Warranties and Disclosure: How Sellers Limit What They Owe

In a share or asset sale, the warranties are the seller's promises about the business: the accounts are accurate, the contracts are valid, there is no litigation, the intellectual property is owned. Break one and the buyer has a claim.

The disclosure schedules — called a disclosure letter in UK and European deals — are how the seller takes those promises back. Anything properly disclosed cannot be claimed on. The two documents only make sense read together, and reading only the purchase agreement tells you very little about what the seller is actually standing behind.

Why the pair exists

A warranty allocates risk about facts nobody can fully verify. The buyer cannot inspect everything; the seller knows the business. So the seller warrants a long list of statements, and the buyer prices the deal on the basis that they are true.

Disclosure is the release valve. Rather than negotiating each warranty down to something the seller is certain of, the seller warrants broadly and then discloses the exceptions. A well-run process ends with warranties that are wide and disclosures that are specific.

The failure mode is the reverse: warranties negotiated to nothing, or disclosure so general that the warranty means nothing either way.

The disclosure fight worth having

General versus specific disclosure. Specific disclosures name a fact against a numbered warranty. General disclosures deem entire categories disclosed — everything in the data room, everything on a public register, everything the buyer's advisers saw.

A "deemed disclosed: the contents of the data room" provision is the single most valuable sentence a seller can get, and the one a buyer should resist hardest. It converts thousands of pages nobody read into a defense against every claim.

"Fairly disclosed with sufficient detail to enable a reasonable buyer to assess the matter." This is the standard a buyer wants applied to every disclosure. Without it, a document buried in folder 7.3.2 counts as disclosure of whatever it happens to reveal.

Timing. Disclosure is usually made at signing. On a split signing and completion, the question is whether the seller may disclose again at completion — and whether new disclosures give the buyer a right to walk or merely block the claim. That is a materially different deal.

What limits the claim after that

Even an undisclosed breach runs into the limitation package, which is negotiated separately and often matters more than the warranty list:

Time limits. Commonly 12 to 24 months for general warranties, and the statutory limit plus a margin for tax. Miss the window and the claim dies regardless of merit.

De minimis. A floor per claim, below which nothing counts.

Basket or threshold. An aggregate figure that must be exceeded before any claim is brought. Check whether it is a true "excess", where only the amount above it is recoverable, or a "tipping basket", where crossing it unlocks the whole sum.

Cap. Frequently a percentage of the price for general warranties, and up to 100% for title and capacity. Title, capacity and tax are usually carved out of both the cap and the time limit — if they are not, that is the first thing to fix.

Knowledge qualifiers. "So far as the Seller is aware" converts a promise about the world into a promise about somebody's memory. Where it appears, ask that awareness be deemed to include reasonable inquiry, and that the individuals whose knowledge counts be named.

What a buyer should check first

1. Which warranties are qualified by awareness, and whose awareness counts.
2. Whether the data room is deemed disclosed, and against which warranties.
3. Whether the fair disclosure standard is present and applies to every disclosure.
4. The cap, the basket and whether the basket is tipping or an excess.
5. Whether title, capacity and tax escape the general limits.
6. Whether warranty and indemnity insurance is being used, and what it excludes — insurers commonly exclude known risks, which are exactly the ones that got disclosed.

FAQ

What is a disclosure letter?

The document in which a seller sets out exceptions to the warranties they are giving. It is the UK and European term; US deals use disclosure schedules attached to the purchase agreement. The function is identical: anything properly disclosed cannot found a warranty claim.

What is the difference between a warranty and an indemnity in a purchase agreement?

A warranty is a statement of fact, and a breach gives a damages claim in which the buyer must prove loss and mitigate it. An indemnity is a dollar-for-dollar promise to reimburse a specific identified risk, with no need to prove diminution in value. Indemnities are used for known problems; warranties for the general state of the business.

Does disclosure defeat a warranty claim?

If the disclosure is properly made against that warranty, yes — that is its purpose. Whether a particular disclosure counts turns on the disclosure standard in the agreement, which is why "fairly disclosed with sufficient detail" is worth insisting on.

How long do warranty claims last in an SPA?

Usually 12 to 24 months for general commercial warranties, with tax and title running much longer. The period is negotiated, not fixed, and a buyer should make sure at least one full audit cycle falls inside it.

What should be on an SPA review checklist?

The warranty list against the disclosure schedules, the limitation package as a whole, the knowledge qualifiers, the treatment of the data room, the completion mechanics and any restrictive covenants on the seller. Reviewing the warranties without the disclosures — or the disclosures without the limits — gives an answer that looks reassuring and is not.

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