What are Representations and Warranties?
• 13 Apr 22
Every entrepreneur should understand the basic tenets of business contracts. When well written, a contract will not only make running your Startup smoother but also protect against possible future conflicts. In many ways, a business contract can be boiled down to two key components: representations and warranties.
Simply put, representations are the facts that a contract is operating off of and warranties are security against loss should those facts be found false. In a business agreement, the representations and warranties act as assurances from one party to another and serve as the best form of protection for all involved. The purpose of including them in a contract is to disclose information between all involved parties. At their core, representations and warranties uphold the entire point of creating a business agreement in the first place: to protect the buyer and the seller.
Any contract drawn up between two or more parties will include representations and warranties. For example, if you decide to buy a new computer from a major brand’s store, you would enter into this transaction with several representations, including:
- The computer is actually the model, make, brand, etc. that the seller represents it to be
- The store is legally authorized to sell computers to customers
- The computer will work as promised when used properly
The warranty made by the computer store is that all of the above concepts are valid. If one or all of these representations are found to be untrue, the transaction may be cancelled or reversed. Another warranty made by the seller might be to repair any defect that arose because of misrepresentation. As you probably know, warranties often do not last forever. In this case, the seller or manufacturer of the computer might declare a period of time when the unit will work without any defects, after which the warranty would no longer be applicable.
Do note that exaggerating the good points of a product or service does not constitute a false representation, though of course an outright lie would. In most cases, when a representation is demonstrated to be false, the warranty allows the person involved in the contract to terminate or decline the transaction.
Including representations and warranties in a contract is the simplest way to split the risk between all those who sign. Representations and warranties also become the plinth for any future amendments to the contract, even possible termination of it. Nevertheless, some companies choose not to include representations in contracts or agreements because doing so may put them at risk of being sued for fraud. Representations always refer to past information, since naturally it is impossible for a company or individual to state future information as factual. For certain services or business models, it may be difficult to articulate all possible representations and thus, warranties may be implied rather than directly expressed.
Generally speaking, however, it’s usually smart for Startups to include specific representations and warranties in any business contract. They allow all involved parties to feel confident that they will receive what they expect and offer recourse for resolving any possible future conflicts.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.