Representations and Warranties

Representations and warranties are the seller's statements about the company, written into the sale agreement so that the buyer can rely on them. Suppose a group agrees to buy a payroll software company from its founders. The buyer cannot see everything, so it asks the founders to state in the agreement that the accounts are accurate, that no customer has given notice to leave, and that nobody is suing the company.

Each statement does two jobs. It pushes the seller to say what it knows before signing, because an untrue statement can cost it money later. It also decides who bears the loss if a problem comes to light after the sale. Where closing happens after signing, the agreement often has the seller repeat the statements at closing.

The pairing of the two words is a drafting convention. Whether they mean different things depends on the law that governs the agreement.

In some legal traditions the words point to different kinds of claim. A representation is a statement made to persuade the other side to enter the contract. A warranty is a promise inside the contract that a fact is true. Under such a law, the label can affect what the buyer may claim if the statement is false. In other legal systems the pair has no settled meaning. Agreements written under those laws often use one word only, or call the statements guarantees, and set out the consequences of a false statement in the agreement itself.

Three clauses show what the words mean in a given agreement: the governing law clause, the remedies clause and the clause that limits the seller's liability.

They cover the facts a buyer cannot fully verify for itself. The list varies with the business, but most sets fall into five groups.

The first group is about the seller: that it owns the shares and has the authority to sell them. The second is about the company's finances: the accounts, the tax filings and the debts. The third is about what the company relies on to trade, such as its main contracts, employees, intellectual property and IT systems. The fourth is about trouble: disputes, investigations and insurance claims. The fifth is compliance with the law, including licences, anti-money laundering rules, sanctions and data protection.

Some statements are limited to the seller's knowledge. The agreement then has to say whose knowledge counts.

The three work as one system. Due diligence is the buyer's own investigation. The warranties cover what that investigation could not confirm. The disclosure letter is the seller's list of known exceptions to the warranties.

The order matters. The buyer's questions in due diligence show where the risks sit, and the warranties are drafted around them. The seller then tests each warranty against what it knows, and discloses anything that would make a statement untrue. In the payroll example, the founders might disclose that one large customer has asked to renegotiate its contract. The buyer now knows. It can respond on price, or ask for a specific promise of compensation. As a rule it cannot later bring a warranty claim about that customer.

What happens if the buyer already knew of a problem that the seller did not formally disclose is left to the agreement and its governing law.

They state that the company has followed those rules, which is hard to judge from outside.

An anti-money laundering warranty typically says that the company has complied with the law that applies to it and has not been investigated for a breach. It carries most weight when the company is itself an obliged entity under Article 3 of the EU Anti-Money Laundering Regulation, such as an accounting practice or an estate agency. From 10 July 2027, Article 77 requires an obliged entity to keep its customer due diligence records for five years after a client relationship ends. The evidence behind the warranty should therefore exist, and a buyer can ask to sample it.

A sanctions warranty typically says that the company, its owners and its directors are not subject to sanctions, and that the company has not dealt with anyone who is. A data protection warranty says that the company handles personal data lawfully and has had no serious breach or regulatory complaint. The GDPR requires a company to be able to demonstrate its compliance (Article 5(2)).

Because a warranty gives the buyer a claim for money against the seller, and nothing more. It does not make the statement true. In a share purchase the company keeps its own liabilities. If the company broke data protection law before the sale, a fine under Article 83 of the GDPR is imposed on the company, which the buyer now owns. The buyer then has to recover the loss from the seller. It can do so only within the limits that the agreement sets, and only if the seller can still pay. A regulator is not bound by what the seller told the buyer.

The advisers have a separate reason. A lawyer or notary who assists with the sale of a business must carry out customer due diligence on its own client. Article 20(1) lists the measures, which include checking the client and its beneficial owners against sanctions lists. A statement in the contract is not one of them. Under Article 48(1), an obliged entity may rely on another obliged entity, on set conditions, to identify the client and its beneficial owners and to understand the purpose of the relationship. The sanctions check is not covered, and responsibility stays with the firm that relies. The Regulation applies from 10 July 2027. Until then, the national laws that implement the EU anti-money laundering directives apply.