Warranty

‍A Warranty is a contractual promise or statement of fact made by one party to another, assuring that specific conditions are true at the time of the agreement or will remain true for a defined period, providing legal recourse if breached.

What is a Warranty exactly?

‍A Warranty in legal terms is a binding assurance embedded within contracts, particularly in business transactions such as share sales, mergers, or supply agreements. It differs from a mere representation by being explicitly part of the contractual terms, often surviving the completion of the deal. In Ireland, warranties form the backbone of buyer protection, allowing the purchaser to seek compensation if the warranted facts turn out to be untrue.

‍When you provide a Warranty, you are essentially guaranteeing the accuracy of information about your company's assets, liabilities, or operations. For instance, a seller might warrant that there are no undisclosed charges over assets or pending litigation. These assurances enable the other party to rely on your statements without conducting exhaustive independent verification, whilst holding you accountable through remedies like indemnities or price adjustments.

‍For startup founders, understanding Warranties is crucial during due diligence, as investors or acquirers will demand extensive warranty coverage. Breaching a warranty can lead to claims that erode deal proceeds or damage your reputation in future transactions.

Why are Warranties important in business contracts?

‍Warranties provide essential protection in commercial deals where full information asymmetry exists between parties. They allocate risk fairly, compelling the party with superior knowledge, such as the seller, to disclose material facts truthfully. Without warranties, buyers would face higher uncertainty, potentially stalling deals or inflating purchase prices to account for unknowns.

‍In Irish law, warranties trigger specific remedies upon breach, including damages measured by the difference between the warranted state and reality. This contractual mechanism fosters trust, encouraging smoother negotiations and completions whilst deterring misrepresentation.

What is the difference between a Warranty and a Representation?

‍Whilst both involve statements of fact, a representation typically induces the contract but does not survive closing, serving as grounds for rescission if fraudulent. A Warranty, conversely, is contractual and endures post-completion, allowing claims for damages even without fraud. Courts treat warranties as strict obligations, focusing on factual inaccuracy rather than intent.

How do you enforce a Warranty breach?

‍Enforcing a breached Warranty begins with notification within any survival period, often 12-24 months. The innocent party claims damages, potentially offsetting against purchase price or pursuing indemnity. In severe cases, an injunction may prevent ongoing harm, though most disputes settle commercially to avoid litigation costs.

What limitations apply to Warranties?

‍Warranties often include materiality thresholds, de minimis amounts, or knowledge qualifiers to prevent trivial claims. Disclosure letters qualify warranties by revealing known issues, rendering them ineffective against disclosed matters. Time limits also apply, balancing buyer protection with seller certainty.

When might a Warranty not survive completion?

‍Certain warranties, like title to shares, survive indefinitely due to their fundamental nature. Others lapse after an agreed period, reflecting diminishing relevance. Tax warranties frequently extend longer, given Revenue audit windows, ensuring comprehensive coverage where risks persist.

How do Warranties feature in M&A transactions?

‍In mergers and acquisitions, warranty and indemnity insurance has become prevalent, allowing buyers comprehensive protection without direct recourse to sellers. This facilitates cleaner exits for founders whilst reassuring acquirers. Irish deals increasingly bundle such policies, streamlining post-completion claims.