What is Representations and Warranties? Plain English Explanation
Definition
Representations are statements of fact about the current state of affairs ("our company has no pending lawsuits"). Warranties are promises that those facts will remain true. Together, they form the factual foundation of a deal.
Why It Matters in Contracts
If a representation turns out to be false, the other party may have grounds to rescind the deal, claim damages, or invoke indemnification. The scope and specificity of reps and warranties directly affect your risk exposure.
Real-World Example
A company being acquired represents that it has no environmental liabilities. After closing, the buyer discovers contaminated land requiring $2 million in cleanup. The buyer sues for breach of the environmental representation.
What to Watch For
- 🔴Overly broad representations you cannot verify
- 🔴Survival periods that extend years after closing
- 🔴Knowledge qualifiers ("to the best of our knowledge") that weaken the representation
- 🔴No cap on liability for breaches of reps and warranties
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Disclaimer: This glossary entry is for educational purposes only and does not constitute legal advice. Consult a qualified attorney for guidance on your specific situation.