Representations and Warranties

Buyers cannot know everything about a business, even after due diligence. Representations and warranties allocate risk. The seller confirms certain facts, and if they turn out to be untrue, the buyer may be able to claim compensation.

Typical statements cover the accuracy of financial statements, ownership of assets and intellectual property, absence of undisclosed liabilities or lawsuits, compliance with laws, the validity of key contracts, tax matters and employee issues.

For example, the seller might warrant that the company is not involved in any litigation. If a major lawsuit filed before completion later comes to light, the buyer may claim damages.

Agreements usually limit claims, for example by setting a minimum claim size, a maximum total liability and a time limit. Sellers disclose known exceptions against the warranties in a disclosure letter or schedule. Representations and warranties insurance, which covers buyers for losses from breaches, has become common, allowing sellers to limit their liability. The legal distinction between representations and warranties varies between jurisdictions.