"The accounts give a true and fair view." "There are no pending disputes." That kind of sentence sounds like a formality — but in a transfer agreement, they're warranties, and they can cost you dearly if they turn out to be wrong.

Short answer: A warranty is the seller's contractual assurance that a specific matter is correct at a given point in time. If the warranty turns out to be wrong, and the buyer suffers a loss as a result, the buyer can generally claim damages or indemnification from the seller.

Typical warranties in a business deal

  • Accounting warranties — that the annual accounts give a true and fair view
  • Ownership warranties — that the seller has full and unencumbered title to the shares
  • Tax warranties — that the business's taxes and duties are correctly reported and paid
  • Contract warranties — that material contracts are valid and not in breach
  • Employee warranties — that employment matters have been correctly handled, cf. HR due diligence
  • Environmental and compliance warranties — that the business complies with relevant legislation

Why are the warranties negotiated so hard?

The broader and more absolute the warranties, the greater the risk the seller runs. Sellers therefore typically try to limit the warranties with qualifications ("to the best of knowledge"), monetary caps, and time limits for how long the buyer can raise claims. The buyer, conversely, wants warranties as broad and unconditional as possible.

Caps, baskets and time limits

Three terms worth knowing: a cap sets a ceiling on how much the seller can be liable for in total. A basket (or "de minimis") means only claims above a certain threshold can be made — to avoid disputes over small amounts. A time limitation sets an expiry date for how long after closing the buyer can raise a warranty claim at all.

What happens if a warranty is breached?

If a warranty turns out to be wrong, the buyer can generally claim damages for the resulting loss — either directly from the seller, from a withheld amount (see escrow/holdback), or from a W&I insurance policy, if one has been taken out.

How to reduce your risk as a seller

The more the buyer investigates through thorough due diligence, the less can subsequently be claimed based on the warranties alone — because what the buyer already knew (or should have discovered) can rarely be turned into a subsequent warranty claim.

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