Insights

Andrew Robins

Published 27 March 2024
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Limitation of Liability

Share & Asset Purchase Agreements. Part 1

When negotiating a share or asset purchase agreement, the extent of a seller’s liability in the event of a claim under any of the warranties is an important issue that requires careful consideration. In this first article in our series about limitation of liability, we explain the background to such limitations and take a look at the two most common types of limitation of liability, namely financial limits and time limitation.

Background

A share purchase agreement (SPA) is an agreement setting out the terms and conditions relating to the sale and purchase of shares in a target company. An asset purchase involves the purchase or sale of some or all of a company’s assets, such as equipment, inventory, real property, contracts or intellectual property.

In our previous article about SPAs, we explained that a warranty is a statement by a seller about a particular state of affairs of the target company. Warranties are used to protect both parties as any breach can form the basis of a claim for damages.

What is limitation of liability? 

As part of the warranties, very specific information will be provided about the company being sold including its financial liabilities, its trading history, any compliance or legal issues, etc.

Parties will then commonly negotiate terms that limit a seller’s liability arising as a result of a breach of warranty, for example, the company’s financial liabilities were significantly different to that disclosed. Different warranties will usually require different limitations.

Different types of liability limitation

There are different types of limitation, and in addition to limits on time and value, these may include liability arising from the seller’s ownership, legislative changes, acts by the buyer and double recovery issues (i.e. where the purchaser could recover any loss claimed by way of another remedy).  We will take a look at these in our next post.

Disclosure

Full and proper disclosure plays a crucial role when it comes to limiting any liability, particularly if the purchaser is seeking certain warranties that the seller feels they cannot provide. It’s important to note, that if an issue is within the purchaser’s knowledge (by reason of full disclosure) it will prevent the purchaser from later bringing a breach of warranty claim.

Financial limit of liability

There are three financial limitations, namely:  

Minimum claims / De minimis clauses

As the name suggests, this means that a claim must meet a minimum financial value or threshold before any warranty claim can be brought.

This is to avoid nuisance and spurious claims and the cost of very small claims. There is no hard and fast rule as to the amount to be used for a De minimis clause, but it is often between 0.1% to 1% of the purchase price.

Basket clauses

Similar to a De minimis clause, these relate to where a number of claims are in effect “put into one basket”. A minimum value must then be met by the basket aggregate before any claims can be made by the purchaser.

Again, this is to limit or avoid time nuisance claims and a common threshold is often 1% to 3% of the purchase price.

The parties also need to agree that if the threshold is met, whether the total amount can then be claimed or only those individual claims over the threshold.

Maximum cap

At the other end of the scale, the parties may agree the total amount that the seller can be liable for in respect of breaches of warranty. Factors that may influence the value of this include (but aren’t limited to) the purchase price or whether part of the purchase price is in cash.

Different warranties may require different levels of maximum cap. What’s more, where there is more than one seller, it may be important to specify who is liable for how much. Parties may wish to consider capping individual liability at no more than the value of an individual’s share in the purchase price, or the parties may wish to enter into a Deed of Contribution separately to the sale so that they can agree a maximum cap in the sale agreement whilst safeguarding the individuals behind the scenes.

Time limitation

As a starting point, under the Limitation Act 1980, a purchaser has six years to bring a claim for breach of contract or 12 years if the contract has been signed as a deed.

However, warranties can be, and often are limited to a certain period of time. The time limit may vary but is usually between one and three years from the date of completion. Some more specific warranties may be limited to a longer period (tax warranties, for example, are often limited to six to seven years). It is also good practice to specify the time within which a claim must be brought by reference to the date at which the breach became known by the purchaser.

In our next post, we will examine various other types of limitation of liability that should be considered when entering into a share or asset purchase agreement. However, if you wish to discuss any of the issues raised in this article, please get in touch.

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