Is it a fundamental or general warranty?
English Law Focus
Richard Catling Partner,Corporate Commercial
Anna RobinsonSenior Knowledge Lawyer (Consultant),Corporate Commercial
When engaging in English law governed business transactions, particularly in mergers and acquisitions, warranties play a crucial role in protecting the interests of the parties involved. Warranties are assurances provided by the seller to the buyer regarding certain aspects of the business being sold. They can be broadly categorised into general/business warranties and fundamental warranties.
Understanding the differences between these two types of warranties is essential for both buyers and sellers to navigate the complexities of business transactions effectively.
General or business warranties are assurances provided by the seller about the ordinary operational aspects of the business. These warranties cover a wide range of areas, including the accuracy of financial statements, the condition of assets, compliance with laws, and the status of contracts and employees.
Examples:
Financial Statements: The seller warrants that the financial statements provided are accurate and fairly represent the financial position of the business.
Assets: The seller warrants that the business assets are in good condition and free from any encumbrances.
Compliance: The seller warrants that the business complies with all relevant laws and regulations.
Contracts: The seller warrants that all material contracts are valid and enforceable.
The primary purpose of general warranties is to provide the buyer with a comprehensive understanding of the business's current state and to protect the buyer from any undisclosed liabilities or issues that may arise post-completion.
General warranties typically have a shorter duration compared to fundamental warranties. They are often subject to negotiated limitations, such as caps on liability and time limits within which claims can be made. For instance, a general warranty might be valid for 12 to 24 months post-completion.
Typically breach of a general warranty will give the buyer a right to claim for damages but not the right to terminate the contract.
Fundamental warranties, on the other hand, are assurances about the core aspects of the business that are critical to the transaction. These warranties cover essential elements such as the seller's title to shares, the authority to enter into the transaction, and in some cases the business's solvency.
Title to Shares: The seller warrants that they have good title to the shares being sold and that the shares are free from any encumbrances.
Authority: The seller warrants that they have the authority to enter into the transaction and that the transaction has been duly authorised by all necessary corporate actions.
Solvency: The seller warrants that the business is solvent and not subject to any insolvency proceedings.
The purpose of fundamental warranties is to provide the buyer with assurances about the most critical aspects of the transaction and the ability of the seller to transfer the assets in question. These warranties are designed to protect the buyer from significant risks that could undermine the entire transaction.
Fundamental warranties generally have a longer duration compared to general warranties and often are only limited by general English law breach of contract limitation periods (6 years or 12 in the case of a deed). They are often not subject to the same limitations as general warranties, such as caps on liability or time limits for making claims. In some cases, fundamental warranties may last for the entire duration of the buyer's ownership of the business.
Contracts usually include specific clauses providing for termination of the contract prior to closing if a breach or potential breach of fundamental warranty is discovered prior to closing.
Scope and Coverage: General warranties cover a broad range of operational aspects of the business. Fundamental warranties cover core aspects critical to the transaction.
Purpose: General warranties provide a comprehensive understanding of the business's current state. Fundamental warranties protect against significant risks that could undermine the transaction.
Duration: General warranties typically have a shorter duration (12 to 24 months). Fundamental warranties generally have a longer duration and may last for the entire ownership period.
Limitations: General warranties are often subject to negotiated limitations, such as caps on liability and time limits. Fundamental warranties are usually not subject to the same limitations and provide more extensive protection.
In summary, both general/business warranties and fundamental warranties play vital roles in acquisitions. While general warranties offer a broad range of assurances about the operational aspects of the business, fundamental warranties provide critical protections regarding the core elements of the transaction. Understanding the differences between these two types of warranties, the limitations that attach to them and the remedies for breach is essential for both buyers and sellers to ensure a smooth and secure transaction process.
For further information,please contact Richard Catling and Anna Robinson.
Published in May 2025
