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It is normal for the seller’s liability under the warranties prepared when you are buying a business to be limited, and this is done in a number of ways:

Number and wording of the warranties

The best way for the seller to limit their liability is to give as few warranties as possible. However, as the buyer you need to make sure that the warranties cover all the aspects of the business that will be important in the future.

In addition the seller will want to cut back on the wording of the warranties whereas you will want the warranties to be as wide as possible, e.g. the seller might be prepared to warrant that “all equipment is in working order” but you may also want to add “and has been properly maintained” so that you have some reassurance that the equipment won’t break down as soon as you buy the business.

Time limits on warranty claims

Unless stated in the contract, as the buyer, you normally have 6 years to start court action against the seller for breach of warranty (12 years if it is a deed). The seller will want to reduce this as much as possible, ideally to a few months or at least 2 or 3 years. The important thing is to make sure that the seller remains liable under the warranties for long enough to allow major problems to arise.  

For tax warranties, the seller’s liability is usually for 6 or 7 years because HM Revenue & Customs can reopen the tax affairs of a company up to six years later.

Time limits for notifying and making warranty claims

The seller will want to be told promptly when you become aware of a possible claim, otherwise, even if the liability period is reduced, you might turn up at the end of that period with a “shopping list” of claims. It is therefore usual for you to have an obligation to notify the seller of the possible claim within a short time after you find out about the breach, e.g. 1 or 2 months. The seller might also ask that you take court action within a set period after the end of the liability period.  Again this is to provide certainty and to prevent you dragging out the matter, but you should make sure this period is not too short otherwise you could be forced into expensive court action prematurely.

Financial limits on warranty claims

Unless stated in the contract there is no limit to the seller’s financial liability, so it is therefore normal to include financial limits in the contract.  An obvious tactic is to limit the seller’s liability to the purchase price so that, whatever your loss, this is the total amount for which the seller could be liable. However, if, in reliance upon the warranties, you will be making substantial investments in the business, e.g. new equipment or premises, you should argue that the limit should reflect this. 
At the other end of the scale the seller may want a minimum amount for claims, e.g. £1,000 so as to prevent you making low value claims that are too expensive to defend.

Disclosure

The seller will not be liable for a breach of warranty if they have told you about the breach beforehand. Disclosures can be general (e.g. anything held in public records) or specific. Specific disclosures relate to specific warranties, e.g. if a warranty states that all vehicles are roadworthy the seller may disclose that there is no MOT certificate for a particular van.

Awareness

It is common for the warranties to be qualified by saying that they are true "so far as the seller is aware". You should make sure the contract states that the seller is deemed to have made proper enquiries.  
If the seller is a company, then what’s in the seller’s knowledge depends on its officers. The seller may ask that this be limited to those officers or employees whose awareness is relevant (e.g. directors). 

Other limits

Other limits on liability that can be included to protect the seller are:
  • Preventing double recovery – this is to prevent you from making a claim if there are other ways of making good the loss e.g. insurers, or a debtor 
  • Post-completion acts to be disregarded – this is to make sure that the seller is not liable for things you do after completion
  • Limiting liability to the seller's ownership – if the seller has only owned the assets or shares for a short time they may say they are not fully aware of the previous history of the business. This is a potentially controversial clause because, as buyer, you will argue that the seller should have their own warranties from the previous owner
  • Disregard of changes in the law – in a heavily regulated industry the seller may argue that they should not be liable for loss where there has been a change in the law.
For further information please contact David Heys at Lawson-West Commercial on 0116 212 1000.