clause serves to ensure that the facts presented by one party to the other are truthful and reliable at the time the contract is executed. The party making the representation and warranty essentially promises that the statements they have made are true and that they will be held accountable if they are found to be incorrect or false.
For example, if a company selling goods states that the products comply with all safety regulations, they are making a representation, and by including the "true and correct" language, they are warranting that the products meet the safety standards as stated.
Why is "representations and warranties true and correct" important?
This clause is important because it provides legal assurance to the other party that the information they are relying on is accurate and reliable. It plays a key role in risk management by holding the party making the representation accountable for any inaccuracies or misstatements. If the representations and warranties are found to be false, the party who made them may be required to remedy the situation, often through compensation or contract termination.
In business transactions, such as mergers or acquisitions, this clause is particularly critical, as the buyer will rely on the seller's statements regarding the financial health, assets, liabilities, and legal standing of the company being acquired. The "true and correct" language ensures that any discrepancies in the information provided could result in legal and financial consequences for the seller.
Understanding "representations and warranties true and correct" through an example
Imagine a company is selling its intellectual property (IP) to another company. In the sales agreement, the seller makes the following representation and warranty:
"The IP being sold is free from any third-party claims or encumbrances, and all relevant rights are valid and enforceable."
By stating that the representation is "true and correct," the seller is guaranteeing that, to the best of their knowledge, the IP is free from legal disputes or ownership challenges. If, after the sale, it is discovered that there are undisclosed legal claims against the IP, the buyer can hold the seller liable for breaching this representation and warranty.
In another scenario, a company that is selling a product line might warrant that all products comply with local regulatory standards and are not subject to any recalls. If this turns out to be false, the buyer could seek compensation or even cancel the agreement based on the breach of the "true and correct" representation.
An example of "representations and warranties true and correct" clause
Here’s how a clause regarding representations and warranties might appear in a contract:
“The Seller represents and warrants that all statements made in this Agreement, including those regarding the financial condition, intellectual property, and compliance with laws, are true and correct as of the Effective Date. The Seller agrees to indemnify the Buyer against any losses resulting from any inaccuracy or misrepresentation of the above representations and warranties.”
Conclusion
The phrase "representations and warranties true and correct" is a crucial element in contracts, particularly in commercial and legal transactions. It ensures that one party guarantees the accuracy and reliability of the information provided to the other party. This clause helps mitigate risks by holding the party making the representations accountable for any inaccuracies, and it can provide legal recourse if the representations are found to be false. It is an essential part of due diligence in business agreements, as it provides confidence that the terms and statements made are factual and reliable.
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.