Disclosure Letters and Warranties

All business transactions, such as a sale of business, sale of assets or sale of shares, will require the parties to make particular warranties. If a party breaches a warranty, this may allow the aggrieved party the right to either rescind or terminate the contract and/or make a claim against the other party.

Generally, the seller makes the majority of warranties. Therefore, to limit the warranties and potential liability of the seller, they may choose to provide a disclosure letter to the buyer. A disclosure letter contains information or statements made by the seller that relate to documents provided to the buyer.

Disclosures can be standard in nature. These types of disclosures relate to information that the buyer should have been aware of if they had conducted public searches or reviewed any documents or material.

In contrast, there are specific disclosures that the seller can make which relate to particular warranties.

Some of the warranties that may be affected by these disclosures include:

1. any outstanding accrued employee entitlements such as sick leave, annual leave and long service leave;
2. any litigation proceedings the business or seller are a party to; and
3. whether a business has any loans or liabilities owed by them or owed to them.

A disclosure letter should generally make the buyer aware of any warranties that the seller cannot make as there are serious ramifications should the seller be in breach of one or more of their warranties. This is effectively achieved by cross referencing the disclosures with the warranties to make it abundantly clear to the buyer which warranties are affected by the disclosures.

By disclosing information in a disclosure letter about particular warranties, the buyer will not have the right to make a claim against the seller in relation to these disclosures. Thus, it is in the best interests of the seller to ensure that all disclosures are in as much detail as possible, even if the buyer may potentially be aware of a particular issue.

The disclosure letter will need to be acknowledged and signed by all parties involved in the transaction.

Navigating a business transaction can be a difficult and complex process. It is essential to ensure that the correct disclosures are made to avoid potential issues in the future.

If you are involved in a business transaction or have an issue regarding disclosures or warranties, contact one of our expert corporate & commercial lawyers.