Macdonald Henderson Solicitors

You are in: HomeNews › Warranties and Representations in Sale and Purchase Agreements, 13th October 2011

Warranties and Representations in Sale and Purchase Agreements, 13th October 2011

What is the difference?

In sale and purchase transactions, misrepresenting information or not disclosing information which may affect the purchaser's valuation of the target company can result in costly post-completion disputes.

Such information is normally gathered and shared during a due diligence process involving both the seller and the purchaser and formal warranties (and indemnities) are then granted by the seller in favour of the purchaser.

Warranties are contractual statements which take the form of an assurance from the seller in a transaction and which can be relied upon by the purchaser, subject to any express disclosures qualifying the warranties which are made by the seller in their disclosure letter. An example of a standard warranty in a sale and purchase agreement is: "the seller warrants that the shares (to be purchased) constitute the entire allotted and issued share capital of the Company". In the event that another shareholder makes himself known to the purchaser post-completion, that purchaser would have a contractual breach of warranty claim against the seller who granted that warranty at the time of sale. Such claims are normally subject to agreed time and financial limits.

However, a purchaser may also rely on other, non-warranted information provided by a seller when deciding whether or not to proceed with a transaction. Such information can be classed as "representations" made by the seller. So, what recourse does a purchaser have against a seller where such representations are inaccurate or misleading given there is no contractual provision to rely on as there is in the case of a breach of warranties? Most sale and purchase agreements will expressly exclude liability of the seller for innocent or negligent misrepresentation meaning the purchaser will have no recourse for inaccurate representations made in those situations, provided the exclusions are reasonable in the circumstances. However, it is not possible for parties to exclude liability for fraudulent misrepresentation in any contract, therefore, if a purchaser can establish that a seller acted fraudulently when providing him with information, he will have common law grounds upon which to pursue the seller. A misrepresentation will be classed as fraudulent where:

- It is made knowingly by a seller;

- It is made without belief in its accuracy;

- It is made recklessly; and

- It is made with the intention that the purchaser shall act upon it (i.e. to induce him to proceed with the transaction).

In order to avoid complex and expensive post-completion disputes, parties, and sellers in particular, should therefore take special care when sharing information in pursuance of a sale and purchase transaction. Representations, unlike warranties (the wording of which will be agreed between the parties in each case), are wide ranging and can take the form of correspondence (whether written or oral) and can even take the form of omissions, for example, an omission by a seller to correct information it knows to be inaccurate.

Last updated: 3.36pm, Monday 30th April 2012

Latest News and Events

Macdonald Henderson client, Provan Sports Limited, trading as Pitch Teamwear, a sports retail and teamwear supplier based in Hillington has had success in obtaining loan funds via the Coronavirus Business Interruption Loan Scheme.
What is Business Interruption Insurance (“BII”)? BII is designed to cover businesses against losses of profit in the event of certain circumstances.

Meet the Team at Macdonald Henderson