The nature and legal assessment of the contractual warranties in the business sale agreement

Virginijus Bitė

Abstract


The provisions relating to warranties and liabilities of the seller are among the most disputed legal questions in the context of corporate acquisitions. The author argues that statutory protection of the business buyer is not sufficient; as a consequence of this, in most transactions the buyer insists that the sale agreement contains warranties regarding the business and its assets and liabilities. These clauses ensure that the buyer is compensated, if the information provided by the seller proves to be incorrect. The number of business acquisition transactions in Lithuania grows constantly, therefore we can expect that more and more cases related to seller’s warranties and responsibility for their breach will appear in courts. On the other hand, the issue of contractual warranties is not analyzed in Lithuania at all. Academic examination of this topic and experience of other countries should help the courts to duly assess the nature of the contractual warranties and the particularities of the seller’s responsibility.
This scientific article provides analysis on the matters of status and legal assessment of the seller’s contractual warranties. The formulated hypothesis is the following: the contractual warranties of the business seller are necessary for the proper and comprehensive protection of the business buyer’s interests.
Firstly, the premises, the concept and the purpose of the seller’s contractual warranties, as well as legal consequences of the breach of such warranties are examined. The formulated hypothesis is proved. The reasons for necessity of special consideration of the seller’s warranties in the business acquisition agreement are the insufficient statutory protection (particularly in share acquisition deals) of the buyer of the business (principle of caveat emptor), inadaptability of general statutory provisions, which regulate business sale transactions, as well as the lack of the related court practice.
A warranty is an assurance of the existence of a fact by one party on which the otherparty to a transaction can rely. The article proves that the seller’s contractual warranties are a special type of contract terms which, once breached, cause the legal consequences for the seller (the contractual responsibility of the seller) – the buyer acquires a right of claim for loss, reduction of price and even termination of the agreement. The amount of damages normally is equal to the difference between the actual market value of the business and the market value the business would have had if the warranty had been true.
The agreement can involve certain material or procedural limitations of the seller’s liability. However, such provisions must be reasonable and fair. Also any limitation of the liability is not possible in case of wilful misconduct or gross negligence of the seller. Additionally, a preconceived knowledge of the buyer about the falseness of the warranty will deprive the buyer of the right to claims in respect of the breach of the warranty, except where this clause is clearly agreed in the agreement.

Keywords


civil law; contractual warranty; warranty claims; seller’s responsibility; buyer‘s knowledge; reimbursement of loss; purchase and sale of business

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"Societal studies" ISSN online 2029-2244 / ISSN print 2029-2236