Monday, May 6, 2013

What is a warranty?

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.
A warranty is essentially a guarantee that a factual statement is correct.  Parties will often negotiate to allocate liability for loss between them if the statement turns out to be incorrect.

In a merger and acquisition context, warranties are generally required where a party (often the buyer) makes an assumption when entering into an agreement, and wants to be able to sue the seller if that assumption is incorrect. 

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For example, where a buyer has determined the purchase price of the target company or business on the basis of its reported earnings, the buyer will usually require the relevant financial statements to be warranted by the seller so that the seller bears the risk of the financial statements being inaccurate.

Warranties are usually 'given' within the sale agreement by the warranting party at the time of entering into the agreement, and repeated at completion.  It is also common to see a statement to the effect that the warranties are taken as being repeated each day during the period between signing and completion.

‘Standard’ warranty limitations include -

1.  Seller's knowledge
2.  Disclosure
3.  Exclude future performance
4.  Buyer's knowledge
5.  Recovery from 3rd parties
6.   Specific (ie provided in the accounts; buyers action post completion; law changes; matter of public record)
7.  Insurance

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.