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
The buyer has little protection if the deal turns out not to be what it expected. Warranties ‘flush out’ potential problems so that they can be negotiated and dealt with before the sale is completed and warranties also enable your buyer to obtain compensation if the business is not as the seller warranted. This is why it is important for you to be open and honest in the due diligence stage.
The effect of warranties
Warranties impose a legal liability on you as the seller to give complete and accurate information on the business. If you provide inaccurate statements about the business, as a result of which its value is reduced or your buyer suffers a loss, they may have grounds to sue you for damages for breach of warranty. In effect, warranties give your buyer the opportunity after completion to adjust the price.
Who gives the warranties
It is usually you as the seller to give the warranties, and if you are not the only seller, your buyer will usually require you 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, a buyer can sue whichever seller it considers is more likely to be able to meet a warranty claim for the full amount of that claim.
In the case of an asset sale by 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 your buyer’s 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
Because of the effect of the warranties, we will try to limit your exposure by deleting those warranties which are not applicable, qualifying some warranties ‘so far as the seller is aware’ and drafting specific limitations on your liability.
Typical limitations include:
- limiting the amount of any claims that can be brought by your buyer to a maximum sum (very often the purchase price);
- limiting the timescales within which a claim must be brought;
- excluding small claims;
- forcing your buyer to do what it can to reduce any loss it has suffered.