WARRANTY CLAIMS

Warranties are only as good as the seller giving them. If a buyer has any doubts about the creditworthiness of the seller, they may want some kind of security for breach of warranty. An individual seller may not have the means to meet claims or may leave the country, making enforcement difficult or impossible. A corporate seller may distribute the proceeds of the sale by paying a dividend and disposing of any remaining assets or become insolvent after the sale. In these situations, warranties however comprehensive are worthless.

If the buyer is concerned about the risk, there are certain forms of security that could be obtained such as a personal guarantee from the seller or a guarantee from the seller’s parent company. The buyer may also insist that part of the purchase price is deposited into an escrow account until the warranty limitation period has expired or part of the consideration is deferred to a future date.

It is common for the seller to qualify certain warranties by providing disclosure, prior to completion, of any material facts that would otherwise result in the seller being in breach of those warranties. These disclosures are normally contained in a disclosure letter and/or disclosure bundle. The disclosure letter/ bundle would provide disclosure of all relevant information and provides the seller with some form of protection in the future and possible defence to a claim for breach of warranty.

Should a buyer wish to make a claim for breach of warranty, it is essential to adhere to any contractual limitation periods and notification requirements contained in the agreement. The sales (or investment) agreement will normally contain a clause limiting the period to bring a claim for breach of warranty. If that period has expired, the party seeking to make the claim will be out of time and there is likely nothing further that can be done. Similarly, the sales (or investment) agreement will normally contain a clause detailing how a claim is to be notified to the seller. If the party seeking to make a claim fails to comply with this notification provision it may be prevented from bringing a claim.