If you are buying or selling a business in England and Wales, two words dominate the contract: representations and warranties. They are often bundled together as "reps and warranties", but in law they do different jobs and give different remedies. For an SME (especially a buyer) understanding the difference is one of the most valuable protections in the whole deal.
What is a warranty?
A warranty is a contractual statement about the business, given (usually) by the seller in the sale agreement, for example: "the company has paid all its taxes", "the accounts give a true and fair view", "there is no litigation pending", "the company owns its key assets".
If a warranty turns out to be untrue, the buyer has a claim for breach of contract and can seek damages. The usual measure is the difference in value: the difference between what the business was worth as warranted and what it was actually worth given the true position.
What is a representation?
A representation is a statement of fact made by one party to induce the other to enter the contract. If a representation is untrue and the buyer relied on it, the buyer may have a claim in misrepresentation.
Misrepresentation is powerful because it can give wider remedies than breach of warranty:
- Rescission, the right to unwind the whole transaction and be put back to where you started (subject to conditions, and it can be lost).
- Damages (assessed on a tortious basis (and under the Misrepresentation Act 1967), broadly aiming to put you in the position you would have been in if the false statement had never been made) which can capture consequential losses.
Why the distinction matters
Because the two routes give different remedies, the labels in the contract are heavily negotiated:
- Buyers often want statements expressed as both representations and warranties, to keep access to rescission and the wider misrepresentation damages as well as the contract claim.
- Sellers often try to limit statements to warranties only, and to exclude misrepresentation through "entire agreement" and "non-reliance" clauses, so the buyer is confined to a contractual damages claim (which sellers can then cap and time-limit).
So whether a statement is "represented and warranted" or merely "warranted" is not just lawyer's boilerplate, it changes what you can recover if things go wrong.
How sellers limit their exposure: the disclosure letter
Warranties work hand-in-hand with the disclosure letter. The seller discloses known problems against the warranties; anything fairly disclosed will usually qualify the warranties to the extent the SPA and disclosure letter provide; whether it bars a claim depends on the agreed definition and effect of "fair disclosure" in those documents. This is why warranties are so useful even when nothing goes wrong: they flush out information, because a seller who fails to disclose a problem risks a claim.
Sellers also typically negotiate limitations: a financial cap (often linked to the price), time limits for bringing claims, a de minimis (small claims ignored) and a basket/threshold (claims must reach a total before any is payable).
Warranties vs indemnities
Do not confuse warranties with indemnities. An indemnity is typically drafted to provide pound-for-pound recovery for a specific, identified risk (say, a known tax dispute), but the actual scope of recovery depends on how the indemnity is worded. Indemnities are often commercially stronger because they can be drafted to sidestep some of the limitations of ordinary damages claims, but issues such as causation, mitigation and recoverable loss still depend on the contract wording and the nature of the indemnity.
Practical points for SMEs
- Buyers: push for key statements to be representations and warranties, resist broad non-reliance clauses, and use indemnities for specific known risks. Do thorough due diligence, it shapes the warranties you need.
- Sellers: disclose fully and accurately in the disclosure letter, and negotiate sensible caps and time limits.
- Everyone: get the definitions and labels right, they decide your remedies.
Key takeaways
- Warranties are contractual statements; breach gives damages (difference in value).
- Representations induce the contract; if false, misrepresentation can give rescission and wider (tortious) damages.
- Buyers usually want both labels; sellers prefer warranties only plus non-reliance and caps.
- The disclosure letter qualifies warranties to the extent the transaction documents provide; indemnities are typically drafted for specific known risks and can provide stronger recovery, depending on their wording.
Sources
- Misrepresentation Act 1967 (remedies for misrepresentation, including s 2(1) damages)
- General law of contract (breach of warranty and damages) and misrepresentation (rescission); standard M&A practice in England & Wales
- Disclosure, warranty limitations and indemnities as commonly used in share/asset purchase agreements
--- This article is general information about the law of England & Wales as at 2026, not legal advice. For advice on your circumstances, consult a qualified solicitor.