Amending Warranties (Seller)

Question 1

Warranty

Answer 1

Contractual statement of fact given by the Seller about the Target at that time

Question 2

Indemnity

Answer 2

Promise by Seller to reimburse Buyer if a specific liability arises in the future

Question 3

What principles apply to warranties?

Answer 3

Contractual principles

• Buyer will have a claim for breach of contract
• Damages: remoteness, foreseeability, mitigation

Question 4

What principles apply to indemnities?

Answer 4

If the liability crystallises, the Buyer will be reimbursed on POUND FOR POUND BASIS

Claim in DEBT

Question 5

What warranties should a Seller NEVER give?

Answer 5

Matters over which the Seller has no control - future events ‘crystal ball warranties’

Question 6

Which company should indemnity payments go to - Target or Buyer?

Answer 6

Zim - if payment goes to the Target, it may have to pay tax on the entire amount when received

Payment should be made directly to the Buyer - HMRC will treat it as an adjustment to the consideration:

• Buyer paid less for Target
  (Target has lower base cost when Buyer eventually disposes of it)
• Consideration received by Seller deemed reduced
• Seller may receive partial tax refund (reduced capital gain on sale of Target)