Truth of representations and warranties: Overview, definition, and example
What is the truth of representations and warranties?
The truth of representations and warranties refers to the requirement that the statements made by one party in a contract (usually a seller or a party providing a service) about certain facts, conditions, or obligations must be accurate and truthful. Representations are factual statements made to induce the other party to enter into an agreement, while warranties are promises that certain facts or conditions will remain true during the life of the contract. If any of these representations or warranties are found to be false or misleading, the party making them may be held liable for any damages that arise as a result.
In simpler terms, the truth of representations and warranties means that the promises or statements made in a contract must be correct. If they aren't, the person who made those statements could be responsible for fixing the problem or paying for damages.
Why is the truth of representations and warranties important?
The truth of representations and warranties is crucial because it helps ensure that both parties in a contract are entering into the agreement with accurate and honest information. These statements often form the basis for trust and decision-making. If a party’s representations or warranties turn out to be false, the other party may suffer financial harm, legal issues, or missed opportunities. Therefore, ensuring the truth of these statements protects both parties and minimizes the risk of disputes or claims after the contract is signed.
For SMB owners, understanding the truth of representations and warranties is essential to avoid misrepresentation, ensure compliance with legal obligations, and maintain business integrity in contracts.
Understanding the truth of representations and warranties through an example
Let’s say your business is selling a piece of equipment to another company. You make a representation that the equipment is in good working condition and has been maintained according to the manufacturer's guidelines. If, after the sale, the buyer discovers that the equipment was faulty and poorly maintained, they could claim that your representation was false. As a result, you could be held responsible for the cost of repairs or even a potential refund.
In this example, the truth of your representation (that the equipment is in good condition) is vital. If the statement is proven to be untrue, you may be liable for the consequences.
Example of a truth of representations and warranties clause
Here’s an example of what a truth of representations and warranties clause might look like in a contract:
“The Seller represents and warrants that all statements made in this Agreement regarding the condition of the property, including but not limited to the accuracy of the financial records, are true and correct as of the date of this Agreement. If any of the representations or warranties made by the Seller are found to be false, the Seller shall be responsible for any damages or losses incurred by the Buyer as a result.”
Conclusion
The truth of representations and warranties is a fundamental principle in business contracts, ensuring that all statements made by the parties are accurate and truthful. For SMB owners, being clear and truthful in making representations and warranties helps protect the business from future legal and financial consequences. By including these clauses in contracts, businesses can safeguard their interests and provide assurance that both parties are operating based on accurate information.
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.