Contractual statements and the liabilities associated with them
English Law Focus
Richard Catling Partner,Corporate Commercial
Anna RobinsonSenior Knowledge Lawyer (Consultant),Corporate Commercial
When entering into a transaction document that is governed by English law attention needs to be paid to the type of contractual statements and obligations that are being agreed to by the parties. Warranties and representations are two types of contractual statements that parties may make to each other. However, they have different legal effects and consequences under English law, especially in terms of the remedies available for breach and the time limits for bringing a claim. An indemnity differs from a warranty or representation as it is a contractual promise by one party (the indemnifier) to compensate another party (the indemnitee) for a specific loss or liability that the indemnitee may suffer as a result of a certain event or circumstance. For example, an indemnity in a purchase agreement may cover the indemnitee for matters relating to potential losses identified in due diligence such as tax liabilities or failures to accrue for end of service benefit appropriately.
This article will explain the main differences between warranties and representations, as well as the statutory limitation periods and damages/types of losses that may arise from them and how an indemnity differs from them.
A warranty is a contractual promise that a certain fact or state of affairs is true or will be true at a specified time. A warranty does not induce the other party to enter into the contract, but rather forms part of the contractual obligations of the warrantor. A breach of warranty gives rise to a claim for damages for breach of contract, but not for rescission (cancellation) of the contract.
A representation is a statement of fact or opinion that induces the other party to enter into the contract. For example, a seller may represent that it has good title to the shares it is selling, or that it has obtained all necessary consents or approvals for the transaction. A breach of representation may give rise to a claim for damages for misrepresentation, and in some cases, for rescission of the contract.
Indemnities and warranties are important contractual mechanisms for allocating risks and liabilities between the parties.
The statutory limitation period is the time limit within which a party must bring a legal action for breach otherwise the claim will be barred. Under English law, the statutory limitation period for breach of warranty is six years from the date of the breach, or if the warranty is contained in a deed, twelve years from the date of the breach. The date of the breach would be the date the warranty is given and therefore this would usually be the date of signing the agreement or completion (depending on when warranties are given in the agreement). The statutory limitation period for breach of representation is six years from the date of the misrepresentation which again is usually the date that the acquisition document is entered into or completion (depending when the representations are given in the document). However, if the misrepresentation is discovered later, the limitation period may be extended under the doctrine of latent damage, allowing the claimant to bring a claim within three years from the date of discovery of the misrepresentation, subject to a long-stop period of fifteen years from the date of the misrepresentation.
A payment obligation arises under an indemnity upon the occurrence of a certain event or circumstance and therefore the payment obligation is not linked to a breach by the indemnifier. A breach under an indemnity arises if the indemnifier does not pay when obliged to under the contract and therefore the same six year period applies for a breach of indemnity as for a breach of warranty. However, the date of the breach will be the date that the payment obligation is not complied with rather than linked to the date that the contract was entered into.
Acquisition documents can shorten statutory limitation periods by agreeing to in the contract. However, if the contract does not include any additional time limitations, it is advisable for the seller to reject any requests for representations to be given to be certain of the limitation periods applicable to any claim that could be made against them. In addition, the period of time that an indemnitee can make a claim from the indemnifier can also be limited in the contract.
The damages or types of losses that a party may claim for breach of warranty or representation depend on the nature and extent of the breach, as well as the contractual terms and the applicable law. Indemnities are obligations to pay and therefore a breach of an indemnity claim is treated similarly to a debt claim. Generally, under English law the following principles apply:
For breach of warranty, the aim of damages is to put the innocent party in the position it would have been in if the warranty had been true, or in other words, to compensate for the loss of bargain. The measure of damages is usually the difference between the value of the contract as performed and the value of the contract as warranted, plus any consequential losses that are foreseeable, reasonable and not too remote. Where the contract relates to the acquisition of a company the losses will be measured against the entire value of the company. For example, has the breach caused the aggregate value of the company to decrease? In most circumstances the costs/losses associated with a business warranty related breach will be more than the impact such damage has on the aggregate value of the company.
For breach of representation, the aim of damages is to put the innocent party in the position it would have been in if the representation had been true, or in other words, to compensate for the loss of expectation. The measure of damages is usually the difference between the value of the contract as performed and the value of the contract as represented, plus any consequential losses that are foreseeable, reasonable and not too remote. However, if the representation is fraudulent, the innocent party may also claim for any losses that are directly caused by the fraud, even if they are unforeseeable, unreasonable or remote. Alternatively, the innocent party may claim for rescission of the contract, which means restoring the parties to their pre-contractual positions and returning any benefits received under the contract. However, rescission may not be available if the contract has been affirmed, if the parties cannot be restored to their original positions, if third party rights have intervened, or if there is undue delay or hardship.
A claim for breach of an indemnity is treated as a debt claim pursuant to the amount payable under the acquisition document. The payment obligation for an indemnity is contained in the contract itself and such language should state what types of losses are payable with the general concept being that an indemnity will compensate the indemnitee on an AED for AED basis for losses associated with the relevant indemnified circumstance.
Acquisition documents can expressly exclude or include certain types of losses and provide for caps on the amounts that are recoverable and it is always recommended for sellers to negotiate the inclusion of such caps and exclusions. As a general concept and to increase certainty for sellers in relation to the amounts that can be recovered from them (and to minimise such amount) it is advisable for sellers to reject the provision of representations and (where possible) indemnities.
As mentioned above it is common place for the giving of representations to be rejected by sellers in acquisition documents and therefore the below only focuses on the negotiation of indemnities and warranties in acquisition documents.
Indemnities and warranties are important contractual mechanisms for allocating risks and liabilities between the parties. Therefore, when drafting or negotiating indemnities and warranties, the parties should consider the following factors:
The nature and purpose of the contract and the transaction: The parties should identify the main risks and liabilities that may arise from the contract and the transaction, and decide which party should bear or share them, and to what extent. The parties should also consider the commercial objectives and expectations of each party, and the balance of bargaining power and leverage between them.
The wording and context of the indemnities and warranties: The parties should draft the indemnities and warranties clearly and precisely, using consistent and appropriate language and definitions, and avoiding ambiguity or contradiction. The parties should also consider the context and interrelation of the indemnities and warranties with other provisions of the contract, such as representations, covenants, conditions, limitations, exclusions, notices, procedures and dispute resolution. It is market practice for indemnities to primarily be used in relation to pre-identified existing risks and warranties to be used to cover the unknown.
The limitations and exclusions of the indemnities and warranties: The parties should agree on any limitations or exclusions of the indemnities and warranties, such as caps, thresholds, baskets, de minimis, time limits, survival clauses, materiality, knowledge, disclosure, mitigation, insurance, set-off or other factors. The parties should also consider the enforceability and validity of the limitations or exclusions under the applicable law and jurisdiction.
When an acquisition document is governed by English law, the liability of sellers can vary greatly depending on the type of contractual statement/liability that the sellers are agreeing to. It is therefore very important that sellers are well advised as to what the different types of contractual liability mean for them with respect to how much and how long they will be liable for under the contract.
For further information,please contact Richard Catling and Anna Robinson.
Published in May 2025
