The recent case of Equitix EEEF Biomass 2 Ltd v Fox has brought into focus the purpose and effect of warranties in the sale of a business.  In this case, the sellers of the business gave certain warranties that proved to be false, resulting in a claim for damages.  Damages were calculated on the reduction in the value of the company caused by the effect of the false warranties (in other words, what the real value of the company was against the value paid on the basis of the false warranties) - or in financial terms, a successful claim against the sellers for £11million.

What are warranties?

Warranties are contractual statements as to the condition of the target company or business. They are usually contained in a detailed schedule to the purchase agreement.

The majority of warranties are in a standard form, covering all the aspects of a normal trading company.  Examples of standard warranties include statements that the seller has good title to the shares, the target company has good title to its assets and the target company has no litigation.

However, there may be specific warranties that are relevant to the target company.  For example, if the target operates in a regulated environment the buyer may want precise warranties relating to the particular regulatory regime that applies to the target.

Why are warranties required?

On an acquisition of shares under English law, the principle of caveat emptor (buyer beware) applies.  In other words, there is no underlying law (in the absence of fraud) that protects a buyer as to the nature or extent of the assets and liabilities it is acquiring. Hence the need for extensive contractual statements in the form of warranties.

Do you need due diligence if you have warranties?

It is always best practice to carry out a due diligence exercise on the target and warranties should never be seen as a substitute for due diligence.  Instead, warranties and due diligence should complement each other.  It is always better for a buyer to be aware of any issues before completing an acquisition rather than have to sue for damages after the target has been acquired. 

What happens if a warranty is incorrect?

There are three main consequences of an incorrect warranty.

First, if the seller identifies the warranty as being incorrect, they can “disclose” against it.  In other words, the seller can formally disclose specific facts that would otherwise make the warranty untrue.  This means the general warranty remains in place but the disclosed matter is exempted from the warranty and the buyer cannot bring a claim subsequently.

Secondly, the buyer could ask for an indemnity to cover any loss arising from the particular facts which make the warranty incorrect.  Alternatively, a buyer may seek to renegotiate the headline price to the extent the issue is identified before the target company is acquired.

Thirdly, if the matter isn’t discovered until after completion, then the buyer will have a right of action against the seller for breach of warranty.

So what is an indemnity?

An indemnity is a promise to reimburse the buyer in respect of a particular type of liability, should it arise. The purpose of an indemnity in an acquisition context is, broadly speaking, to shift the risk of a particular event or matter to the indemnifying party and to allow the indemnified party to recover on a pound-for-pound basis in respect of that matter or event. Indemnities are often used where a warranty may not allow a buyer to be reimbursed. For example, because a buyer had knowledge of the matter before signing the acquisition agreement.

Is there much negotiation of warranties?

Given that warranty schedules have become fairly standardised, there is less negotiation today than historically.  However, there will still be a negotiation of the warranties.  A seller will seek to delete or water down any warranties that are forward-looking, such as financial forecasts or warranties about the impact of the buyer buying the target.

A well accepted method of amending the warranties is to make (at least some of) them subject to the seller’s knowledge. A buyer will also want to ensure that any warranties that are so amended will also include the knowledge of key people (such as non-shareholder directors), so the seller cannot avoid liability simply by ignoring the issue.

Can a seller limit its liability?

Yes, and it is usual for there to be several limitations and other protections for the benefit of the seller.

In general terms, a seller will usually cap its liability to the purchase price received by it for its shares.  In addition, other means of limiting liability include a financial threshold for individual small claims and a further aggregate threshold which must be met for accumulated claims.

Indemnities, on the other hand, are often excluded from the limitation protections because they relate to specific and, usually, quantifiable losses.

How 3CS can help

If you need any assistance in relation to warranties and indemnities, please get in touch with your usual 3CS contact.









Keith McAlister


3CS Corporate Solicitors

Providing solutions, not just legal advice
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Registered in England & Wales | Registered office is 60 Moorgate, London, EC2R 6EJ
3CS Corporate Solicitors Ltd is registered under the number 08198795
3CS Corporate Solicitors Ltd is a Solicitors Practice, authorised and regulated by the Solicitors Regulation Authority with number 597935

Registered in England & Wales | Registered office is 60 Moorgate, London, EC2R 6EJ
3CS Corporate Solicitors Ltd is registered under the number 08198795
3CS Corporate Solicitors Ltd is a Solicitors Practice, authorised and regulated by the Solicitors Regulation Authority with number 597935