Warranties and Indemnities: What You Are Actually Signing

The commercial terms of a sale get negotiated in the open: price, structure, timing. The risk allocation gets negotiated in the schedules, late, by lawyers, and it is where a seller discovers months later what they actually agreed to.

Three documents do the work. The warranties, the limitations, and the disclosure letter. They only make sense together.

Warranties are statements of fact

A warranty is the seller asserting something is true: the accounts give a true and fair view, there is no litigation pending, the company owns its intellectual property, all tax has been paid, the material contracts are listed and none is in default.

If a warranty is untrue, the buyer has a claim for breach. They have to prove the untruth and prove resulting loss, usually measured as the difference between what the business was worth as warranted and what it is actually worth. That loss calculation is itself a fight, and the gap between a technical breach and a recoverable loss is where most warranty claims quietly die.

The schedule will run to many pages. Read it as a list of everything the buyer has been told, restated as your promise.

Indemnities move money directly

An indemnity is different in kind, not degree. It is a promise that if a specified thing happens, the seller pays the cost, pound for pound. No need to prove the business was worth less. No argument about valuation.

Indemnities attach to known risks. A tax enquiry already open. An environmental issue found in diligence. A disputed customer contract. An employment claim in progress.

Buyers ask for them broadly. Resist that. An indemnity should be specific to an identified matter, capped, and time-limited, because an open-ended indemnity on a general subject is a blank cheque with no requirement to show harm.

The disclosure letter is the seller’s protection

This is the document sellers under-resource, and it matters more than any individual warranty.

The disclosure letter qualifies the warranties by setting out what is actually true. A warranty says there is no litigation; the disclosure letter says except the claim from the supplier described in schedule 4. Properly disclosed, that matter cannot found a warranty claim.

Two kinds of disclosure. General disclosure deems certain public information disclosed, such as Companies House filings and the data room contents, though buyers increasingly resist data room sweep-ups and will argue the point. Specific disclosure names individual matters against individual warranties.

Do not treat it as an afterthought drafted in the last week. Go through the warranty schedule line by line with the people who actually know, and disclose anything doubtful. Over-disclosure costs you some negotiation. Under-disclosure costs you a claim.

The limitations are where the real negotiation sits

The warranties set out what you promise. The limitations decide what it costs you if you are wrong.

A financial cap, often a proportion of the price rather than all of it, sometimes with a lower cap for general warranties and a higher one for fundamental matters like title and capacity. A de minimis so trivial claims are excluded. A basket or threshold, so claims only become payable once the aggregate passes a figure, and watch whether it is first-pound recovery or excess only, because the difference is real money.

Time limits matter as much. General warranties commonly run twelve to twenty-four months, which should cover one full audit cycle after completion. Tax warranties run considerably longer because tax authorities take longer to arrive.

And the conduct provisions: who controls a third-party claim, who pays the defence costs, and whether the buyer can settle without your agreement. A buyer who can settle freely and bill you has little reason to fight.

What to do before you get there

Build the disclosure process into diligence rather than bolting it on. The same questions get asked in both, and answering them once properly, with documents attached, produces a disclosure letter almost as a by-product.

Keep a contemporaneous record of anything that might become a disclosure: disputes, informal complaints, unsigned variations, key person arrangements, anything handled by agreement rather than paperwork. These are the matters that surface at eleven at night in the final week, when the choice is between delaying the deal and hoping.

Neither of those is a good option, and both are avoidable in October for a deal completing in January.