COVID-19 and Breach of Warranties

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Article

19 March, 2020

The ever changing circumstances and consequential advice relating to public health and COVID-19 may have adverse impacts on ongoing business transactions, in particular relating to warranties that are provided for in sale and purchase agreements.

A warranty is typically provided by the seller to the buyer to provide security as to the nature and success of a business. The recent outbreak may result in certain representations that are disclosed by the seller later becoming untrue, particularly as matters draw close to completion. Importantly for business owners, if such representations are made which later become untrue (and which are not subsequently amended) this may give rise to a breach of warranty claim. A breach of warranty claim may give rise to the right for the buyer to claim damages or seek an indemnity for loss that they have suffered, or to pull out of the deal altogether if the buyer considers the situation negatively impacts on its commerciality.

Buyers should therefore consider including warranties relating to the risk assessments of employees (in anticipation that COVID-19 will impact the workforce), scenario planning such as working from home capabilities, full disclosure relating to all material contracts, risk assessment of anticipated risk associated with supply and demand of their business, and other anticipated changes affecting business profitability.

Sellers on the other hand should consider a COVID-19 breach of warranty exclusion, in the event that COVID-19 affects their business in an unforeseeable way. In particular, general warranties should be 'ring fenced' so the business owners will be liable for specific warranties only. This may exclude liability for sellers in the events that certain business information will be unascertainable at this given time in response to rapidly changing Government advice. Examples of such information include business accounts and internal auditing, periods of which may have been extended to accommodate compliance with legislative requirements. Sellers are also encouraged to make warranties 'to the best of their knowledge' to reflect the assumption that business owners are keeping up to date with rapidly changing guidelines.

For many companies it's business as usual and any reflective changes may even be positive. Providing up to date warranties in the final signed agreement as a result of COVID-19 will encourage business transparency and help alleviate any future transactional issues for both parties.

For more information contact Nick Hodgson in our Corporate department via email or phone on 0333 207 1139. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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