Representations, warranties, and covenants: Overview, definition and example
What are representations, warranties, and covenants?
Representations, warranties, and covenants are legal terms often included in contracts to set forth the assurances and commitments made by the parties involved. While these terms are related, they each serve different functions within a contract.
Representations are statements or assertions made by one party regarding the truth of certain facts at the time the contract is made. These statements are meant to provide the other party with confidence that certain conditions exist or facts are accurate. If a representation is found to be false, it can be a basis for a legal claim of misrepresentation or breach.
Warranties are promises that certain facts or conditions are true or will be true in the future. Warranties provide assurances that specific aspects of the agreement will be upheld, such as the condition of goods, the legality of the actions, or the quality of services provided. Breaching a warranty typically leads to a right to claim damages, but it does not necessarily result in contract termination.
Covenants are promises or commitments to do or refrain from doing something in the future. A covenant typically refers to an obligation to act in a certain way, such as maintaining insurance, paying certain amounts, or refraining from competing with the other party. Breaching a covenant may lead to legal remedies, including specific performance or damages.
Why are representations, warranties, and covenants important?
These provisions are crucial for clarifying the obligations, assurances, and expectations of each party to the contract. They help establish trust and provide legal protections by:
- Ensuring that the parties have a clear understanding of the facts and circumstances at the time of signing (representations).
- Offering assurances regarding the future performance or condition of the subject matter (warranties).
- Setting forth promises that bind the parties to take or refrain from certain actions (covenants).
In the case of a breach, these provisions provide a clear path to enforce rights, seek damages, or terminate the agreement.
Understanding representations, warranties, and covenants through an example
A company enters into a contract to purchase a business. In the agreement:
- The seller represents that the business has no outstanding legal disputes.
- The seller warrants that the financial statements of the business are accurate as of the closing date.
- The seller covenants to maintain the business in its current operational state until the sale is completed.
If any of these representations, warranties, or covenants are breached (e.g., the seller misrepresents the legal standing of the business or fails to uphold a covenant to maintain operations), the buyer may seek remedies based on those breaches.
An example of representations, warranties, and covenants clauses
Here’s how these provisions might appear in a contract:
*"Representations: The Seller represents that the Business is not involved in any pending litigation and has no knowledge of any material claims that could affect the operation of the Business.
Warranties: The Seller warrants that the financial statements provided to the Buyer accurately reflect the Business’s financial condition as of the date of the Agreement.
Covenants: The Seller covenants to continue operating the Business in the ordinary course and refrain from taking any actions that could materially affect the Business’s assets, operations, or financial condition until the closing of this transaction."*
Conclusion
Representations, warranties, and covenants are essential elements of most contracts, providing clarity, assurance, and legal protection for the parties involved. Representations ensure that facts presented are true, warranties guarantee the fulfillment of certain conditions or standards, and covenants commit the parties to take specific actions or avoid certain behaviors in the future. Clearly defined representations, warranties, and covenants help prevent disputes and provide a foundation for enforcing the contract if breaches occur.
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.