Why new business owners can’t afford to ignore a breach of warranty

Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, explains why a new business owner should deal with a breach of warranty as quickly as possible.

When a business is sold, the new owner has an agreed period of time to highlight any major problems that subsequently come to light. If something turns out not to be as it should in terms of the state of the business, it may be a breach of warranty.

A new business owner has a limited period of time to make a breach of warranty claim. It is important to make a note of the deadline for any claims and that you understand how to go about making a claim.

What is a warranty?

A warranty is a contractual statement of the condition of the business. Warranties are issued as part of a business sale to serve two main purposes:

1. To encourage the seller to disclose known problems to the buyer.
2. To give the buyer the opportunity to claim, if the statements made about the company later prove to be incorrect and the value of the company is reduced.

So, the aim of warranties is to flush out potential problems. Once a business sale has gone through, the onus is on the buyer to show there has been a breach and quantifiable loss as a result. For example, a common warranty is that there have been no changes since the preparation of the last set of accounts. Often a buyer will have only seen the latest accounts which may relate to a much earlier period. If the warranty is given then on receipt of the most current accounts, this position may be reviewed and a claim made if there is a substantial change in the business.

I have written more about warranties and indemnities in a previous blog.

If I am selling a business, how can I avoid future claims for a breach of warranty?

It is not possible to completely prevent any potential future claims for a breach of warranty. However, with the right advice you can ensure that your warranties are clear and understood on both sides. This should avoid wasted time and legal fees should issues arise.

How do I claim for a breach of warranty?

Time is off the essence. When one of our clients is buying a business we always encourage them to make a diary note of the deadline for any breach of warranty claims. This is typically 1 – 2 years but is a commercial point to be reasonably negotiated by the parties, taking into account the type of business. We also emphasise to them the importance of them making any claims as soon as they arise. If you think you have a legitimate breach of warranty claim but are not sure, get legal advice in the first instance.

What is the mechanism for making a breach of warranty claim?

The mechanism for a breach of a warranty claim should also be clearly set out in the agreement between the parties. It must usually be in writing and often notice of such breaches will not be accepted by email. These can also be attached as a schedule to the agreement a formal notice template which the parties will need to complete

For more information or advice on these issues, please contact Kirsty Davey at Coodes Solicitors on 0800 328 3282 or email kirsty.davey@coodes.co.uk