What are representations and warranties?
Representations and warranties are contractual statements used primarily in commercial transactions, including share deals, asset acquisitions, investments, financing arrangements and major business contracts. They concern facts, circumstances or legal conditions relating to a party, its business, assets, liabilities, contracts or compliance status.
A representation is generally a statement of fact made by one party to another, often as at the date of signing or completion of a transaction. For example, a seller may represent that it owns the shares being sold, that financial information has been prepared properly, or that there are no undisclosed disputes. A warranty is commonly understood as a contractual assurance that a specified statement is true and that the party giving it will bear the agreed consequences if it proves inaccurate.
The distinction between representations and warranties is well established in common law transaction practice, but its legal consequences may differ under Polish law. Polish courts and legal doctrine assess contractual clauses according to their wording, the intention of the parties and the applicable provisions of the Civil Code. For this reason, agreements governed by Polish law should clearly define the nature of each statement, the consequences of a breach, available remedies and any limitations of liability.
What do representations and warranties cover?
Representations and warranties are particularly important where one party has better access to information than the other. In an M&A transaction, the buyer usually relies on the seller’s statements when deciding whether to acquire shares or assets and when determining the purchase price. In an investment agreement, founders may give assurances concerning the company’s ownership structure, intellectual property, financial position or key commercial contracts.
The scope of representations and warranties depends on the transaction and the results of legal, financial and tax due diligence. Typical areas include:
- legal existence and proper corporate authority to enter into the agreement;
- ownership of shares, assets, intellectual property rights or real estate;
- accuracy and completeness of financial statements and management accounts;
- absence of material litigation, administrative proceedings or regulatory investigations;
- compliance with applicable laws, permits, sanctions, anti-money laundering rules and data protection requirements;
- validity of material contracts and the absence of breaches or termination notices;
- employment matters, including claims by employees and compliance with employment regulations;
- tax settlements, tax audits, transfer pricing and potential tax liabilities;
- environmental obligations, licences and permits where relevant to the business.
These clauses may also address future matters. For example, a party may undertake that no action will be taken between signing and closing that could materially affect the target company. Such obligations are often drafted separately as covenants, although transaction documents may use different terminology.
When are representations and warranties important?
Representations and warranties should be considered whenever a party relies on information provided by its contractual counterparty and incorrect information could affect the value, legality or commercial purpose of the transaction. They are central to share purchase agreements, investment agreements, joint venture arrangements, financing documentation, real estate transactions and long-term supply or distribution contracts.
For buyers and investors, properly drafted statements create a contractual basis for claims if relevant information is false, incomplete or misleading. For sellers, founders and other warrantors, the wording of these clauses determines the extent of potential exposure after completion. The parties commonly negotiate qualification by knowledge, materiality thresholds, disclosure mechanisms, time limits for claims, financial caps and exclusions for matters known to the buyer.
It is important not to treat representations and warranties as standard boilerplate. A broad statement that a business complies with all laws may create substantial risk if it is not limited appropriately. Conversely, overly narrow statements may fail to provide meaningful protection to the buyer or investor. The disclosure letter and transaction due diligence materials are often critical because they may identify exceptions to the warranties and limit liability for disclosed matters.
A prompt legal review can help identify inaccuracies, gaps in disclosure and contractual provisions that may lead to disputes, liability or financial loss. It may also help the parties align the warranty package with the actual risk profile of the transaction and the findings of due diligence.
Legal support regarding representations and warranties
Legal support in relation to representations and warranties may include in particular:
- drafting and negotiating representation and warranty clauses;
- reviewing share purchase, investment and asset sale agreements;
- preparing warranty schedules and disclosure letters;
- conducting legal due diligence and identifying transaction risks;
- advising on liability caps, claim procedures and limitation periods;
- assessing potential claims for breach of contractual assurances;
- supporting negotiations between buyers, sellers, investors and founders.
Need legal assistance with representations and warranties? Contact us.