Insights + Resources

June 26, 2024

Corporate Law+ | Real World Limits on the Holy Status of Warranties in Business Sales Part 2

In the negotiation of the sale and purchase of a business, an almost supernatural level of time and effort can be devoted to conducting due diligence, and negotiating and documenting the seller’s warranties. Warranties can sometimes be treated with a holy reverence by those involved in the sale, in the belief that a breach gives rise to seismic repercussions. In practice the seller and their lawyers may seek to qualify the warranties to such a degree, that meaningful enforcement is constrained. In this second of a two-part series, we look at the ways in which these contractual promises may be brought back to earth, potentially leaving the purchaser with more risk than they expected.


Under modern Australian law a warranty is technically a form of “independent promise”, that is not conditional on any other thing.[1]  This is to be compared to “dependent promises”, today known technically as “conditions”, which relies on some further act or performance by the promisor.

The word “warranty” has come to imply that an absolute pledge is given by the seller, and that a breach of a warranty will have automatic and profound consequences. Yet as we saw in Part 1 of this series (What Remedies Arise for False Warranties in Business Sales), warranties may not provide the purchaser with a right to escape the bargain entirely unless expressly stated in the contract, or, more challengingly, unless the warranty can be characterised as an ‘essential term’ of the contract.

Furthermore, through the negotiation process of the sale, warranties are often heavily qualified by the seller and their lawyers through specific clauses. We discuss this further below.

Negotiated Limits on Warranties

Depending on various factors, examples of limitations negotiated into sale and purchase agreements may include:

  • Qualifying at least some warranties as “to the best of the seller’s knowledge”;
  • Including a threshold amount of loss before a warranty can be enforced;
  • Including an upper limit on the amount of damages for warranty breach;
  • Setting time limits that warranty claims must be lodged within;
  • Excluding claims to the extent that the purchaser knew or should have known about the mater being warranted, or in other defined circumstances such as a failure to mitigate their loss.

We take a quick look at these qualifications below.

The Knowledge Qualification

The limitation of ‘to the best knowledge of the Company’ is used to protect the company from absolute warranties. In the context of a business transaction, s 1042G of the Corporations Act provides that this includes the knowledge of the company secretary as well as the directors. Under this section of the Act, hether one or all of the directors / officers of a company possess a piece of knowledge, the knowledge will still be attributed to the company. Accordingly, it is good practice to draft into the contract to whom the knowledge of the company is to be attributed.

Minimum Thresholds Before a Claim Can Be Brought

In order to protect themselves from subjectively trivial claims, parties may contract for a minimum claim threshhold to have to be reached before the seller is liable. The amount specified may depend on the size of the transaction, and be set as a percentage of the total purchase price (e.g. 0.5 to 1%). For example, in a sale of a business for $20 million, the minimum claim amount may be set at 0.5% x $20m =  $100,000.

Maximum Claim Amounts

A maximum claim amount seeks to set a prescribed cap on the amount a purchaser can recover in respect of all claims and liabilities from the sale. If included, the cap often relates to the amount of the purchase price, and for example may be capped at 100% of that value. However all of these things are a matter of negotiation, and can come down to which party enjoys the stonger bargaining position. There are no set rules.

Maximum Time Limits

A time limitation period specifies the maximum amount of  time during which a party can bring a warranty claim.  Whilst there are no set rules, somewhere between one to three years is usually typical. However, tax warranties may have longer limitation periods due to the regulatory powers of the tax authorities to investigate past matters.

Excluding claims in certain identified circumstances

Examples include excluding claims to that extent that the purchaser:

  • actually knew, or should have known, about the matter;
  • is able to claim on a policy of insurance;
  • occasioned the loss as a result of a change of law;
  • has a contingent loss only which has not crystallised;
  • has not acted properly to mitigate their loss; and/or
  • has an indirect or consequential loss

Concluding Remarks

In theory, the giving of warranties could be seen to be akin to sprinkling holy water over the transaction. The seller stands absolutely by the veracity of their promises about the health of the company or business being sold. In practice though, this is rarely (if ever) the case.

As we explored in Part 1 (What Remedies Arise for False Warranties in Business Sales) it may be challenging for the purchaser to escape the transaction entirely, and instead may be left with the assets and a claim in damages.  Additionally, as we have explored above, through the process of negotiation and documenting the sale and purchase agreement, the seller may set exceptions, limits and caveats on its warranties.

The effect of all of this is that purchasers and sellers of businesses should be aware of the real world limits of warranties. It is important to take proper advice from experienced legal practitioners, who can help you navigate what can be at times a bewildering landscape of traps, potholes, wrong turns and misleading pathways.

For further advice on negotiating the sale and purchase of businesses, including the important aspect of warranties, please contact us below.  Edwards + Co Legal provide corporate legal advice to buyers and sellers of modern Australian businesses.

[1] Nuwan Dias, ‘Re-Examining the Relationship between Mutual Promises in Contract Law,’ (2022).

Close Btn Created with Sketch.


Straight to your inbox on legal and business developments set to disrupt and transform.