In an acquisition, warranties are contractual statements about the target business. They commonly cover accounts, material contracts, employees, litigation, tax, intellectual property, property and compliance. The buyer uses them to assess whether the business matches the information provided during due diligence. If a warranty is untrue and the buyer suffers a resulting loss, the share purchase agreement may provide a claim for damages, subject to its agreed limitations.
An indemnity allocates a specified risk to one party, usually the seller. It requires the indemnifying party to compensate the beneficiary for an identified loss, often on a pound-for-pound basis. Indemnities are used for known or particularly defined exposures, such as an ongoing tax dispute, a threatened claim or a specific environmental liability. The agreement should define the covered event, the recoverable losses, the procedure for making a claim and any financial or time limits.
A seller qualifies its warranties through disclosure. A disclosure letter identifies information that would otherwise make a warranty inaccurate or incomplete. General disclosure may refer to publicly available records or documents supplied in a data room, while specific disclosure addresses individual warranties and risks. Buyers generally seek detailed, clear disclosures because a properly disclosed matter can restrict or defeat a warranty claim.
The parties negotiate the scope of warranties, the indemnities, the disclosure standard and the claim limitations together. Common limitations include a liability cap, a minimum claim threshold, a time limit for claims and exclusions for matters fairly disclosed. Buyers also review whether the seller has sufficient financial resources to meet a claim and whether warranty and indemnity insurance is appropriate. Harper James advises businesses on corporate and M&A matters under the laws of England and Wales, including due diligence, disclosure letters and share purchase agreements.