Warranty Claims

This dramatic increase is thought to be fuelled by the continuing stagnation of the British economy. In more prosperous times the prospect of growth and commercial opportunity appears to have curtailed the appetite for expensive litigation. In these leaner times there is more willingness to take a more confrontational stance and fight for every last penny.

Here we consider how claims for a breach of warranty can arise and how they should be handled.

What is a warranty?

Warranties in a sale and purchase contract are collateral agreements which are ancillary to the main agreement. A breach of a warranty triggers a claim for damages. This can be contrasted with a breach of a term which may permit the termination of the contract itself.

What are warranties for?

In a commercial transaction it will often be the case that the final deal is the result of negotiations between the parties and, as with any deal, there will be some bargaining. Warranties provide a useful means for such arrangements and can apportion risk between the vendor and the purchaser.

In a typical agreement the vendor will provide a number of warranties regarding a wide range of matters. If these are later found to have been breached, warranties provide an effective price adjustment mechanism.

Are there other remedies?

It is important to note the differences between warranties and indemnities in a sale agreement. An indemnity is a promise to reimburse the other party for a particular kind of breach; a claimant will not need to show that they have suffered any loss because of this breach.

By comparison, a breach of a warranty will only provide a remedy under the same rules as would apply to normal contractual damages. Broadly speaking, to be successful a claimant would need to prove that they have suffered a loss as a result of the breach and that their loss was reasonably foreseeable. A claimant would also need to show that they have mitigated their loss wherever possible or face having any award reduced.

The generous nature of indemnities inevitably results in great resistance to them from sellers during negotiations because of the potentially increased liabilities. It is therefore more likely that some form of warranty will be provided, which is a more restrictive remedy.

Are there limits to what I can claim?

A good sale contract will set out the limitations on what can be claimed and when. Usual limitations include maximum and minimum claim amounts, exclusions of liability for actions post-completion and, importantly, time limits.

A recent case demonstrates the importance of abiding by the terms of the contract when seeking to raise a claim. The contract in this case required a claim to be served on the seller within 12 months of the notice of proceedings; the claim form was served one day late. The court held that the claim, potentially worth £2 million, was time barred and therefore could not proceed.

How can I make best use of warranties?

When negotiating a sale agreement, whether buying or selling, it is important to take professional advice so your commercial intentions are properly embodied in the sale agreement.

Good warranties will work alongside your due diligence to ensure that you are purchasing what you are expecting; conversely where you are selling they will complement your disclosures by making it clear what is and is not being sold. Both parties should bear in mind enforcement when negotiating the agreement, however distant this may appear.

What should I look for post-completion?

This is more a concern for a purchaser as the business will now be out of the control of the seller. Somebody will need to be put in charge of collating post-sale documentation and general monitoring so that where a claim is identified it does not fall foul of the limitations defined in the agreement.

Where a claim is identified, independent experts will need to be instructed through your legal team to quantify any claim. The involvement of your legal team will ensure that correspondence at this early stage is privileged, this may be important if the matter ends up being litigated. Once your team has substantiated the claim, your legal team will then ensure that it is raised in line with the correct procedure.

How can Ward Hadaway help?

Warranties are a vital part of any agreement and should not be dealt with as a mere supplement to the main body of the agreement. If you are buying or selling a business the ramifications of these warranties could have effect well after post completion and ill-considered warranties may result in the commercial agreement not being accurately reflected in the documentation.

Whether you are buying or selling, whatever the size of your business Ward Hadaway’s dedicated expert teams can help; for example:

• Drafting and negotiating comprehensive sale agreements to ensure that the warranties protect you and accurately reflect the agreement you want to make.
• Identifying claims and managing the process from the outset to final settlement.

Where disputes continue and litigation occurs we can guide you through the process, include any appropriate Alternative Dispute Resolution, such as expert determination or mediation.

Further information

For further details on any of the issues raised in this briefing, please get in touch.