Full warranties (i.e. assurances given to a buyer) relating to the assets being sold are usually included in the agreement. The warranty schedule is usually very lengthy and is heavily negotiated.
Purpose of warranties: As the buyer, you have little protection if the deal turns out not to be what you expected. Warranties “flush out” potential problems so that they can be negotiated and dealt with before the purchase is completed and warranties also enable you to obtain compensation if the business is not as the seller warranted.
The effect of warranties: Warranties impose a legal liability on a seller to give complete and accurate information on the business. If a seller makes inaccurate statements about the business, as a result of which its value is reduced or you suffer a loss, you may have grounds to sue the seller for damages for breach of warranty. In effect, warranties give you the opportunity after completion to adjust the price.
Who gives the warranties: Usually the seller, however if there is more than one seller, you will usually require the seller to give the warranties “jointly and severally” which means that each of the sellers is responsible for the full amount of any claim if the warranties are not correct. In practice, you can sue whichever seller you consider is more likely to be able to meet a warranty claim for the full amount of that claim.
Where the seller is a company, the company gives the warranties, but the shareholders may also be asked to give warranties personally to reinforce the company’s warranties, especially if the company will have little substance post completion.
The scope of the warranties: The warranties are drafted by us as your solicitor, usually on the basis of information gained from due diligence. The warranties are usually general, wide and as far reaching as possible.
Limiting the warranties: Due to the potential effect of the warranties, the sellers’ solicitor will try to limit their exposure by deleting those warranties which are not applicable, qualifying some warranties “so far as the seller is aware” and drafting specific limitations on the sellers’ liability.
Typical limitations include:
- limiting the amount of any claims that can be brought by you to a maximum sum (very often the purchase price)
- limiting the timescales within which a claim must be brought
- excluding small claims
- forcing you to do what you can to reduce any loss you have suffered
- disclosing exceptions to the warranties in a “disclosure letter”