Insights

Andrew Robins

Published 18 April 2024
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Limitation of Liability

In Share & Asset Purchase Agreements. Part 2

In our last post about the limitation of liability when negotiating warranties in a share or asset purchase agreement, we took a look at limiting claims for breach of warranty in terms of value or the time within which a claim can be brought.

By way of a quick recap, it is standard for a seller to provide a set of warranties within a share or asset purchase agreement. A warranty is a contractual promise to the buyer and warranties can cover various aspects in respect of the business that is being sold. In this second post in the series, we look at other common types of limiting liability under a warranty from the seller’s perspective.

Legislation changes

Normally uncontentious, it is common to agree that a seller will not be liable for a breach of warranty that arises as a result of changes to the law after completion of the sale.

Seller’s awareness

The wording “So far as the seller is aware…” is sometimes used to qualify a warranty. As the wording suggests, this is designed to protect a seller against liability for things or events of which the seller was unaware. Whether or not this sort of limitation can be agreed may depend on other aspects of the warranty including the extent of the seller’s involvment in the business. Careful drafting will be required, and it may be necessary to specify individuals to whom the “awareness” criteria applies.

Within the seller’s ownership

Similar to the limitation above and often intrinsically linked to it, it may be possible to negotiate a limitation to liability for things that occurred during the seller’s ownership of the business. This may be acceptable to the buyer where the seller has owned the business for many years, but it may be more contentious if the seller has not owned the business for long.

Double recovery of loss

It is common to include a clause to prevent the buyer being able to claim for breach of warranty if they could recover their loss by other means. Such alternatives could include claiming under an indemnity in the purchase agreement, under an insurance policy or from a third-party.

If there is the potential for a third-party claim, it may be necessary to include wording in the sale agreement that allows the seller to protect their interest by being involved in that claim.

Other methods of protection

Mitigation

The buyer has a duty to mitigate any losses and take steps to minimise its loss as well as a duty to avoid unreasonable steps that increase the loss. Again, carefully considered wording in the sale agreement needs to be agreed in relation to this.

Insurance

If the seller has concerns about liability, despite any warranty limitation, it may be possible to obtain warranty and indemnity insurance. The availability and cost of such will, of course, depend on the exact circumstances of the situation.

If you wish to discuss any of the issues raised in this article, please get in touch.

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