The importance of warranties when buying a business so as to protect the purchaser against undisclosed risks cannot be underestimated. Equally, from the seller’s point of view, providing written disclosure of any existing issues to limit liability for any warranties made can be crucial. Below we look at how warranties work in the context of two competing principles: ‘caveat emptor’ (let the buyer beware) versus ‘caveat venditor’ (let the seller beware).

What are warranties and how do they work?

Warranties are contractual statements regarding the affairs of the company or business being sold, given by the seller to the buyer prior to the point of sale. These are usually incorporated into the sale/purchase agreement and can cover a wide range of areas, from ongoing employment disputes to ownership of assets and the condition of plant and equipment.

If a seller provides a warranty but it subsequently transpires that this was untrue at the time it was given, the buyer may have a claim in damages against the seller. In this way, warranties can be used to protect a purchaser from any undisclosed risks when buying a business.

Under English law, unless warranties have been made prior to the point of sale, a purchaser will be afforded very little protection when buying a business. This is due to the well-established principle of 'caveat emptor' or ‘buyer beware’, under which the buyer alone is responsible for checking the viability of, and risks attached to, a business before proceeding.

Nonetheless, where warranties have been made by the seller, the extent of any liability under those warranties can be limited, albeit only where the seller has provided full and formal disclosure of any pertinent issues against a particular warranty. Under the lesser-known principle of ‘caveat venditor’ or ‘seller beware’, absent detailed written disclosure — even where the buyer was otherwise aware of the matter complained of and for which damages are sought — the seller is likely to remain liable in full in respect of any warranties given.

What are the potential consequences of breach of warranty?

In the recent decision of Equitix EEEF Biomass 2 Ltd v Fox & Others [2021] EWHC 2531, the High Court ordered that the sellers pay the buyer £11 million in damages for breach of multiple warranties contained within a written share sale agreement.

On its’ facts, the buyer purchased the entire issued share capital of an energy company. The sale agreement contained multiple warranties given by the sellers, including a warranty that the company’s biomass boilers were in good condition. Following the sale, faults with the boilers led to the loss of its’ sole customer to whom the company supplied heat energy.

The court rejected the seller’s argument that they’d disclosed against the warranties and/or that the information was within the buyer’s actual knowledge, such that the warranties could not be relied on. Notwithstanding that the buyer had been aware of certain issues, the court found that the sellers’ liability for any warranties given would only be limited if specific disclosure had been made, prior to completion, against the warranty in question. Equally, disclosure must be made in sufficient detail for the buyer to fully understand the true picture.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.