If you are thinking of buying or selling a business, it is important to consider the warranties and indemnities that will be included in the sale agreement.
When a business is bought or sold, rights and liabilities will also be transferred. The buyer will want to receive assurances that the information they have relied upon is correct and also that any risk to them is limited. This is done by including warranties and indemnities in the agreement for sale.
What is a warranty?
A warranty is a guarantee given by the seller in respect of information provided prior to the sale and the state of the business. It encourages the seller to be honest with the buyer about potential issues. If a warranty is breached, for instance where information turns out not to be true, then the buyer can bring a claim for damages in respect of any loss or reduction in the value of the company.
For more information about due diligence, see our recent article Due diligence.
If a court finds that a warranty has been breached, it will aim to put the claimant in the financial position it would have been in if the warranty had been accurate.
Warranties can be about financial matters, ownership of intellectual property, ownership of shares, employee details and many other matters about which a business purchaser might seek reassurance.
What is an indemnity?
An indemnity is a legal undertaking to reimburse the buyer in respect of a specified liability.
Examples include legal action, environmental issues, product liability and outstanding tax.
The buyer will be compensated in the same sum as the amount of the loss, i.e. covering all of the losses, but no extra by way of damages, although it is open to the seller to place a clause in the indemnity clause capping the amount of compensation they will pay.
Other exclusions can be included, such as where the buyer knew of the liability in advance, where the issue is covered by insurance or to limit the number of claims, for example, to prevent numerous small product liability claims being brought. Time limits can be specified so that an indemnity clause is not indefinite.
Claiming under an indemnity clause may be preferable to making a claim for breach of contract because fault does not need to be proven; if a relevant loss has occurred then a claim can be made.
Warranties and indemnities: Which one is the better option?
An agreement for the sale of a business will include both warranties and indemnities, however in some cases an issue could arise under both types of clause.
Using an indemnity may be preferable, as all losses are usually compensated without any dispute over the amount in question.
The period during which a claim can be made might be longer with an indemnity, where the time limit is calculated from the date on which a loss is suffered. With regard to warranties, the limitation period begins from the date that the warranty is breached.
When bringing a claim under a warranty, the claimant will usually need to show that the seller was aware of the information in question, for example, that they knew that the company’s accounts were not accurate or that the condition of goods was not as it was stated to be. This is because a warranty often begins, ‘…So far as the seller is aware…’
Negotiating warranties and indemnities
When an agreement for sale is drawn up, both parties will have their views as to what warranties and indemnities should be included. We can negotiate on your behalf to ensure that the agreement is robust, tailored to the specific requirements of the business in question and that it protects your rights and interests as far as possible.
Contact us
At Witan Solicitors we have wide-ranging experience of dealing with business sales and purchases across a range of sectors.
If you are thinking of buying or selling a purchase and you would like to discuss this with an expert company and commercial lawyer, email us at info@witansolicitors.co.uk or fill in our contact form. We have offices in Birmingham and Northampton.
