Warranties and Indemnities provide protection to buyers buying Shares or Assets of a company. They are protection provided by a seller in a sale and purchase agreement being statements that the buyer will rely on when entering into these agreements. In any sale, it is the buyer who bears the risk that the asset they’re acquiring may turn out to have unexpected liabilities or to be less profitable than expected.
The statement ‘let the buyer beware’ is very crucial in any sale. It is therefore only right for a buyer (who may have little knowledge about the company or assets they are buying) to have some comfort and future protection in the form of warranties and indemnities.
Warranties are contractual promises given by a seller to a buyer in respect of the condition of the thing that is being sold. Their purpose is to provide the buyer with a resolution (namely a claim for damages) if the statements that the seller has made about the company turn out to be untrue. It also encourages the seller to disclose known problems to the buyer prior to the completion of the sale.
A seller’s liability under a warranty can however be limited if the seller has properly revealed information about the condition of the thing that is being sold. This gives the seller a reason to reveal information that may make the company less attractive to the buyer, enabling the buyer to decide about the company they are purchasing.
Furthermore, a seller may wish to restrict the extent of warranties and indemnities. This can be done by including exclusions and/or restricted time limits to bring a claim after completion.
An indemnity is a promise by the seller to compensate the buyer for losses they have suffered if a specific event occurs. The buyer should be able to recover that loss provided that it has been clearly stated in the agreement. The indemnity therefore provides the buyer with a tool to protect themself from a known or identified risk. Indemnities are more advantageous than warranties.
From the seller’s perspective, it is important to check the wording of an indemnity very carefully. While the buyer will insist that the wording of an indemnity should be as broad as possible in order to avoid unnecessary liability risks, the seller must consider the following points:
- a specific description of the liability to be covered by the indemnity.
- a restriction in both time and value of the indemnity.
Making a claim for a breach of Warranties
Claims for warranty breaches will emerge after completion after the buyer is running the company and can see all the operational details and documentation with regard to business, profitability and quality issues.
Claims by buyers are often that they have paid too much for the company, relying on the warranties which have turned out to be untrue and that, had they been aware of the true position, they would never have paid the purchase price or would never have proceeded at all.
Damages in these claims are usually the difference between the market value of the company had the warranties have been true (often the purchase price) and the actual market value of the company given the true position.
Making indemnity claims
Indemnities on the other hand are compensatory meaning all actual loss proven can be recovered. All that is required is that the loss suffered by the buyer falls within the category of losses described in the agreement. There is no need to show that the loss suffered was caused by any fault of the seller or that the loss was expected.
Limiting the seller’s liability
Careful drafting of warranties and limits of indemnity can balance the risk between the parties.
Time limits and financial caps may also be used to limit a seller’s liability.
If you are considering buying or selling a company or assets and want advice please contact Nick Attwell at email@example.com for an initial consultation.
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