Warranties and guarantees.

The statutory warranty under sections 922 et seq ABGB relates to defects of the object sold. In a share deal, however, the object of sale is the share and not the business itself. Defects of the business are hard to capture this way, which is why the statutory rules often fail to meet the economic expectations of the parties.

For this reason the parties agree independent guarantees in the sense of an abstract promise. The seller assures certain qualities of the business irrespective of fault, and the contract governs the consequences of a breach of guarantee independently. We recommend clarifying the relationship to the statutory warranty expressly in the contract.

The warranty catalogue is the heart of the allocation of risk. It typically covers assurances on the existence and ownership of the shares, on financial statements, on taxes, on material contracts, on employment relationships, on intellectual property rights as well as on compliance with legal provisions. Each warranty describes a specific state for which the seller stands behind.

The scope of the warranties is closely linked to the due diligence: what the buyer has reviewed and had disclosed flows into the warranties through disclosure letters. We tailor the catalogue to the specific risks of your transaction, so that it leaves no gaps and does not burden the seller with unrealistic assurances.

In practice the seller liability is limited. Common features are a liability cap, a de minimis threshold for individual claims as well as a deductible or threshold (basket) above which liability arises at all. In addition, the periods for asserting warranty claims are set out in the contract, because the statutory limitation rules do not fit well here.

For known or specifically foreseeable risks the parties agree indemnities, under which the seller indemnifies the buyer against a particular loss irrespective of the general limitations of liability. In addition, a W&I insurance can shift the warranty risk onto an insurer. We examine whether this route is sensible and available for your transaction.

Warranties do not arise in isolation but in the course of the contract negotiation. From the findings of due diligence the buyer shapes the warranty catalogue, and the seller responds with disclosures and liability limits. What is disclosed restricts the warranty liability, which is why aligning catalogue and disclosure is the core of the negotiation.

On the documents side the disclosure letter, the data room and the due diligence reports matter most. The disclosure letter allocates individual matters to the warranties and deliberately carves them out of liability. We make sure that these documents are cleanly interlocked, so that no dispute arises later about the scope and interpretation of the warranties.

Caution is warranted when the contract contains no liability cap, when warranties are vaguely worded or when a clear disclosure mechanism is missing. A warranty catalogue that does not match the findings of due diligence is also a warning sign, because known risks would otherwise fall through the cracks.

The sensible next step is the legal alignment of the warranty catalogue with the liability limits and the disclosure. We review the draft, close gaps and negotiate cap, de minimis and basket so that the allocation of risk remains workable for you.