Under English law, a warranty is a promise made by one party to another that certain facts or conditions are true. The inclusion of warranties in a contract provides assurance to buyers or the investors that they can rely on the accuracy of the information provided and helps to allocate risk between the parties.
In a fundraising scenario, warranties are typically given by the company and in some instances the founders to the investors and are referred to as the warrantors under a contract. In a sale scenario, warranties are typically given by the sellers to the buyers.
The importance of warranties and the liability that comes with them
Warranties typically cover various aspects of title to the relevant asset being sold and the business, such as the share capital of the company, the company's financial status, intellectual property, assets, and liabilities. The warranties may also cover any legal or regulatory compliance issues that the company may face.
If a warranty is breached, the investors or buyer may have the right to claim damages from the warrantors. The damages may include the amount invested, any additional costs incurred, or any losses suffered because of the breach.
It is important for warrantors to ensure that the warranties they provide are accurate and truthful and to the extent that any warranty statement is untrue, disclose the relevant information to the investors or buyers. Any false or misleading warranties may result in legal liability and damage to the company and personal liability of the founders.
Difference between warranties, indemnities, and representations
A warranty is a contractual statement and promise that provides assurance to an investor or buyer that certain conditions are true. If a warranty is breached, the party making the warranty may be liable for damages, but the liability for the warrantors is typically limited by a range of time based and financial limitations.
An indemnity on the other hand, is a contractual promise to compensate the other party for any losses or damages that may arise from a specified event or circumstance. An indemnity is usually broader than a warranty and provides the other party with more extensive protection. Generally, an indemnity offers the investors or the buyers a £ for £ loss recovery and simpler actionable remedy in the event of a breach.
Representations are a statement of fact that are made by one party to induce the other party to enter into a contract. One thing to be aware of when dealing with US parties is that the consequences of breaching a representation under English law are different than US law. Under English law if a representation is breached this gives the investors or buyers the right to terminate the contract which particularly in a fundraising situation is not feasible.
In conclusion, warranties are important aspects of many contracts, providing reassurance to the investors or buyers, that certain conditions will be met and that certain facts are true and accurate. Warranties allow the investors or buyers to allocate risk back on to the other parties and protects their interest in the event that one of those warranties is later found out to have not been true at the time they were given.