Warranties, also referred to as representations, are statements of fact. Warranties are made by one party (e.g. a seller, service provider, borrower or licensor) to the other party as of a particular moment in time. The purpose of the warranties is to reflect those facts or events that are important to the other party’s business decision to enter into the transaction (on the agreed terms of the contract). If warranties appear to be incorrect, this results in rights or remedies under the contract.
For example in the context of a sale of a chemical business, the buyer most likely wants to know whether there are any environmental contaminations for which the target company may be held liable at some point in time. The seller may have done environmental investigations providing a minimum of comfort that there are no environmental complications. However, there may have been hazardous spills that were not accurately reported in the records and not discovered in the soil investigation. This risk can be addressed by requiring the seller to make a warranty confirming the absence of hazardous spills. A more burdensome warranty to claim under, but anyhow better than nothing, would be a warranty stating that the seller has always had adequate waste spill reporting policies in place in accordance with the best industry practices at such moment in time, and that it has conducted adequate soil investigations.