Warranties and Indemnities in Share Purchase Agreements 

What they are, why they matter, and how they are limited 

The acquisition of a company is, for most buyers, one of the most significant commercial decisions they will ever make. Unlike a straightforward asset purchase, buying shares means acquiring the company in its entirety — its assets and its liabilities, its history and its obligations, known and unknown. The buyer steps into the shoes of the seller and inherits whatever the company brings with it. 

That reality creates an immediate challenge: how can a buyer obtain adequate protection against problems that may not be visible during due diligence? The answer, in English law, lies primarily in two contractual mechanisms found in every well-drafted share purchase agreement (SPA) — warranties and indemnities. 

These provisions sit at the commercial heart of any acquisition. They allocate risk between buyer and seller, they define the scope of the seller’s liability and they provide the buyer with enforceable remedies if the deal turns out to be materially different from what was represented. Understanding how they work, how they differ from one another, and how their scope is typically limited is essential for both parties to any transaction. 

In this article, the corporate and commercial team at Ronald Fletcher Baker LLP examines each of these questions in turn. 

Why Are Warranties Needed? 

When a buyer acquires shares in a company, the principle of caveat emptor — let the buyer beware — applies as a matter of general law. Subject to any express or implied representations made during the transaction, the buyer takes the company as it finds it. There is no implied warranty that the company is worth what the buyer has paid, that its accounts are accurate, or that it has no undisclosed liabilities. 

Due diligence — the process by which a buyer investigates the target company before exchange — helps to reduce this risk, but it cannot eliminate it. Information provided during due diligence is only as reliable as the seller’s disclosures, and even the most thorough investigation cannot uncover every latent problem in a business. 

Warranties bridge this gap. By giving the buyer a series of contractual assurances about the state of the business — covering matters such as the accuracy of the accounts, the company’s contractual commitments, its employees, its intellectual property, its tax position and its compliance with applicable law — the seller is in effect saying: this is what you are buying, and I stand behind it. 

If a warranty proves to be untrue and the buyer suffers loss as a result, the buyer has a contractual claim for damages. The SPA creates a private system of protection that supplements what due diligence reveals and what the law would otherwise provide. 

Key Point: Warranties do not give the buyer the right to walk away from the deal after completion. Once the transaction has closed, the buyer’s remedy for a breach of warranty is a claim in damages — not rescission of the SPA. This makes the accuracy and scope of warranties, and the adequacy of the limitations placed upon them, critically important. 

Why Are Indemnities Needed? 

Warranties provide broad, general protection — but they come with important limitations. The measure of damages for a warranty claim is the difference between the true value of the shares and the value they would have had if the warranty had been correct. This is often described as the ‘diminution in value’ measure. It requires the buyer to prove that the warranty was false, that the falsity caused a reduction in value, and to quantify that reduction. 

For some risks, this approach is insufficient. Where a known or identifiable liability exists — perhaps a tax dispute with HMRC, a personal injury claim by an employee, or a contractual obligation that predates the acquisition — the buyer does not want to be left arguing about diminution in value after the event. It wants a straightforward promise: if this liability crystallises, you will pay. 

That is precisely what an indemnity provides. An indemnity is a promise by the seller to reimburse the buyer pound-for-pound for a specific loss if it occurs. Unlike a warranty claim, there is no need to prove breach, no requirement to demonstrate a reduction in share value, and no duty to mitigate. If the indemnified event occurs, the seller pays. 

Indemnities are particularly valuable where: 

1. A specific risk has been identified during due diligence that cannot be resolved before completion. 

2. The seller has disclosed something that would otherwise give the buyer grounds to renegotiate the price. 

3. A known contingent liability exists — such as a tax assessment or regulatory investigation — and the parties want certainty about who bears that risk. 

4. Pre-completion conduct by the company may give rise to future claims, such as environmental remediation obligations. 

5. The parties wish to deal with a risk outside the disclosure process entirely, so that disclosure does not defeat the claim in the sale and purchase agreement 

 Practical Insight: Indemnities are often used as a negotiating tool in the context of share sales.  

Where a seller is unwilling to accept a price reduction for a known risk, an indemnity allows the deal to proceed at the agreed price while ensuring that the buyer is protected if the risk materialises.  

The seller’s exposure is capped to the actual loss — they do not pay unless the liability crystallises. 

Warranties vs Indemnities: A Comparison 

The differences between warranties and indemnities are not merely academic — they have very real practical consequences for how claims are brought, what losses are recoverable, and what protections the seller retains. The table below sets out the key distinctions: 

	Warranty	Indemnity
Nature	A contractual promise that a statement of fact is true.	A contractual promise to reimburse a specific loss pound-for-pound.
Tetikleyici	Breach — the statement must be false at the date of the agreement (or, if repeated, at completion).	The occurrence of a specified event or loss in an asset sale, whether or not anyone is ‘at fault’.
Loss calculation	Diminution in value of the shares — the difference between what the buyer paid and what they would have paid had the warranty been true.	The actual loss suffered, calculated on a pound-for-pound basis. No diminution in value test.
Duty to mitigate	Yes — the buyer must take reasonable steps to minimise its loss.	Generally no — the indemnifying party simply makes good the loss.
Remoteness	Applies — losses must not be too remote to be recoverable.	Generally does not apply — loss is recoverable if it falls within the scope of the indemnity.
Disclosure	Disclosure against a warranty prevents a claim. The buyer takes risk of disclosed matters.	Disclosure does not defeat an indemnity claim. The indemnity operates regardless of what was disclosed.
Typical use	General protection against misrepresentation across the business — accounts, contracts, litigation, IP, employees, tax etc.	Specific, identified risks — known tax liabilities, environmental contamination, ongoing litigation, pre-completion conduct.

The practical significance of these distinctions is substantial. A buyer who relies on a warranty where an indemnity would have been more appropriate — for example, in relation to a specific, identified tax risk — may find that its recoverable loss is far less than the actual cost of the liability. Conversely, a seller who agrees to indemnify against a broadly defined category of risk may find itself exposed to liabilities it did not anticipate. 

Careful, precise drafting — and a clear understanding of which mechanism is appropriate for which risk — is therefore essential. 

The Disclosure Process and Its Interaction with Warranties 

A warranty claim can only succeed if the warranty was untrue and the buyer did not already know about the relevant matter, highlighting the importance of warranty and indemnity insurance. This is where the disclosure process becomes critical. 

The seller will typically prepare a disclosure letter, setting out specific disclosures against the warranties given in the SPA. Anything that is fairly and specifically disclosed qualifies the relevant warranty, meaning the buyer cannot bring a claim in respect of it under the asset purchase agreements. The risk of that disclosed matter passes to the buyer as part of the agreed deal. 

This creates a powerful incentive for sellers to disclose as much as possible — and for buyers to review disclosures carefully. A seller who buries a significant liability in a lengthy disclosure letter may be protected from a warranty claim in respect of it. A buyer who signs without properly scrutinising the disclosures may find it has effectively accepted risks it was not aware of. 

The Critical Difference with Indemnities 

An important feature of indemnities — and one that distinguishes them sharply from warranties — is that disclosure does not defeat an indemnity claim. Even if the seller has disclosed the matter that gives rise to an indemnity claim, the indemnity still operates. 

This reflects the nature of the indemnity as a promise to make good a specific loss in the context of a share sale. The parties have agreed that, whatever happens with disclosure, the seller will bear this particular risk. For this reason, indemnities are particularly valuable where the seller has disclosed something that creates a future liability but the buyer is unwilling to carry that risk without a direct right of recovery. 

How Are Warranties and Indemnities Commonly Limited? 

While buyers naturally seek the broadest possible protection, sellers will resist open-ended liability. In practice, every SPA contains a suite of limitations on the seller’s exposure. These limitations are heavily negotiated and represent one of the most commercially significant aspects of any transaction. 

The following are the most common categories of limitation found in English law SPAs: 

1. Financial Cap 

The seller’s aggregate liability under the warranties (and sometimes the indemnities) is typically limited to a maximum amount — the cap. The level of the cap is a key commercial negotiation point. Sellers will push for a cap as low as possible; buyers will push for a cap that reflects the full purchase price or a significant proportion of it. 

Common cap structures include: 

• A fixed sum, often representing a percentage of the total consideration (e.g. 20%, 50% or 100% of the purchase price). 
• A tiered structure, with a higher cap for fundamental warranties (such as title to shares and capacity) and a lower cap for general business warranties. 
• For tax indemnities and specific indemnities, the cap may be set separately, often at the full purchase price or the value of the relevant liability. 

2. De Minimis Threshold 

A de minimis threshold prevents the buyer from bringing a warranty claim unless the loss from a single breach exceeds a minimum value. This protects the seller from the cost and disruption of defending minor claims that are disproportionate to the effort involved. 

The de minimis threshold is usually expressed as a fixed sum — for example, no single claim may be brought unless it exceeds £25,000 or £50,000. Claims below this threshold are simply disregarded. 

3. Aggregate Threshold (the ‘Basket’) 

Closely related to the de minimis threshold, the aggregate threshold — often called the ‘basket’ or ‘tipping basket’ — prevents the buyer from bringing any warranty claim at all until the total value of all claims (each exceeding the de minimis) reaches a specified aggregate amount. 

Two common basket structures are used: 

• Tipping basket (or ‘threshold’) — once the aggregate threshold is reached, the buyer can claim for the full amount of all losses, including those that ‘tip’ it over the threshold in an asset sale. 
• Excess basket (or ‘deductible’) — once the threshold is reached, the buyer can only claim for losses above the threshold amount. The first tranche of loss acts as an excess, similar to an insurance deductible. 

The tipping basket is generally more favourable to buyers; the excess basket to sellers in a share and asset sale. Which structure applies in the sale and purchase agreement is a negotiating point. 

4. Time Limits 

The seller’s liability under warranties is subject to time limits. Claims must be formally notified within a specified period after completion, failing which the claim is barred. Separate and usually longer periods may apply to tax indemnities or specific indemnities. 

Typical time limits seen in English law SPAs include: 

• General business warranties — 18 months to 3 years from completion. 
• Tax warranties and tax indemnity — 7 years from completion (reflecting the statutory limitation period for tax assessments) or, increasingly, the period ending on the seventh anniversary of the relevant accounting period. 
• Title and capacity warranties (fundamental warranties) — often the full statutory limitation period of 6 years, or sometimes longer. 

It is important to note that notification of a claim within the relevant period is typically not sufficient on its own. The SPA will usually require the buyer to issue formal legal proceedings within a further specified period (often 6 to 12 months) after notification, failing which the claim lapses, emphasising the importance of the clause. 

5. Knowledge Qualifications 

Many warranties in an SPA are qualified by the seller’s knowledge — either actual knowledge or constructive knowledge (what the seller ought to have known). A knowledge-qualified warranty can only be breached if the seller was aware (or ought to have been aware) of the relevant matter. 

Knowledge qualifications significantly limit the buyer’s ability to claim. They are frequently the subject of hard negotiation, with buyers pushing for warranties to be given on an absolute basis and sellers seeking the broadest possible knowledge qualification. Common compromises include: 

• Limiting knowledge to specific named individuals within the seller’s organisation who are most likely to have relevant knowledge. 
• Defining ‘knowledge’ to include matters that the relevant individuals would have discovered had they made reasonable enquiries. 
• Restricting knowledge qualifications to specific warranties where they are commercially justifiable, rather than applying them across the board. 

6. Limitations on Tax Indemnity Claims 

Tax indemnities are often subject to their own, separate regime of limitations within the SPA or in a dedicated tax covenant or tax deed. Common limitations include: 

• An obligation on the buyer to notify the seller promptly of any tax claim and to give the seller conduct of (or the right to participate in) any dispute with HMRC. 
• A restriction on the buyer settling any tax claim without the seller’s consent. 
• A reduction in the seller’s liability where the buyer recovers the relevant loss from a third party (such as an insurer or under a warranty and indemnity (W&I) insurance policy). 
• Exclusions for changes in law or HMRC practice occurring after completion. 

7. Conduct of Claims 

Many SPAs include provisions governing how the buyer must conduct third-party claims that may give rise to a warranty or indemnity claim against the seller. Sellers will typically require: 

• Prompt notification of any circumstance that may give rise to a claim. 
• The right to take over conduct of the relevant third-party proceedings. 
• An obligation on the buyer not to admit liability or settle without consent. 

Failure to comply with these requirements may reduce or extinguish the buyer’s right to claim, making it essential that buyers understand and follow them. 

8. Warranty and Indemnity (W&I) Insurance 

An increasingly common feature of English M&A transactions is the use of W&I insurance — a policy that covers losses arising from a breach of warranty (and sometimes indemnity claims) in an SPA. W&I insurance allows sellers to cap or eliminate their post-completion liability under warranties, whilst ensuring that the buyer retains full protection. 

Where W&I insurance is in place, the limitations in the SPA are often set at a very low level (or even at nil) on the basis that the buyer is expected to look to the insurer rather than the seller for recovery. This has become standard practice in private equity and larger M&A transactions and is increasingly used in mid-market deals. 

The Seller’s Perspective: Why Limitations Matter 

From a seller’s perspective, the limitations on warranty and indemnity liability are not merely a negotiating tactic — they are a commercial necessity. Without appropriate limitations, a seller who completes a transaction may find themselves exposed to claims for years after they have received the consideration and moved on. 

Sellers should ensure that the limitations negotiated in the SPA are properly aligned with the way in which the transaction has been structured. In particular: 

• Where the consideration includes deferred payment or earn-out provisions, the seller should consider whether the buyer might set off warranty claims against amounts owed. 
• Where there are multiple sellers (for example, in a management buy-out or investment exit scenario), the allocation of liability between sellers — and whether each is jointly and severally liable or severally liable only — should be clearly documented. 
• Sellers should ensure that all disclosures are properly made in the disclosure letter. A disclosure that is too brief or that lacks the specificity required by the SPA may not be effective. 

The Buyer’s Perspective: Getting the Balance Right in the context of share sales. 

For a buyer, the warranties and indemnities negotiated in the SPA represent the primary contractual protection for the investment made. The protections should be proportionate to the risks identified during due diligence and should not be so heavily limited as to be commercially meaningless. 

Buyers should be alert to the following: 

• Overly broad knowledge qualifications that render warranties effectively worthless in respect of matters within the management team’s awareness. 
• Very short time limits for notification that may expire before the relevant problem comes to light — particularly for matters relating to historic financial performance. 
• Low caps that do not adequately reflect the potential loss if a significant warranty is breached. 
• Basket structures that impose a high aggregate threshold before any claim can be made. 
• Conduct of claims provisions that are so restrictive as to prevent the buyer from taking the steps needed to protect itself in third-party proceedings. 

Properly advised buyers will push back on limitations that are commercially unacceptable and will seek to ensure that the warranty and indemnity package provides genuine, enforceable protection. 

Sonuç 

Warranties and indemnities are the cornerstone of risk allocation in any share purchase agreement. Together, they provide the buyer with assurance about the state of the business it is acquiring and with enforceable remedies if that assurance proves to be misplaced. For the seller, the limitations placed upon them define the boundaries of post-completion exposure. 

Getting this balance right requires experience, skill and a thorough understanding of both the legal principles at stake and the commercial dynamics of the transaction. Warranties that are poorly drafted, indemnities that fail to cover the risks they were intended to address, and limitations that are either too broad or too narrow can all have significant financial consequences for both parties. 

At Ronald Fletcher Baker LLP, our corporate and commercial team has extensive experience advising both buyers and sellers across a wide range of transactions — from owner-managed business sales to complex multi-party acquisitions. We work closely with our clients to ensure that the warranty and indemnity provisions in their SPAs are properly tailored, clearly drafted and commercially robust.