Representations and Warranties in a Business Sale in British Columbia

If you are buying or selling a business, the purchase agreement will almost certainly contain a long list of statements about the business. The seller says the books are accurate, the licences are in order, the employees are paid, and so on. These are the representations and warranties, and they often take up more pages than the price clause.

They matter because they are where the risk of the deal is divided up. A buyer wants comfort that what they were shown is true. A seller wants to avoid promising more than they can know. This article explains the terms in plain words and points out where British Columbia rules shape what is worth stating.

This article covers the law of British Columbia.

What representations and warranties mean

A representation is a statement of fact about the business at a particular moment, usually the date of signing and the closing date. A warranty is the seller's promise that the statement is true, backed by whatever consequences the agreement sets out. In practice, most agreements combine them in one section and treat them together.

They differ from covenants, which are promises about future conduct, such as running the business normally until closing. A representation looks backward and at the present: it describes what is true now. A covenant looks forward: it describes what a party will or will not do.

What they commonly cover

The list depends on the business, but certain topics come up again and again. Several connect to British Columbia rules that a buyer would want confirmed.

• Financial statements and records: that they are complete and fairly show the business.
• Ownership: that the seller owns the assets or shares being sold, free of undisclosed claims.
• Tax: that returns were filed and amounts owing were paid. A buyer who does not obtain a PST clearance certificate may be liable for an amount equal to any outstanding PST owed by the collector.
• Licences: that required licences are valid. For example, an expired liquor licence cannot be transferred, so a statement that the licence is current and renewed is worth having.
• Employees: that wages, vacation pay and terms of employment are accurately described. On a sale of a business, employment is deemed continuous and uninterrupted, and the purchaser must honour the employee's length of service with the seller.
• Franchise matters: that any franchise disclosure rules were followed, where the business is a franchise.

How asset and share sales change the list

The structure of the deal changes which statements carry the most weight. The comparison below shows a few examples. Your own deal may differ, so the structure is worth settling with a lawyer and accountant early.

In a share sale the buyer takes the corporation as it is, history included, which is why buyers usually ask for broader statements about past conduct. In an asset sale the buyer picks what it acquires, so statements focus on those specific assets.

What happens if a statement turns out to be false

The agreement itself usually answers this. Common approaches include a compensation clause, a holdback of part of the price, a time limit for making claims, and a cap on the amount. Whether a buyer can end the deal, or only claim for loss, depends on the wording and the facts, and a lawyer can confirm how that works in your case.

Some statements are also governed by statute. Under the Franchises Act, a franchisee who suffers a loss from a misrepresentation in the disclosure document, or from a failure to comply with s. 5, has a right of action for damages, and is conclusively deemed to have relied on the misrepresentation. A person is not liable if the franchisee bought with actual knowledge of the misrepresentation. That last point shows why what the buyer already knew can matter.

• Buyers often ask whether a claim survives after closing, and for how long.
• Sellers often ask to limit statements to what they actually know, and to disclose exceptions in a schedule.
• Both sides should ask what happens to claims if the price is paid in instalments.

What to do next

• Ask for the draft statements early, and read them against your own records.
• Sellers: list every exception in a disclosure schedule rather than leaving it to memory.
• Buyers: check what you can verify yourself, such as licence status and PST clearance, before closing.
• Confirm with your accountant how the structure affects tax before you accept or reject a statement.
• Have a lawyer review the claims, limits and time periods, since those decide what a false statement is really worth.

Frequently asked questions