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Warranties Notes

LPC Law Notes > Private Acquisitions Notes

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WARRANTIES Managing the Risk?

S wants to hand over the company to B and retain as little liability as possible. B wants to keep S on the hook for every conceivable problem/pre-sale liability.

Caveat emptor B is afforded no statutory protection when acquiring the company and must itself carry out investigations into the company for any defects and potential problems. Share Sale
?????All assets and liabilities (hidden or otherwise) automatically transfer to B
?????Unqualified caveat emptor Asset Sale?

Only specified assets and liabilities are transferred to B Implied warranties for some assets being transferred by virtue of Sales of Goods Act 1979 (though these will not address all of B's concerns about Business, and so will be insufficient).

Solutions to shifting Balance of risk?
In both a share and asset purchase B will want to:

1. write in its own warranties and representations into SPA, which offer express contractual protection to override the principle of caveat emptor and shifts the risks and liabilities back onto S.

In response to the warranties, S will:

Risk B

S "warranties & representations

1. tinker with the wording of the warranty to limit its scope

2. disclose known liabilities to avoid breach of warranty

3. exclude matters within B's knowledge

4. exclude misrepresentation

5. place limits on its liability Risk B


In response to disclosure, B will:

1. request indemnities from S in relation to specific and known liabilities.

2. (renegotiate the price)

3. (walk away)

Basic Contract Law Warranties - contractual promise from S about State of the company that it is selling to B as at the date of exchange of SPA. B will want warranties to: (i) redress balance of risk back onto S (ii) encourage full disclosure of any problems/liabilities with the company (S will disclose in order to limit their liability for breach of warranty). Remedies for breach of warranty As warranties are terms of the contract, then if they prove untrue B will have a remedy against S:

1. 'Condition' - major term of the contract (i) terminate the contract (ii) claim damages (Poussard v Spiers)

2. 'Warranty' - minor term of the contract (i) claim damages only (Bettini v Gye) Damages for breach of warranty

1. Causation - loss caused by breach of contract

2. Damage which is not too remote (Hadley v Baxendale) (i) loss which arises naturally from breach of contract (ii) if the defendant at the time the

Joint and Several Liability
? standard position under contract law.
? B can sue any of sellers individually, or a combination of them, for the entire amount of loss. Will B want this? YES allows them to sue any seller for the whole amount, easier and more reassuring. Will S want this? NO S won't want this as each S will only want to be responsible for a proportion of the liability. Indemnity - contractual promise to reimburse S for a specific and known liability that may arise in the future, normally on a pound for pound basis. Normally only given in response to specific problems where it is agreed S should bear the risk for example: (i) known environmental risks (ii) ongoing/threatened litigation (iii)specific doubtful book debts (iv) product liability claims before completion (v) loans (vi) tax deed against tax liability up to the date of completion Why are indemnities better than damages?

contract was made had actual knowledge, or reasonably ought to have known, that the abnormal consequence might follow.

3. Duty to take reasonable steps to mitigate loss The aim of damages is to put the parties in a position that they would have been if the contract had been performed (i.e. had the warranty been true) (difference in value from what was expected)

Misrepresentation - false statement of fact which induces another party to enter into contract (Misrepresentation Act 1967). 3 types: (i) negligent (ii) fraudulent (iii)innocent B will want to be able to rely on misrep as it will provide different and additional remedies than a warranty claim.?

Indemnities are better for B - no need to prove loss and no duty to mitigate loss (unless specified in the contract). B need only prove a prescribed event has occurred and will then be able to automatically recover the relevant amount from S.

When shouldn't S give an indemnity?
? unspecified or unknown problems!


1. Rescission (all 3)
? puts parties back into pre-contract positions
? difficult to use after completion (more appropriate where there is a gap between exchange and completion)
? equitable bars to equitable remedies as Business will not be exactly Same

2. Damages in lieu of rescission (innocent and neg) (i) assessed on tortious basis (i.e. put the parties into the position they would have been had the tort not been committed).

Warranties Who gives the warranties?
Asset sale = Seller Share sale = Corporate shareholder. However, share sales can be more complicated where there are multiple shareholders or institutional/trustee SH This is because:
? Shareholders, who have limited information about business and liabilities, will not be

Common areas of warranty protection

1. No pending/threatened litigation

2. Accounts of target
? audited and management accounts
? relied on heavily during DD/valuation
? will want reassurance they give true and fair view, and comply with reporting standards... and management accounts fair and not misleading

3. Employees

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