Representations and warranties of both parties: Overview, definition, and example
What are representations and warranties of both parties?
Representations and warranties of both parties refer to the statements or promises made by each party in a contract regarding the truthfulness and accuracy of certain facts or conditions at the time the contract is signed and throughout its duration.
- Representations are factual statements or assertions about a party’s condition, capabilities, or circumstances at the time of the contract signing. These statements assure the other party that certain conditions are met, such as ownership of property or compliance with laws.
- Warranties are promises or guarantees made by one party to the other that certain facts or conditions are true and will remain true throughout the course of the agreement. Warranties often provide a level of protection in case something goes wrong and may lead to legal remedies if a warranty is breached.
Together, representations and warranties ensure that both parties enter into the contract with a mutual understanding of the facts and conditions that will govern the agreement.
Why are representations and warranties of both parties important?
Representations and warranties are important because they create a level of trust and certainty between the parties. By making specific factual assertions, each party affirms that they are in a position to fulfill their obligations under the contract. If a party’s representation or warranty turns out to be false, the other party may have legal recourse, such as the right to terminate the contract or seek damages. These clauses also provide clarity about the responsibilities and obligations of each party, reducing the risk of disputes during the execution of the agreement.
Understanding representations and warranties of both parties through an example
Imagine a business that is purchasing real estate. In the purchase agreement, both the buyer and the seller make representations and warranties to each other. The seller represents that they have clear title to the property, meaning they legally own it and have the right to sell it. The buyer represents that they have the financial capability to complete the purchase and comply with any necessary regulations. If, after the transaction, the seller’s representation about the property title is found to be false, the buyer may be entitled to legal remedies, such as rescinding the contract or seeking compensation.
In another example, two companies enter into a partnership agreement. One company represents that it has the necessary licenses and approvals to conduct business in certain jurisdictions. The other company warranties that it will comply with all applicable laws and regulations. If one company fails to meet its representations or warranties, the other party may seek damages or terminate the partnership.
An example of a representations and warranties clause
Here’s how a clause about representations and warranties might appear in a contract:
“Each Party represents and warrants to the other that: (i) it has full legal authority to enter into this Agreement, (ii) it is in compliance with all applicable laws and regulations, and (iii) no third-party consents are required to execute this Agreement. Any breach of these representations and warranties will constitute a material breach of this Agreement.”
Conclusion
Representations and warranties of both parties are fundamental elements of contracts that ensure each party is transparent about its ability to fulfill its obligations. These statements or promises provide security and clarity by affirming certain facts about the business, property, or conditions at the time the contract is signed. If either party fails to meet their representations or warranties, the other party can take legal action to protect their interests, ensuring the integrity of the contract.
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.