Representations and Warranties in an Alberta Business Sale

If you are buying or selling a business in Alberta, the draft agreement will almost certainly contain a long list of representations and warranties. They can look like boilerplate, but they decide who carries the risk if something about the business turns out not to be as described.

This article explains in plain words what these terms mean, how they differ from conditions, and what usually happens if one is false. The exact result in any deal depends on the wording of your agreement and the facts, so a lawyer should read it before you sign.

This article covers the law of Alberta.

What representations and warranties are

A representation is a statement of fact about the business, made by the seller so the buyer can decide whether to go ahead. A warranty is a promise that a statement is true, or will be true at closing. In most business purchase agreements the two are grouped together and treated as one list.

Typical topics include who owns the shares or assets, whether the financial statements are accurate, whether taxes have been paid, whether there are lawsuits or debts, what contracts the business is bound by, and whether employees are owed anything. The more the buyer cannot check on their own, the more the buyer will rely on the seller's word.

For the seller, a warranty is not just a formality. It is a promise you may be held to after closing, so it should be accurate and limited to what you actually know.

How they differ from conditions

People often mix these up. A warranty speaks about facts. A condition is something that has to happen, or be satisfied, before one side must complete the deal.

Financing is a good example of a condition. Government-backed small business loans through the Canada Small Business Financing Program do not finance share purchases or assets acquired by a holding company, so a buyer planning a share purchase of an Alberta company cannot count on that program. Whether the deal depends on financing is something to set out in the conditions, not in the warranties.

Warranties you can check before closing

A warranty is only as useful as the buyer's ability to test it. Some statements can be checked against public records before you close.

• Corporate Registry searches, requested through a registry agent, can show the registration date, owners, directors and legal addresses of a current or formerly registered Alberta corporation, partnership or trade name.
• A certificate of status confirms status as of a given date only, and certificates of status are not available for trade names and partnerships.
• Personal Property Registry searches, including by business debtor name or by serial number for vehicles, trailers, aircraft and boats, can show registrations against the seller or the assets.
• Tax statements, such as a warranty that GST has been properly handled, can be tested by asking for supporting records and having an accountant review them.

Checking does not make a warranty unnecessary. It lets you find problems early, adjust the price, or ask for a specific promise about anything that turns up.

What happens if a warranty is false

If a statement in the agreement turns out to be untrue, the buyer may be able to claim for the loss that results. Whether, how much, and for how long depends on what the agreement says. Agreements often set out how a claim must be made, how long the warranties last, and whether there are limits on the amount.

Several points tend to matter in a dispute. Was the statement unqualified, or limited by phrases such as 'to the seller's knowledge'? Did the buyer know the truth before closing? Is part of the price held back to cover claims? Did the agreement say what the buyer's remedies are? A lawyer can confirm how these questions apply to your agreement and to Alberta law.

A seller can reduce risk by adding disclosure to the agreement, listing known exceptions to each warranty. A buyer should read those exceptions carefully, because they narrow what the seller has promised.

What to do before you sign

• Read each warranty and ask whether it is true today and whether you can prove it.
• As a seller, add disclosure for anything you know does not fit.
• As a buyer, run registry searches and ask for tax and financial records to test the key statements.
• Check whether the warranties survive closing and for how long.
• Find out whether any money is held back or any person guarantees the seller's promises.
• Have a lawyer review the whole agreement, including conditions and remedies, before you sign.

Frequently asked questions