Reps

Definition of the term: Reps in a legal context

Reps is an abbreviation commonly used in German and international legal practice for ‘Representations’, which in German translates to ‘declarations’ or ‘assurances’. The term originates from the Anglo-American legal system, but is increasingly used in German contracts, particularly in the context of corporate transactions and other commercial agreements. Legally, Reps are certain assurances given in a contract regarding the status, condition, or specific characteristics of a contracting party or subject matter of the agreement.

Meaning and function of Reps

General meaning of Representations

Representations (Reps) play a special role in contract law. Contracting parties expressly assure each other of certain facts and circumstances that are essential for the conclusion of the contract. By including Reps in a contract, the benefiting party is enabled to rely on the accuracy and completeness of these declarations.

Functions and purposes

The main functions of Reps are:

• Reducing information asymmetries: Reps serve to secure knowledge about certain facts relevant to the contract and to create transparency.
• Risk allocation: The party making a Representation simultaneously assumes the risk for the accuracy of this assurance.
• Legal consequences of falsehood: If a Representation proves to be incorrect after the contract is signed, warranty rights, claims for damages, or even rights of rescission may arise depending on the contractual arrangement.

Legal classification of Reps

Integration into contract law

Under German law, Reps are often used together with so-called ‘Warranties’ (guarantees/assurances). While Reps secure facts at the time of contract conclusion, Warranties usually provide assurances for a certain period of time.

Reps in company acquisition agreements (M&A)

In connection with company acquisition agreements (share deal and asset deal), Reps are primarily used to secure certain material characteristics of the company being acquired, including the accuracy of the accounts, ownership structure, legal disputes, or tax liabilities. The absence or inaccuracy of Reps can have serious legal and economic consequences for the contracting parties.

Legal consequences of breach of Reps

Liability and claims

If there is a breach of a Representation (so-called ‘Breach of Representation’), the other party may, depending on the contractual arrangement, for example:

• Claim damages demand,
• withdraw from the contract in whole or in part,
• demand purchase price adjustments, or
• assert other contractually defined legal consequences.

Distinction from warranties and guarantees

Under German law, Reps and Warranties are treated differently. While warranty rights arise by law, liability for Reps is generally based on the contract itself. The exact distinction must be made on a case-by-case basis by interpreting the contract, its wording, and the intentions of the parties.

Typical contents and regulated areas of Reps

Examples of common Reps

1. Accuracy of accounts: The delivered annual financial statements properly reflect the company’s asset, financial, and earnings position.
2. Ownership structure: The shares or assets to be transferred are the unrestricted property of the seller and are free from third-party rights.
3. Legal disputes: There are no pending or threatened legal disputes that would significantly affect the subject matter of the contract.
4. Tax situation: All tax obligations have been duly fulfilled and there are no outstanding tax debts.

Temporal scope of application

Reps generally refer to the time of contract conclusion, although individual Reps may also cover a longer period (e.g. since the last annual financial statement).

Drafting and wording of Reps in contracts

Typical clause drafting

The inclusion and specific drafting of Reps usually takes place in a separate section of the contract (e.g., “Representations and Warranties”). The precision and level of detail of the wording varies depending on the subject matter, bargaining position, and risk structure of the particular transaction.

Exclusions and limitations

It is common practice to include provisions in contracts about so-called “knowledge qualifiers” (e.g., “to the best of knowledge”) or limitations of liability for Reps to limit the risk for the party giving the assurance. For example, it can be agreed that a Representation is made only to the best knowledge of the acting persons or that liability is limited to a certain maximum amount.

Due diligence and disclosures in connection with Reps

In practice, a comprehensive due diligence review often precedes the giving of Reps. During this review, facts are established that will later be disclosed in the contract to exclude liability arising from Reps. Such disclosures are regularly documented in disclosure lists (‘Disclosure Schedules’).

International aspects and significance of Reps

Differences compared to Anglo-American law

In the Anglo-American legal sphere, Reps are a central element of almost all contracts, especially in company acquisitions and financing agreements. In German and continental European law, on the other hand, they are a relatively recent development, and their legal classification and scope are partly still unsettled.

Dispute resolution in cross-border contracts

In international transactions, the clear definition and delineation of Reps is particularly important. Different legal systems may assign different scopes of content and liability consequences to Reps. To minimize risk, it is recommended that the contract text be drafted comprehensively and unambiguously.

Summary

Reps (Representations) are an important instrument for establishing legal certainty and risk distribution in the commercial world and, in particular, in the area of corporate transactions. They embody contractual assurances of certain conditions, the breach of which can entail extensive legal consequences. The legal treatment, drafting, and economic importance of Reps largely depend on the contract design and, where applicable, relevant international rules. Careful drafting, an extensive disclosure schedule, and appropriate risk limitations are essential factors for the practical use of Reps.

See also

• Warranty
• Guarantee
• Company acquisition agreement
• Liability
• Disclosure Schedule

Note: For a detailed contractual drafting and case-by-case review of other legal aspects, a thorough analysis of the specific transaction and the applicable legal system is recommended.

Frequently asked questions

Within what legal framework may representatives (‘Reps’) act for companies?

Representatives (‘Reps’) may in principle act within the framework of the commercial, corporate, and contract law applicable to them. The decisive factor is the type of representative, e.g., commercial agent under § 84 HGB, authorized dealer, or employed sales representative. Commercial agents are legally authorized to broker or conclude transactions on behalf of an entrepreneur and are subject to a variety of legal provisions, inter alia regarding duties of care (§ 86 HGB), confidentiality and non-competition obligations (§ 90 HGB), commission claims (§§ 87 et seq. HGB) as well as compensation claims after termination of contract (§ 89b HGB). They act legally independently and may only act on the basis of an agreement, which, in addition to statutory requirements, can also contain individual arrangements. On the other hand, employees in external sales are in a dependent employment relationship and subject to the employer’s right of instruction. Whether and to what extent representatives may effectively act on behalf of the company depends on the exact structure of the contractual relationship, particularly whether they have been granted the appropriate power of attorney.

What legal consequences result from a Rep exceeding their authority?

If a representative exceeds the authority granted to them or acts without power of representation, this has significant legal consequences. According to § 177 BGB, a contract concluded without authority is initially voidable and requires approval by the principal (the company). If approval is refused, the representative may be personally liable to the contracting party for performance or damages under § 179 BGB. For commercial agents, the HGB additionally stipulates that within the scope of their typical activities, they are deemed authorized for certain legal acts as long as third parties are unaware of any restrictions on their authority (§ 54 HGB). A violation may, however, have employment law consequences such as a warning or dismissal and, if applicable, result in claims for damages by the represented company.

What obligations do Reps have regarding data protection and confidentiality?

Representatives who process personal data or have access to trade secrets are subject to both the provisions of the General Data Protection Regulation (GDPR) and additional statutory confidentiality obligations. They must ensure that customer data is processed exclusively for agreed purposes and that appropriate technical and organizational measures are taken to protect the data (§ 32 GDPR). In particular, commercial agents are legally obliged to maintain confidentiality regarding business and trade secrets (§ 90 HGB). Violations, such as unauthorized disclosure of sensitive information, can result in civil claims for damages, injunctive relief, and, where applicable, criminal consequences.

What contractual components are mandatory in Rep agreements?

In a legal context, Rep agreements must provide certain minimum elements: a precise job description and scope of authority, commission arrangements and remuneration structure, provisions on termination and duration, non-competition clauses, confidentiality provisions, and, where applicable, liability issues. Provisions regarding subordination, due diligence requirements, the handling of customer data, and accounting obligations are especially necessary. For commercial agents, the compensation claim under § 89b HGB must also be taken into account. Regulations on the return of documents and customer lists after the end of the contract as well as on the handling of expenses and costs are also advisable.

What liability risks exist for companies by engaging a Rep?

Companies are generally liable for the actions of their representatives in external relations, provided that they have been granted the corresponding power of representation (§ 164 BGB). Loss events arising from actions taken in the context and name of representation are attributed to the company. If authority is exceeded or actions are taken independently, the company is usually not liable, except in cases of apparent or assumed authority. The careful selection, instruction, and supervision of Reps is part of organizational obligations and, in the event of a breach of duty, may result in the company’s liability, e.g., for organizational negligence. To minimize liability risks, clear contractual provisions and ongoing monitoring of Reps are essential.

What special legal regulations must be observed when deploying Reps across borders?

When deploying representatives across borders, the applicable law must be clearly stipulated (e.g., by means of a choice of law clause pursuant to Art. 3 Rome I Regulation), otherwise foreign law may apply. This is especially relevant for commercial agents, for whom the law of the state in which they mainly work applies (Art. 4 Para. 2 Rome I Regulation). In addition, regulations regarding international tax law, social security, and the minimum labor law standards of the country of assignment, as well as registration and residency requirements, must be observed. Regulations on cross-border commission payments and currency risks, as well as – in the case of data processing – compliance with (European and, where applicable, national) data protection law, are also mandatory.