|Article - Company|
Warranties in Company and Business Sale Agreements
I am presently in the process of selling my
business. The purchaserís
solicitors have asked that I give warranties.
What are warranties and what are the implications if the warranties
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:-
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.
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
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.
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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