Holding the Bag

Lots of provisions are looked at prior to a contract being signed, some at signing, and others not until afterwards when there is a problem. Representations and warranties are ones that can be important at each of these stages. Each of these are used to properly place risk and expense. They do so by showing who is “holding the bag” whenever bad things are discovered. Representations and warranties let you know what facts the other side is willing to promise are true (and put their money behind those promises).

This matters when the parties are deciding how much to pay now and how much to risk if things go to pot. If you represent that something is true, then the other side is more willing to believe you. But if you warrant that it is true, you are not just saying it is true, you are saying you are willing to pay them back if it turns out it isn’t true. Now the other side is much more willing to believe you – and be more willing to pay for what it is you are selling. Like the difference between “Hey, I found this car. Want it?” “Umm, found?” “Yeah, on the side of the road. Don’t know what the dried stuff is in the back. Haven’t looked in the trunk. Want it?” and “I promise you that this car is brand new. It has never been driven except to get on and off the delivery truck, and if I am wrong, I’ll give you your money back plus maybe some extra for your trouble.” Which are you going to pay more for? That’s the power of representations and warranties.

Lots of things are not as clear cut as that, but that doesn’t mean the power of representations and warranties are diminished. In fact, the fuzzier the situation, the more powerful those representations and warranties. It’s when the parties need reassurance and the allocation of risk that they really shine. Who is taking the risk? And how should that risk be shown and timed? The more promised as true, the more the promise maker is taking the risk of falsehoods and the more money they can demand to be kept on their side of the ledger. You know, just in case that trunk doesn’t glow gold when opened.

Thanks for reading, Erin.