Warranties are independent promises, for example that the financial statements are correct, that no litigation is pending or that taxes have been paid. If a warranty is untrue, the seller must put the buyer in the position it would be in if the warranty were true. Indemnities apply to known risks, for example an ongoing tax audit. If the risk materialises, the seller pays regardless of fault.
For sellers of mid-sized companies, this part of the purchase agreement is often the most important after the price. Common limitations are a de minimis threshold, a basket, a liability cap and short limitation periods. Matters disclosed in the data room are often excluded from liability.
The statutory sales law of the German Civil Code (BGB) is a poor fit for businesses. It is therefore usually excluded in the contract and replaced by a bespoke liability regime. § 444 BGB sets limits: in the case of fraudulent concealment or a quality guarantee, the seller cannot rely on an exclusion of liability.
Example
Hypothetical example: Purchase price €10 million, cap 10% (€1 million), basket 1% (€100,000) as a deductible. A warranty loss of €180,000 leads to a payment of €80,000. A loss of €1.4 million is capped at €1 million.
Warranty vs. indemnity
| Feature | Warranty | Indemnity |
|---|---|---|
| Subject | Assured condition | Specific risk |
| Buyer's knowledge | Often excludes liability | No effect |
| Limitation | De minimis, basket, cap | Often no basket |
Sources
- § 444 BGB Haftungsausschluss, Bundesministerium der Justiz
- § 442 BGB Kenntnis des Käufers, Bundesministerium der Justiz