In the context of a business sale (whether by acquiring shares or assets - click here to see article “Share v. Asset Sale“), warranties are “contractual promises” given by the seller to the buyer. These promises relate to the seller and also to the business being sold and usually include promises with respect to, for example, the previous accounts and finances of the business, the employees of the business, the property occupied by the business and the trading relationships of the business (amongst various other matters).

The buyer’s solicitors will usually include the warranties within a schedule in the sale and purchase agreement. Depending upon the size and nature of the transaction the warranties can be quite extensive and it is not unheard of for the schedule of warranties to extend to in excess of 20 pages or more of the sale and purchase agreement.

If, following completion of the sale and purchase, the buyer can establish that any of the contractual promises were not true when made then the buyer may wish to bring a claim for damages against the seller for breach of warranty.

The role of the seller’s solicitors, in the first instance, is to review the warranties and negotiate any necessary amendments to them to make them more reasonable. For example, a warranty under which the seller is being asked to give a contractual promise to the buyer about something entirely outside of the seller’s control should be resisted or at least amended.

Once negotiations in relation to the warranties are concluded and there is an agreed schedule of warranties then the seller’s solicitors will guide the seller through each of the warranties with a view to producing disclosures against them in the form of a disclosure letter (click here see article “Disclosure Letter”).

The seller’s solicitors will also usually require provisions to be included with the sale and purchase agreement to limit the seller’s liability under the warranties. These would normally include provisions limiting the seller’s financial exposure under the warranties and also limit the time period after completion within which a buyer can bring a claim for breach of warranty.

Lupton Fawcett LLP can assist by advising on the scope of the warranties to be contained in a sale and purchase agreement, drafting and (whether acting for the seller or the buyer) negotiating the terms of those warranties.

Posted: March 7th, 2008 under Corporate Finance.
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