Representations and Warranties

Representations and warranties are statements by the seller about the condition of the business, covering financial statements, title to key assets, pending litigation, employment matters and the validity of core contracts. If a statement proves false, the buyer can bring a claim. The purchase agreement determines the consequences of an inaccurate warranty.

Economically, warranties allocate risk between the parties. Although the buyer investigates the business through due diligence, it cannot independently establish every fact. Warranties therefore protect specified assumptions behind its decision to buy. For the seller, the key questions are which statements it can confirm and where qualifications or explicit disclosure are needed.

The warranty package should reflect the diligence findings. For a software business, ownership of the software and existing licence agreements may be particularly relevant. For a manufacturer, equipment, permits and key supply relationships also matter. An indiscriminately long catalogue is of limited value if it fails to address the risks that are important to the specific business.

Negotiations cover liability caps, minimum claim amounts and the time allowed to bring claims, as well as the content of the warranties. It also matters whether a statement applies independently of the seller's knowledge or is limited to what the seller knows. A warranty's heading alone therefore says little about its economic reach.

Disclosure is closely connected. The agreement determines how far disclosed matters exclude claims. Merely placing a document in the data room does not automatically remove liability for every matter that could be identified from it. Specific known risks are often addressed through separate indemnities. Warranty and indemnity insurance may additionally cover certain warranty risks. What matters to both sides is how these instruments work together and which losses are ultimately borne by whom.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.