Warranties and indemnities—asset purchase

The following Corporate practice note provides comprehensive and up to date legal information covering:

  • Warranties and indemnities—asset purchase
  • Why we need warranties and indemnities
  • Characteristics of warranties
  • Remedies for breach of warranty
  • Measure of damages for breach of warranty
  • Hurdles to bringing a warranty claim
  • Indemnity
  • Advantages of an indemnity over a contractual warranty
  • Liability of the seller

Warranties and indemnities—asset purchase

An asset purchase agreement will typically include warranties and indemnities given by a seller in favour of a buyer.

Why we need warranties and indemnities

The starting point for a buyer in any asset purchase transaction is the maxim caveat emptor (let the buyer beware). The buyer will conduct due diligence on the target business so as to learn as much as possible before entering into the transaction. However, the buyer will not be in a position to know exactly what they are buying and therefore must seek protection from the common law position by negotiating appropriate contractual provisions in the form of warranties and indemnities. Without warranties or indemnities, unless the seller has made a misrepresentation in the course of the negotiations, the buyer will have no recourse against the seller.

Warranties aim to allocate risk and liability between the seller and the buyer. They also:

  1. allow the buyer to elicit information about the target business through disclosure that will enable the buyer to decide whether to enter into the transaction

  2. encourage the seller to make disclosures against the warranties

  3. provide the buyer with a mechanism to adjust the purchase price after completion to what it should have been at completion if the parties had known all the relevant facts at that time, and

  4. enable the buyer to seek protection by way of

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