Warranties in Company and Business Sale Agreements

I am presently in the process of selling my business.  The purchaser’s solicitors have asked that I give warranties.  What are warranties and what are the implications if the warranties are breached?

A warranty is a statement of fact which is collateral to the main agreement to sell your business.  The purpose of warranties is to give your potential purchaser sufficient information about your business to enable him to make an informed decision as to whether he wants to buy the business and, secondly, to give him a right of redress if your business is not as you had represented it to him. 

Matters covered by warranties include the following:-

1. The accounts show a true and fair view;

2. The valuation of stock and work in progress;

3. Collectability of debts;

4. The net asset value of the business;

5. Trading since the last set of audited accounts;

6. Contingencies;

7. Tax liabilities;

8. Projections and forecasts.

If you give warranties to the purchaser of your business and you breach one or more of those warranties, usually, it would not be possible for your purchaser to rescind the contract, but he would be able to bring a claim for damages against you.  Damages are usually awarded to put a purchaser in a position he would have been in if the contract had not been breached, i.e. on a contractual basis.  Alternatively, damages can be awarded on a tortious basis where your purchaser would be compensated by being put in the same position he would have been in if the tort had not been committed.

In normal circumstances, your purchaser would bring a claim for breach of contract.  However, if you made any fraudulent or negligent representations to him or had otherwise been deceitful, your purchaser could bring a claim against you on a tortious basis.

In a recent case, an investment company brought a claim for breach of warranties contained in a share purchase agreement by alleging that due to an inaccurate forecast relating to the value of the shares, there had been a breach of warranties.  The Court said in order for the investment company to succeed in their claim, they would have to establish that the sellers ought to have realised from other information or material and after making appropriate enquiries that the statements made in the management accounts at the company in which the investment company had invested were not true and accurate.

As seller, you should try and limit your exposure to warranty claims.  The most obvious limitations relate to the length of time within which a warranty claim can be brought against you and the amount which can be claimed by way of compensation. Other restrictions on your potential liability could include being given credit for third party claims where sums are recovered from insurers or from the Inland Revenue.

If you are concerned about the possibility of warranty claims being made against you, you can take out insurance against potential claims.

Article First Published: 18 January 2005

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