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5th December 2023
Senior Lawyer Peter Kaye, emphasizes the critical importance of precise drafting in business sales agreement warranty clauses to avoid pitfalls and ensure effective enforcement.
Anyone dealing in the arena of buying and selling a business will be aware of the importance of Warranty clauses in the sales agreement. In this article, Senior Litigation Lawyer, Peter Kaye, explains how trying to enforce a warranty clause can prove to be problematical from the outset and the reasons why great care needs to be taken to ensure you get it right.
Depending on whether you are a buyer or seller there are certain aspects which need to be carefully considered when agreeing to warranty clauses in the sales agreement and the knock-on effect when trying to enforce the terms.
There is no doubt that from the seller’s perspective you may want to make the possibility of being bound by any warranty terms as practically difficult as one can, whereas from the buyers’ perspective you want to ensure that these clauses can be easily and effectively enforced.
So what should you look out for and what are the common pitfalls ?
There are usually 4 key elements where either side can be caught out if a proper understanding of the legal issues surrounding the service of a warranty Notice are not known in detail.
The likely outcome is that there is a dual condition. Usually, the Courts require strict compliance of the term and, therefore, clauses of this nature should be carefully drafted to avoid any form of ambiguity.
If there is any apparent ambiguity in relation to a clause, it would be construed by the courts against the party seeking to rely on that clause or condition. The courts, however, would be looking to find commercial common sense in relation to the interpretation of any clause.
The more clearly and accurately a clause is drafted should enable that clause to be applied and accepted by a court when a dispute arises. The key takeaway from this is that one should not assume the trigger date is obvious because the consequences of getting it wrong can be critical to the outcome of the claim one way or another.
But what if the trigger date is to be based on one’s “knowledge” of the alleged breach? For example, to give Notice “as soon as reasonably practicable and in any event within x days after becoming aware of the matter”?
How is “as soon as reasonably practicable” defined?
The reference to the interpretation of “aware” can create difficulties. What is the legal interpretation of the extent of the “awareness”? is it just simple awareness that there may be a claim in due course or knowledge of a proper basis for a claim? These are points that have to be carefully considered in the light of the claim that could arise on a case-by-case basis.
All of the points highlighted above have been the subject of litigation and tested before the courts.
Therefore , whichever side of the fence you are on the main “takeaways “ from this article is that the service of a Warranty Notice can be fraught with risk if not properly dealt with and all the more reason why all the above points must be considered properly and in detail by your lawyers at the time of sending out a Warranty Notice or where you have received one from your opponent
It is important that the content of your Notice complies fully with the requirements of the documented Agreement, refers to the relevant warranties , gives enough detail of the claim so that the other party would understand the nature of the potential claim against it , to ensure that timeframes are carefully adhered to and finally that it is properly delivered.
You should avoid at all costs, leaving the service of the Notice to the last minute because dealing with any errors that may arise could be very costly because the risk is the courts may interpret any failures to adhere to the terms of the Agreement very strictly against you.
Our commercial litigation team can assist in steering you down the right path whichever side of the fence you sit on.