Received a Warranty Claim After Selling Your Business? What To Do Next

If you have received a warranty claim after selling your business, do not rush into a detailed response. The sale agreement may contain strict notice rules, deadlines and seller protections that could materially affect your exposure.

This guide explains what sellers should check first, how warranty claims are usually defended, and why early advice can protect your position.

Introduction

If you have sold your company and the buyer has now notified a warranty claim under the share purchase agreement, how you respond in the first few weeks can materially affect the outcome. This article explains what a warranty claim is, the contractual and statutory deadlines that apply, the defences most commonly available to sellers, and the practical steps to take when a claim notice arrives. It is written for sellers of private companies and businesses in England and Wales who want to understand their exposure and protect their sale proceeds.

Very few sellers expect to hear from the buyer again once the money has cleared. In practice, a meaningful proportion of private company sales generate a post-completion dispute, and warranty claims are the most common form it takes. The good news is that the sale agreement you negotiated almost certainly contains protections designed precisely for this moment. The difficulty is that those protections operate to strict timetables, and they reward the party who reads the contract first and reads it properly.

What a warranty claim actually is

A warranty is a contractual statement of fact about the target company or business, given by you as seller in the share purchase agreement (SPA) or asset purchase agreement (APA). Warranties typically cover accounts, tax, key customer and supplier contracts, employees, intellectual property, litigation, property, data protection and regulatory compliance. If one of those statements was untrue when given, the buyer may claim damages for breach of contract.

The measure of damages in a share sale is frequently misunderstood. The usual starting point for breach of warranty is the difference between the value of the shares as warranted and their actual value at the relevant date, commonly completion, given the true position. The cost of remedying a problem is not automatically recoverable, although it may sometimes be relevant evidence of diminution in value or be recoverable where the contractual wording or the facts support a different analysis. Quantum is therefore a battleground in its own right.

It helps to distinguish a warranty claim from the other things a buyer might allege, because the consequences differ:

• Breach of warranty. This is ordinarily a contractual claim in which the buyer must establish that the warranty was untrue or breached, that it has suffered recoverable loss caused by that breach, and that it has complied with the claim procedure and limitations in the agreement. Damages are generally assessed by contractual principles. The buyer will ordinarily be expected to take reasonable steps to avoid or reduce loss where the mitigation principle applies, although the principal measure of loss in a share warranty claim is often the diminution in the value of the shares at completion.
• Indemnity claims. An indemnity is a promise to reimburse the buyer for a specified liability, often on a pound for pound basis. Depending on its wording, an indemnity may entitle the buyer to recover a specified liability or loss on a different basis from a damages claim and may reduce the scope for a diminution-in-value argument. Whether it creates pound-for-pound recovery, requires actual payment, or remains subject to other limitations depends on the drafting.
• Misrepresentation. This is an allegation that a false statement induced the buyer to enter the transaction, and it can carry different remedies, including rescission in limited circumstances. Well-drafted agreements often contain entire-agreement and non-reliance provisions intended to limit misrepresentation claims, but their effectiveness depends on the wording, statutory controls on exclusions and the facts. Liability for fraudulent misrepresentation cannot generally be excluded.
• Tax covenant claims. A tax covenant, sometimes called a tax deed, is a separate promise to meet unexpected tax liabilities of the company relating to the pre-completion period. It usually has its own longer time limit and its own procedure, so a claim that looks out of time under the general warranties may still be live here.

Why claims tend to surface twelve to twenty-four months after completion

Warranty claims rarely arrive immediately. The buyer needs time to take control, close its first set of accounts, meet the customers and absorb the workforce. The first post-completion audit, an HMRC enquiry, an employment tribunal claim, the loss of a key contract or a complaint about historic work are all classic triggers.

There is also a commercial reality worth understanding. Buyers sometimes notify claims because the acquisition has underperformed for reasons unconnected with any warranty, and the claim becomes a way of recovering part of the price or applying pressure on a deferred payment. That does not mean the claim is baseless and it should never be assumed to be, but the buyer’s motivation is relevant context when you assess how the matter is likely to resolve.

The first steps to take when a claim notice arrives

Resist the urge to reply substantively. A quick email explaining what you knew, what you thought and what you would have done differently can undermine an otherwise strong defence, and it can waive procedural points that would otherwise be available to you. A short, courteous acknowledgement that the notice has been received and is being reviewed with your solicitors is almost always the better opening move.

The immediate priorities are these:

• Preserve everything. Retain your transaction bundle, the disclosure letter and its annexures, the data room index, board minutes, correspondence with your former advisers and any personal notes or emails from the sale process. Losing documents at this stage creates real risk, and reconstructing the disclosure record later is far more expensive than preserving it now.
• Locate the notices and limitations clauses. These usually sit towards the back of the agreement and in a schedule of seller protections, and they will tell you whether the notice was validly given, when it had to be given and what it had to contain. Reading them before you engage with the factual allegations changes the order in which you assess the whole dispute.
• Check who is actually on the hook. Where there were several sellers, liability is commonly several rather than joint, and each seller’s exposure may be capped by reference to their share of the consideration. Institutional or minority sellers sometimes gave narrower warranties or none at all, which affects both your exposure and the dynamics of any negotiation.
• Identify any money still in play. Retentions, escrow accounts, deferred consideration and earn-out instalments are the buyer’s most attractive source of recovery, because they allow an attempted set-off rather than a claim. If a payment date is approaching, your timetable for taking advice is considerably shorter than you may think.
• Check for insurance and third party recovery. Warranty and indemnity insurance, run-off professional indemnity cover, or the company’s own policies may respond, and notification deadlines are often tight. There may also be a claim onwards against a professional adviser, and that should be assessed early rather than as an afterthought.

Test the notice before you test the facts

This is the point most sellers overlook, and it is frequently decisive. Sale agreements almost always require a claim notice to be served within a defined period, in a defined manner, and to contain a defined level of detail, commonly reasonable detail of the nature of the claim, the circumstances giving rise to it and the buyer’s good faith estimate of the amount claimed. The courts may enforce contractual notice requirements strictly, particularly where the clause makes compliance a condition of liability. A notice that is late, insufficiently detailed, sent to the wrong address or served by the wrong method may therefore be ineffective and may bar the claim, but the result depends on the wording, construction and facts of the particular agreement.

Many agreements go further and provide that a notified claim falls away, is deemed withdrawn, or becomes time-barred unless proceedings are commenced—and sometimes validly served—within a stated period after notification. Six- and nine-month periods are seen in practice, but the precise consequence and trigger must be checked against the clause. That creates a hard secondary deadline capable of extinguishing an otherwise valid claim. Equally, substantive engagement without an express reservation of rights may complicate reliance on a procedural objection later, particularly if the buyer argues waiver, estoppel or variation. Whether that argument succeeds will depend on the agreement and the parties’ communications.

Separately from the contract, section 5 of the Limitation Act 1980 generally gives a six-year limitation period for an action founded on simple contract, running from the date the cause of action accrues. In a warranty claim, that will commonly be the date on which the warranty was given or repeated, often completion, but the position depends on the drafting and the particular warranty. If the relevant obligation is contained in a deed, the statutory period may instead be 12 years under section 8, subject in each case to any valid contractual limitation provisions.

If a notice has landed on your desk and you are not certain whether it complies with the agreement, that is exactly the point at which an early review pays for itself. Our dispute resolution team reviews claim notices for sellers alongside colleagues in our corporate and commercial team who negotiate these agreements daily, and an initial assessment of the procedural position is usually a short piece of work relative to the sums at stake.

The contractual limitations that often decide the outcome

Seller protections in a well negotiated agreement do a great deal of quiet work. Before the merits are ever argued, the following provisions frequently reduce or remove liability:

• De minimis and aggregate thresholds. Individual claims below a stated figure are usually excluded entirely, and the buyer often cannot claim at all unless qualifying claims together exceed a further threshold. Whether the buyer then recovers the whole amount or only the excess above that threshold depends on the precise wording, and the difference can be substantial.
• The overall liability cap. Total seller liability is normally capped, frequently at a percentage of the consideration received, with separate and sometimes lower caps for particular categories of warranty. Where a claim is notified at a headline figure well above the cap, your practical exposure may be far smaller than the letter suggests.
• No double recovery and third party recoveries. Agreements typically prevent the buyer recovering twice for the same loss, and require it to pursue insurers or other third parties, or to account to you for sums recovered. Corresponding savings, such as a tax benefit arising from the same matter, are often required to be brought into account.
• Post-completion conduct and changes in law. Losses caused or increased by the buyer’s own actions after completion, by changes in accounting policy, or by a change in law after the date of the agreement, are commonly excluded. Buyers regularly present a figure containing elements that fall squarely within these carve outs.

Why the disclosure letter is usually your strongest defence

The disclosure letter qualifies your warranties, and it is often more valuable to a seller than any other part of the transaction file. Where a matter has been fairly disclosed against the relevant warranty, the buyer generally cannot claim on it, because it bought with knowledge of the position. The battleground is what fair disclosure means in your particular agreement, and how much detail was required for a disclosure to be effective.

The wording matters. Some agreements require disclosure in sufficient detail to enable a reasonable buyer to identify the nature and scope of the matter disclosed. Others deem everything in the data room to have been disclosed, which is far more favourable to sellers. Where a buyer argues that a general reference in a data room folder was insufficient, the outcome turns on the interaction between the disclosure standard, the specific disclosures given and the warranty said to have been breached. Reconstructing that picture accurately, folder by folder if necessary, is often the single most productive exercise in defending a claim.

The buyer’s own knowledge matters too, though less than sellers assume. Unless the agreement expressly says the buyer cannot claim for matters it knew about, general knowledge is not automatically a defence, so the disclosure record rather than the buyer’s understanding tends to carry the weight.

Common misconceptions we see from sellers

Some assumptions come up repeatedly, and each of them can prove expensive:

• “They had full access to the data room, so they cannot complain.” Access is not the same as disclosure, and whether the data room protects you depends entirely on how the agreement defines disclosure. A seller who relies on this point without checking the drafting can find it falls away at the first hurdle.
• “It has been over a year, so I must be safe.” General warranty periods are often twelve to twenty-four months, but tax covenants commonly run for four to seven years, and allegations of fraud fall outside the contractual protections altogether. The critical date is also the date of valid notification, not the date proceedings are issued.
• “The company should deal with this, not me.” Warranties are given personally by the sellers, so the claim is against you rather than the business you no longer own. Any hope that your former company will handle the matter is usually misplaced, and its cooperation may now be within the buyer’s control.
• “I will ignore it and see what happens.” Silence rarely helps, and it can forfeit procedural advantages while the buyer builds its case and sets off against sums still owed to you. Engaging early, on a reserved basis and with advice, keeps far more options open.

How these disputes are usually resolved

Most warranty claims settle. They settle because both sides face real litigation risk, because quantum is genuinely uncertain, and because the costs of a fully contested High Court claim are significant in themselves. A well prepared response that sets out the procedural defects, the disclosure position, the applicable contractual limitations and a reasoned critique of the buyer’s loss calculation frequently produces a very different settlement discussion from the one the buyer expected.

Where the sums justify it, expert accounting input on valuation and on the shortfall between warranted and actual value can be transformative. Mediation is common and often effective, particularly where a consultancy arrangement or an outstanding earn-out means the parties must continue to deal with each other. If proceedings become necessary, the pre-action protocol and the court’s expectation of proportionate conduct shape the process, and the costs consequences of unreasonable behaviour on either side are real.

Outcomes and costs cannot sensibly be predicted in the abstract, because both depend on the drafting of your agreement, the quality of the disclosure record, the buyer’s appetite and the size of the claim. What we can say is that sellers who take advice at the notification stage tend to end up in a stronger position than those who wait until proceedings are threatened.

Deadlines and consequences to keep in view

The risks here are usually procedural rather than dramatic. A missed insurance notification, an unanswered notice, a payment of deferred consideration made without reserving rights, or an admission in a well intentioned email can each cost more than the underlying allegation. Conversely, a buyer’s failure to comply with the notice or proceedings deadline in your agreement can end the claim outright, but only if someone identifies it in time.

Further Reading in This Series

 The Most Common Warranty Claims After a Business Sale, on the categories of claim that arise most frequently under a share purchase agreement and what a buyer can realistically expect to recover in each.
 Warranty vs Misrepresentation Claims: What is the Difference?  on the difference between a contractual warranty and a pre‑contractual representation, the remedies available for each, and the effect of entire agreement and non‑reliance clauses.
 Warranty Claims After Selling or Buying a Business: A Practical Guide.  This guide explains what warranties are, how claims arise, the time limits and procedural steps involved, and what both buyers and sellers should do if a claim looks likely.

How the Jonathan Lea Network can help

We act for sellers of private companies and businesses in warranty, indemnity and tax covenant disputes, and we bring together two things that matter here, transactional understanding of how these agreements are drafted and negotiated, and litigation experience of how they are enforced. That combination allows us to assess a claim notice quickly and advise on the points that will actually determine the result.

Typically we will review your SPA or APA, the disclosure letter and the claim notice, advise on validity, time limits and the effect of the seller protections, help you assemble and preserve the disclosure record, deal with insurers where cover may respond, and take the lead in correspondence with the buyer’s solicitors. If the matter cannot be resolved commercially, we will advise clearly on the merits, the likely costs and the proportionality of defending proceedings, so that you decide with the full picture in front of you.

If a claim notice has arrived, or you have simply heard the buyer is unhappy and suspect something is coming, an early conversation is the sensible step. Do get in touch and we will tell you where you stand on both procedure and substance, and set out the realistic options before any position becomes fixed.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.