Meaning
Breach of contract occurring when a factual statement regarding the state of a business is false. A representation and warranty breach occurs when the information provided in the purchase agreement is found to be false or incomplete on the date of the transaction.
Indemnity Trigger
Compensation for the injured party is typically sought through a claim for damages or a reduction in the purchase price. The discovery of a representation and warranty breach often leads to a withdrawal from the deal if the error is identified before the final signatures are exchanged.
Disclosure Defense
Protection for the seller comes from listing exceptions in a formal disclosure letter delivered at signing. When a fact is properly disclosed, no representation and warranty breach can be claimed for that specific matter because the buyer was made aware of the situation.
Loss Calculation
Measuring the financial impact depends on the difference between the value of the business as represented and its actual value with the defect. A major representation and warranty breach might reduce the valuation of the firm by millions if it concerns ownership of substantial patents or the loss of a major customer. Courts and arbitrators calculate the settlement based on the direct financial harm caused by the inaccuracy in the signed documents.
