TRW & Co · M&A and private capital
Warranties and Indemnities in a Share Purchase Agreement
Warranties and indemnities decide who bears the risk of unknown and known problems in a company you are buying or selling. Warranties are statements of fact that give a damages claim if untrue; indemnities pay pound for pound for specific risks. Disclosure, caps, thresholds and time limits then determine what a buyer can actually recover.
Key pointWarranties protect against the unknown, not the known: once a seller fairly discloses a problem, the warranty claim disappears. Any significant issue found in due diligence needs a price change, a specific indemnity or a condition.
At a glance
Warranties give damages
A buyer claiming for breach of warranty normally recovers the fall in share value caused by the untrue statement, and must prove that loss with evidence.
Indemnities pay in full
Specific indemnities pay for defined losses pound for pound, are not usually qualified by disclosure, and are used for risks found in due diligence.
Disclosure qualifies warranties
Matters fairly disclosed in the disclosure letter cannot found a warranty claim, so the scope of general disclosures is a key negotiating point.
Limits shape recovery
Caps, de minimis, thresholds and the choice between tipping and deductible baskets set the real economic value of the warranty package.
Statutory default periods
Absent contractual limits, contract claims have six years, or twelve for deeds, under the Limitation Act 1980; agreements almost always shorten these.
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Warranties and indemnities: the short answer
In a UK share purchase agreement, warranties and indemnities are the two main ways risk in the target company is split between seller and buyer. Warranties are contractual statements of fact about the company, such as its accounts, contracts, employees, disputes and compliance. If a warranty is untrue and the shares are worth less as a result, the buyer can claim damages for breach of contract.
Indemnities are promises to pay for a specific, identified loss, pound for pound, whether or not the share value falls. They are used for known risks found in due diligence, such as a pending claim or a regulatory issue. The tax covenant is a specialised indemnity covering pre-completion tax liabilities.
The protection a buyer actually gets depends on three further elements: what the seller discloses against the warranties, the financial limits on claims (caps, de minimis and thresholds), and the time limits for bringing them. This guide explains each element and the negotiating positions on both sides.
How warranties work
In a share purchase, the buyer acquires the company with all its history: liabilities, contracts and disputes come with it. Unlike an asset purchase, the buyer cannot choose which liabilities to leave behind, which is why warranties carry so much weight. Our guide to share purchase versus asset purchase explains that structural choice.
Two functions: information and compensation
Warranties do two jobs. First, they force disclosure. Faced with a warranty that "there are no current or threatened claims", the seller must either confirm it or disclose the exceptions. Much of the value of warranties lies in the information they draw out before signing.
Second, they provide a remedy. If a warranty proves untrue, the buyer can claim damages for breach of contract. The usual measure is the difference between the value the shares would have had if the warranty were true and their actual value. That makes warranty claims harder than many buyers expect: a liability of a given amount does not always reduce the share value by the same amount, and the buyer must prove its loss.
Warranties or representations?
A misrepresentation that induces a contract can give rise to rescission and, under section 2 of the Misrepresentation Act 1967, damages on a more generous basis. Buyers therefore sometimes ask for statements to be given as "representations and warranties". Sellers resist, and most UK share purchase agreements state that the statements are warranties only, with an entire agreement clause and a non-reliance statement.
The courts have generally respected that drafting. In Idemitsu Kosan v Sumitomo Corporation [2016] EWHC 1909 (Comm), the High Court held that warranties in a share purchase agreement were not representations that could found a misrepresentation claim. Exclusions of misrepresentation liability remain subject to the reasonableness test in the Unfair Contract Terms Act 1977, and no clause can exclude liability for the seller's own fraud.
Common warranty areas
A typical warranty schedule covers capacity and title to the shares, constitution and records, accounts and management accounts, conduct of business since the accounts date, material contracts, employees and pensions, property, intellectual property, IT and data protection, compliance and anti-bribery, litigation, insolvency and tax. Due diligence findings should drive which warranties matter most; see our legal due diligence checklist.
How indemnities and the tax covenant work
An indemnity is a promise to reimburse a defined loss. The buyer does not need to show that the share value fell, and the indemnity is not usually qualified by disclosure, because it is designed for risks the buyer already knows about. Specific indemnities commonly cover identified litigation, environmental contamination, product liability claims, regulatory investigations or a misclassified workforce.
Sellers resist general indemnities for breach of warranty, which would convert every warranty into a pound-for-pound obligation. In UK practice that request is usually refused, though it appears more often in deals with US-style drafting. The negotiation is normally about the scope of specific indemnities: the trigger, the losses covered, whether costs and penalties are included, and how claims are conducted.
The tax covenant
The tax covenant, sometimes a separate tax deed, is a specific indemnity under which the seller pays for tax liabilities of the target arising from events before completion, to the extent not provided for in the completion accounts or the last accounts. It sits alongside the tax warranties. Its standard exclusions include tax arising in the ordinary course of business after the accounts date, tax caused by the buyer's own post-completion actions and tax already provided for.
Tax covenants also deal with conduct of HMRC enquiries and disputes, gross-up for any tax on payments, and secondary liabilities, where the target is liable for tax owed by a former group member. These points interact with transactional tax structuring and should be settled with tax advisers rather than treated as boilerplate.
Disclosure: how sellers qualify warranties
Disclosure is where the balance between warranties and indemnities is really set. Sellers limit their exposure by disclosing exceptions to the warranties in a disclosure letter. A fact that is fairly disclosed cannot found a warranty claim. The negotiation therefore centres on what counts as fair disclosure and which documents are deemed disclosed.
A disclosure letter has two parts. General disclosures deem the contents of the data room, public registers and other sources to be disclosed. Specific disclosures are matched to individual warranties and describe particular exceptions. Buyers try to narrow general disclosures, for example by excluding broad deemed disclosure of the whole data room or requiring disclosure to be fair and specific enough for a buyer to assess the nature and scope of the matter.
Buyer knowledge is a separate battleground. Sellers ask for a clause stopping claims for anything the buyer knew; buyers want a clause saying their knowledge does not affect claims. Where the agreement is silent, the position is less certain, so the point should be dealt with expressly.
Disclosure is where many warranty claims are won or lost. Sellers should disclose fully and specifically, because over-disclosure costs little and under-disclosure creates claims. Buyers should insist on reviewing the disclosure letter well before signing and, for any serious issue it reveals, negotiate a price adjustment or a specific indemnity rather than relying on warranties that the disclosure has already neutralised.
Limitations on claims: caps, thresholds and time limits
A schedule of seller limitations sets the financial and procedural boundaries of claims. The main components are set out below. Limits usually apply differently to warranties and indemnities, so each protection needs its own row in the schedule. The figures in any deal are a matter of negotiation and market conditions, not law, and vary widely by deal size, sector and the presence of insurance.
| Feature | Warranties | Specific indemnities | Tax covenant |
|---|---|---|---|
| Purpose | Information and general protection | Cover identified, known risks | Cover pre-completion tax liabilities |
| Qualified by disclosure? | Yes | Usually not | Usually not |
| Measure of recovery | Damages: loss in value of shares; buyer must prove loss | Pound-for-pound payment of defined loss | Pound-for-pound payment of the tax and related costs |
| Typical financial limits | De minimis, threshold and cap | Often a separate or higher cap; thresholds often disapplied | Often a higher cap; de minimis may still apply |
| Typical time limit | Shorter period for general claims | Negotiated per indemnity | Longer period, linked to tax assessment windows |
Cap, de minimis and threshold
The cap sets the seller's maximum aggregate liability. Title and capacity warranties are often capped at the price; other warranties are usually capped at a lower proportion. The de minimis excludes individual claims below a set amount. The threshold or basket requires aggregate claims to exceed a set amount before any can be brought. Whether it is a "tipping" basket (once exceeded, the whole amount is recoverable) or a "deductible" (only the excess is recoverable) is a significant economic point.
Time limits
Without contractual limits, a claim for breach of a simple contract must normally be brought within six years under section 5 of the Limitation Act 1980, and within twelve years if the agreement is a deed. Share purchase agreements almost always shorten these periods. General warranty claims typically must be notified within a period designed to allow at least one full audit cycle after completion, while tax claims run longer to reflect the period in which HMRC can raise assessments.
Notice clauses are strictly construed. A claim notice usually must give reasonable detail of the matter and, where practicable, an estimate of the amount, and proceedings must often be issued within a further fixed period. Buyers lose valid claims every year through defective or late notices.
Other seller protections
Other standard limitations include exclusion of losses provided for in the accounts, no liability for matters arising from changes in law after completion, a duty on the buyer to mitigate, no double recovery, recovery from third parties and insurers first, and seller conduct rights over third-party claims. All limitations normally fall away for fraud or dishonest concealment by the seller.
How warranties and indemnities are negotiated
The sequence below reflects a typical private UK sale. It applies whether the buyer is a trade buyer or a private equity fund, though private equity sellers often refuse to give business warranties at all, leaving management and insurance to fill the gap.
- Heads of terms. Agree the price mechanism, whether warranty and indemnity insurance will be used, and headline positions on caps and time limits.
- Due diligence. The buyer investigates and identifies issues that need a price adjustment, a specific indemnity or a condition.
- First draft of the agreement. The buyer's solicitors usually draft, including a full warranty schedule, tax covenant and limitations.
- Seller mark-up. The seller narrows warranties, adds knowledge and materiality qualifiers, and proposes limitations.
- Disclosure. The seller prepares the disclosure letter and data room index; the buyer reviews and pushes back on general disclosures.
- Specific indemnities. The parties negotiate indemnities for issues found in diligence and any escrow or retention to secure them.
- Signing and completion. Warranties are given at signing and often repeated at completion, with any update to disclosure controlled by the agreement.
An illustrative scenario
This scenario is illustrative only; the parties are generic.
A trade buyer agrees to acquire a UK software company from its founders. Due diligence reveals that a former distributor has threatened a claim for unpaid commission. The founders disclose the threat specifically against the litigation warranty, so the buyer cannot claim under that warranty if the claim succeeds.
The buyer negotiates a specific indemnity covering the distributor claim, including legal costs, with a portion of the price held in escrow for the expected life of the dispute. Separately, the warranty package is capped at a negotiated percentage of the price with a tipping basket, and general claims must be notified within a period covering the next audit.
After completion, the buyer finds that a key customer contract contained a termination right that was not disclosed. It serves a detailed notice within the time limit and claims for the reduction in the value of the shares, supported by valuation evidence. The indemnity and the warranty claim run on different tracks, which is exactly what the drafting intended.
Risks and common mistakes
Most disputes over warranties and indemnities come from a handful of avoidable errors, made either at the drafting stage or in the months after completion.
Relying on warranties for a known problem
Once a seller discloses an issue, warranties give no protection for it. Buyers who identify a significant problem in diligence and then simply rely on the warranties often find they have no claim. The right response to a known risk is a price reduction, a specific indemnity, a retention or escrow, or a condition requiring the seller to resolve the issue before completion. Each has different cash-flow and credit-risk consequences, so the choice should be made deliberately.
Serving a defective claim notice
Notice provisions are treated as conditions of the seller's liability. If the agreement requires reasonable detail of the claim, the nature of the breach and an estimate of the amount, a vague notice may be invalid, and by the time the defect is spotted the deadline may have passed. Buyers should diarise every limitation date at completion, take advice as soon as a potential claim emerges, and serve notice in strict compliance with the agreement's address and method requirements.
Ignoring who will actually pay
Warranties and indemnities are only as good as the seller's ability to pay. Where sellers are individuals who will distribute the proceeds, or a fund that will wind up, the buyer should consider an escrow, a retention from the price, a parent or guarantor covenant, set-off rights against deferred consideration, or warranty and indemnity insurance. Sellers in turn should check whether liability is joint and several among multiple sellers, which can leave one seller exposed for the whole claim.
Leaving buyer knowledge and materiality unresolved
Silence on whether buyer knowledge prevents claims, or on how "material" and "so far as the seller is aware" are defined, creates disputes later. Awareness qualifiers should identify whose knowledge counts and whether the seller must make enquiries. Materiality scrapes, which disregard materiality qualifiers when calculating loss, should be addressed expressly, especially if insurance is involved.
Insurance and cross-border points
Warranty and indemnity insurance has changed many UK deals. With a buy-side policy, the buyer claims against the insurer rather than the seller, and the seller's cap can be set very low. Insurers do not cover known issues or many specific indemnities, so negotiation over those does not disappear. Our article on warranty and indemnity insurance explains how a policy interacts with the agreement.
In cross-border deals, including UK acquisitions by Bangladeshi, Gulf or Asian groups, local law warranties may be needed for overseas subsidiaries. Enforcement against a seller abroad should be considered at the outset: a judgment against a seller with no UK assets may need to be enforced overseas, which can favour escrow or an arbitration clause. Price mechanics also matter; see our guide to locked box versus completion accounts.
Checklist for buyers and sellers
Getting warranties and indemnities right is mainly about matching each risk with the right protection. Before signing, check that:
- every material diligence finding has a decided treatment: price, indemnity, condition or accepted risk;
- the disclosure letter has been reviewed in full, and general disclosures are acceptable;
- buyer knowledge, awareness and materiality are dealt with expressly;
- caps, de minimis, threshold and basket type are clear and consistent across the agreement;
- time limits and notice requirements are diarised, including tax covenant periods;
- security for claims is in place where the seller's covenant is weak;
- any insurance policy aligns with the agreement's definitions and limitations.
TRW & Co's mergers and acquisitions team in London acts for buyers, sellers and management teams on share purchase agreements, disclosure and post-completion claims, and supports owner-managers through our buying and selling a business practice. Our London office is authorised and regulated by the Solicitors Regulation Authority. To discuss a transaction, contact us.
Frequently asked questions
01What is the difference between a warranty and an indemnity?
A warranty is a contractual statement of fact about the target company. If it is untrue, the buyer can claim damages, normally measured by the reduction in the value of the shares, and must prove its loss. An indemnity is a promise to reimburse a specific loss pound for pound, regardless of any effect on share value. Warranties are qualified by disclosure; specific indemnities usually are not, because they are designed to cover risks the buyer already knows about.
02What is a disclosure letter?
A disclosure letter is the seller's document setting out exceptions to the warranties. It contains general disclosures, which deem certain sources such as the data room and public registers to be disclosed, and specific disclosures matched to individual warranties. Anything fairly disclosed cannot ground a warranty claim. Buyers should review the letter carefully before signing, narrow broad general disclosures, and respond to any significant disclosed issue with a price change or a specific indemnity.
03What is a tax covenant in a share purchase agreement?
A tax covenant is a specific indemnity in which the seller agrees to pay for tax liabilities of the target arising from events before completion, unless they are provided for in the accounts or fall within agreed exclusions. It sits alongside the tax warranties and is usually not qualified by disclosure. It also governs how HMRC enquiries are handled after completion, who controls disputes, gross-up of payments and secondary tax liabilities from former group companies.
04What are de minimis and basket provisions?
A de minimis provision excludes individual claims below a set amount, so trivial claims cannot be brought at all. A basket or threshold requires the total of qualifying claims to exceed a set amount before the seller is liable. With a tipping basket, once the threshold is passed the buyer recovers from the first pound; with a deductible basket, only the excess is recoverable. The amounts are negotiated and vary with deal size and sector.
05How long does a buyer have to bring a warranty claim?
It depends on the agreement. Without contractual limits, the Limitation Act 1980 gives six years for a simple contract and twelve years for a deed. Share purchase agreements almost always shorten those periods: general warranty claims commonly have a period long enough to include at least one audit after completion, and tax claims a longer period reflecting HMRC assessment windows. Claims must also be notified in the form the agreement requires.
06Can a buyer claim for misrepresentation instead of breach of warranty?
Usually not, if the agreement is well drafted. Most UK share purchase agreements state that the statements are warranties only and include entire agreement and non-reliance clauses. The High Court in Idemitsu Kosan v Sumitomo held that warranties were not representations in that case. Exclusions of misrepresentation liability must satisfy the reasonableness test in the Unfair Contract Terms Act 1977, and liability for fraud cannot be excluded.
Sources and official materials
- Misrepresentation Act 1967, section 2 — Damages for misrepresentation
- Limitation Act 1980, section 5 — Six-year limitation period for simple contracts
- Unfair Contract Terms Act 1977, section 11 — The reasonableness test
- Idemitsu Kosan Co Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) — Warranties distinguished from representations
- Corporation Tax (GOV.UK) — HMRC overview relevant to tax covenant exposure
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.