Breach of warranty claims after business sale

Warranties are contractual statements about facts or circumstances, breach of which gives rise to a claim for damages but not a right to terminate the contract.

M&A Warranties form a crucial part of and provide comprehensive protection for buyers, typically including statements about target company's condition whether financial, legal or operationally aspects

If you were the buyer of the business and believe that warranties were incorrect, the first thing to do is to carefully check the warranties because commonly warranties have time limits of typically 18-24 months, (generally not tax warranties though) and warranties are often drafted as being subject to disclosure and materiality thresholds. There are often other complexities and considerations where a warranty may have been breached on sale of a business (see more on this below)

Some of the most common forms of warranty breach allegations we deal with are :-

• Financial Warranties - accuracy of accounts and financial statements and undisclosed liabilities

• Operational Warranties - compliance with laws and regulations, especially with a business operating in several jurisdictions

• Employee-related issues -covering employment terms, disputes, and obligations

• Intellectual property rights - ownership and usage rights.

• Tax Warranties

Checklist - issues and obstacles with breach of warranties

• Post-completion discovery - when and how was the breach discovered?

• Have you checked any seller disclosure letter? - the breach must not be covered by seller's disclosures.

• Quantum of loss - what are your losses? Is the other party worth suing? Is there a de minimis threshold for minimum claim value or a basket threshold (a predetermined monetary value or number of claims that must be reached before a warranty provider will process or pay claims)?

• Causation - did the breach of warranty cause your loss? If so, how can you prove this?

• Mitigation efforts - have you taken steps to minimise your loss? If not, a court may significantly reduce damages.

• Have you given notice of the alleged breach? - the SPA may include a formal procedure and contractual time limits.

Are warranty damages treated the same as other contractual damages claims?

Normal contractual damages aim to put the innocent party in the position they would have been in had the contract been performed properly. Warranty damages in M&A transactions are typically calculated differently, based on the difference between the actual value of the company as warranted versus the true value given the breach. This often involves complex valuation exercises

Who to sue?

Strategy and tactics should include a consideration of whether the defendants were individual shareholders or a corporate entity. Regardless of which, it's essential to carefully assess whether the sellers likely retain sufficient assets to meet claims.

There may be other options other than the risky litigation approach. You may have set-off rights, where any warranty claim can be set off against earn-out payments or some of the purchase funds may have been retained in escrow.