A warranty is a contractual statement. A breach of warranty can give rise to a claim for damages. In relation to warranties for the sale of shares or a business, they are statements in the contract regarding the business’ condition and financial standing. They offer some protection to the buyer who is often exposed to considerable risk when purchasing shares and assets of a business. Warranties should not be relied on in place of due diligence, but they offer additional protection and remedies in the event that the business assets or potential are not as expected.

The warranty

Warranties are usually included in the contract in a separate schedule. What the warranties will cover will depend on whether you have bought the shares or assets of the business, but they generally include many different aspects of the business, including assets, employees, accounts and tax.

Indemnities may also be used in the sale of shares or assets, but they are different to warranties. A claim for breach of warranty will only be successful if the buyer can show that it caused a reduction in the value of the business acquired. However, a breach of indemnity does not have to cause a loss of value of the business for a claim to be successful. You can recover damages for breach of indemnity to cover other costs not related to loss of value.

Warranty claim and limiting liability

A buyer may find that after they have purchased the business, its affairs are not quite what they expected. If the seller made a warranty that turns out to be untrue, the buyer can make a claim for breach of that warranty to recover damages for the loss of value of the business that has resulted from the breach.

The seller will often try to limit their potential liability under warranties by restricting the circumstances under which a claim can be made and the value of the claim. This includes:

• Knowledge. The seller will usually qualify their liability on an awareness basis. Therefore, they would not be in breach of a warranty if they were unaware of an issue or circumstance at the time of making that warranty. This is usually achieved by including the words “so far as the seller is aware” in the warranty clause.
• Financial caps. The seller can also place financial limits on claims in order to limit the extent of their liability. A minimum limit for claims will prevent the buyer bringing low-value claims and a maximum cap will limit the amount the buyer can claim in damages. The maximum cap is usually the total consideration received for the business.
• Time limits. A time limit can be placed on bringing a claim- this is usually 2 or 3 years. However, any warranties relating to tax are normally subject to longer periods as HM Revenue & Customs has 6 years from the end of a tax year to investigate.

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