Representations and warranties are the seller’s formal statements in a purchase and sale agreement about the accuracy and completeness of everything material about the business, and breaching them triggers indemnification obligations.
Every material fact about the business that a buyer relies on is captured as a representation: the financial statements are accurate, there is no undisclosed litigation, all material contracts are disclosed and in good standing, employees have been paid all amounts owing, and tax returns have been filed and taxes paid. If any representation turns out to be false or misleading, the buyer has a claim against the seller for the resulting loss.
The scope, survival period, and indemnification cap governing representations and warranties are among the most heavily negotiated provisions in a PSA. A seller who gives broad representations with a long survival period and a high cap has retained significant post-closing exposure. Representations and warranties insurance, a product that allows a third-party insurer to take on some or all of that exposure, has become increasingly common in Canadian private transactions, providing sellers with greater certainty on their net proceeds while giving buyers meaningful protection without having to pursue the seller directly.
See also: Indemnities · Purchase and Sale Agreement (PSA) · Closing and Post-Closing AdjustmentsRepresentations and warranties define the post-closing risk a seller retains. Understanding the scope before signing determines how much of the purchase price is truly certain. See how Wefinx approaches exit planning.