BREACH OF WARRANTY AND INDEMNITY CLAIMS IN AUSTRALASIA; DEBUNKING A FEW MYTHS

Claims for breaches of warranties and indemnities in the context of the sale of private companies don’t often get much air time in the media but we have seen a significant increase in claims notifications in the past few years.

Prospective insureds should give careful consideration to the claims management history and experience of potential insurers before they choose the most appropriate market for their risk.

This article endeavours to debunk a few myths about breach of warranty claims in Australasia.

Introduction

Warranties and indemnities (W&I) given by a seller in a share or asset sale play an important role in M&A transactions by aiding information gathering and clarifying the scope of legal liability attributable to the warranting parties. They serve as a vital risk allocation tool in virtually all share and asset sale transactions and the extent to which sellers will agree to compensate buyers for breaches of warranties is one of the critical determinants of the target’s purchase price.

The warranties given in a share or asset sale are often heavily negotiated and can form one of the most contentious aspects of the deal negotiations. Even in transactions that involve sophisticated buyers and sellers supported by experienced and professional advisers, there always remains the risk that something might be overlooked throughout the due diligence and disclosure process, or that matters unknown to either party might emerge after the completion of the transaction has taken place.

Transacting parties seek an apportionment of these contingent risks and tend to heavily negotiate warranties, with: (i) buyers seeking maximum protection from sellers in the event of a breach of warranty; and (ii) sellers trying to minimise liability in order to retain as much of the deal proceeds as possible and avoiding locking proceeds in escrow accounts.

Apr-Jun 2013 Issue

AIG Australia Limited