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Warranties and guarantees.

How the contract allocates risk between buyer and seller and which limitations of liability are common.

BRANDAUER Rechtsanwälte
Your law firm

BRANDAUER Rechtsanwälte

Salzburg law firm for corporate, company and transaction law

Every transaction is handled by a coordinated team of lawyers, legal staff and specialists. In company acquisition matters we look at structure, contract, tax and liability together.

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When buying a company, the allocation of risk determines the true value of the deal. The statutory warranty under the ABGB fits poorly with the purchase of an entire business. The parties therefore work with independent contractual guarantees that define precisely what the seller stands behind.

A well considered warranty catalogue and clear limitations of liability protect both sides from later disputes. We draft the guarantees so that they match the findings of the due diligence, and we anchor cap, de minimis and basket in a balanced relationship.

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01 Question 1

Is this about a specific known problem or about general protection?

An already identified risk calls for a different contractual answer than general protection against hidden defects of the business.

All paths at a glance

Overview of all answers.

01

An already identified risk belongs in an indemnity that operates independently of the general liability limits.

Where a risk is already known, for example a pending case or a disputed tax question, an indemnity is the right tool. The seller indemnifies the buyer against precisely this loss, independently of the general warranty catalogue.

The advantage is that the indemnity does not fall under cap, de minimis or basket. The known risk thus stays fully covered, while the remaining warranties keep their limited scope. We draft the indemnity so that trigger, scope and handling are clearly regulated.

Start the SPA clause check →
02

As a buyer you keep the warranty catalogue broad and tie it closely to due diligence and disclosure.

From the buyer perspective a broad warranty catalogue is the central lever. It secures assurances on shares, financial statements, taxes, material contracts, employment relationships and intellectual property. Each warranty describes a state for which the seller stands behind.

The link to due diligence is decisive: what was reviewed flows into the warranties through the disclosure letter. That leaves no gaps, and disclosed points are deliberately allocated. We tailor the catalogue to the identified risks of your transaction.

Start the SPA clause check →
03

As a seller you limit liability through cap, de minimis and basket and consider a W&I insurance.

From the seller perspective the limitation of liability is paramount. Common features are a liability cap, a de minimis threshold and a basket above which liability arises at all. Added to this are clear periods for asserting claims.

In addition, a W&I insurance can shift the warranty risk onto an insurer and allow a clean break. We negotiate the liability limits in a balanced relationship and examine whether insurance is available and sensible for your transaction.

Start the SPA clause check →
The instruments compared

Warranty, guarantee, indemnity and liability limits

Four instruments allocate the risk differently. The table orders what each instrument stands for and which legal consequence it triggers.

Instruments for allocating risk in a company purchase at a glance
Instrument Purpose Legal consequence
Statute Statutory warranty Applies by operation of law but is dispositive and fits poorly with a company purchase Defects of the object sold under sections 922 et seq ABGB, often economically unsuitable
Guarantee Independent guarantee Fault-independent promise within the warranty catalogue Seller stands behind the assured qualities of the business
Indemnity Indemnity Covers a specifically known risk independently of the liability limits Full compensation of the particular loss, no cap and no basket
Limits Liability limits Cap, de minimis and basket limit the seller warranty liability Ceiling, trivial exclusion and threshold allocate the risk

The table offers an overview and does not replace an examination of the individual case. Which instruments fit together depends on the risk profile and the negotiating position of the parties.

Statutory warranty versus contractual guarantees

The statutory warranty under sections 922 et seq ABGB relates to defects of the object sold. In a share deal, however, the object of sale is the share and not the business itself. Defects of the business are hard to capture this way, which is why the statutory rules often fail to meet the economic expectations of the parties.

For this reason the parties agree independent guarantees in the sense of an abstract promise. The seller assures certain qualities of the business irrespective of fault, and the contract governs the consequences of a breach of guarantee independently. We recommend clarifying the relationship to the statutory warranty expressly in the contract.

The warranty catalogue

The warranty catalogue is the heart of the allocation of risk. It typically covers assurances on the existence and ownership of the shares, on financial statements, on taxes, on material contracts, on employment relationships, on intellectual property rights as well as on compliance with legal provisions. Each warranty describes a specific state for which the seller stands behind.

The scope of the warranties is closely linked to the due diligence: what the buyer has reviewed and had disclosed flows into the warranties through disclosure letters. We tailor the catalogue to the specific risks of your transaction, so that it leaves no gaps and does not burden the seller with unrealistic assurances.

Limitations of liability and indemnities

In practice the seller liability is limited. Common features are a liability cap, a de minimis threshold for individual claims as well as a deductible or threshold (basket) above which liability arises at all. In addition, the periods for asserting warranty claims are set out in the contract, because the statutory limitation rules do not fit well here.

For known or specifically foreseeable risks the parties agree indemnities, under which the seller indemnifies the buyer against a particular loss irrespective of the general limitations of liability. In addition, a W&I insurance can shift the warranty risk onto an insurer. We examine whether this route is sensible and available for your transaction.

How warranties are negotiated in the SPA process

Warranties do not arise in isolation but in the course of the contract negotiation. From the findings of due diligence the buyer shapes the warranty catalogue, and the seller responds with disclosures and liability limits. What is disclosed restricts the warranty liability, which is why aligning catalogue and disclosure is the core of the negotiation.

On the documents side the disclosure letter, the data room and the due diligence reports matter most. The disclosure letter allocates individual matters to the warranties and deliberately carves them out of liability. We make sure that these documents are cleanly interlocked, so that no dispute arises later about the scope and interpretation of the warranties.

Warning signs and next steps

Caution is warranted when the contract contains no liability cap, when warranties are vaguely worded or when a clear disclosure mechanism is missing. A warranty catalogue that does not match the findings of due diligence is also a warning sign, because known risks would otherwise fall through the cracks.

The sensible next step is the legal alignment of the warranty catalogue with the liability limits and the disclosure. We review the draft, close gaps and negotiate cap, de minimis and basket so that the allocation of risk remains workable for you.

This page gives a general overview of Austrian law and does not replace advice in an individual case. The specific circumstances of your transaction are always decisive.

FAQ

Common questions.

Why is the statutory warranty not enough when buying a company? +
The statutory warranty relates to defects of the object sold. In a share deal that is the share and not the business, which is why operational risks can only be reflected appropriately through independent contractual guarantees.
What do cap, de minimis and basket mean? +
The cap is the ceiling of seller liability, the de minimis threshold excludes trivial claims and the basket sets a threshold above which liability arises at all. These limits allocate the risk in a balanced way between the parties.
When does a W&I insurance make sense? +
A W&I insurance can shift the warranty risk onto an insurer, for example where the seller wants a clean break or the buyer needs additional security. Whether it is available and economical is something we examine in the individual case.
In depth

Tools and terms on this focus area

SPA clause check

The interactive check orders the warranty catalogue, indemnities and liability limits of your contract and shows where gaps threaten.

Warranty catalogue

What the warranty catalogue covers in a company purchase and how it connects to due diligence.

Warranties and liability limits checklist

The points that should be settled between warranty catalogue, cap, de minimis and basket before signing.
Related focus areas

This may also be relevant.

Company purchase agreement (SPA)

The share or asset purchase agreement at the heart of the deal: obligations, closing conditions, completion and protection cleanly drafted.

Purchase price and earn-out

Price mechanisms from locked box to completion accounts, variable earn-out components and securing future payments.

Due diligence

The structured review of the target company before purchase: spotting legal, tax and commercial risks before the purchase price is fixed.

Shape guarantees and limitations of liability?

We draft the warranty catalogue and negotiate cap, de minimis and basket. Call us or send an email.

+43 662 6280000 kanzlei@brandauer-rechtsanwaelte.at Book initial consultation (72 euros)
Contact

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BRANDAUER Rechtsanwälte GmbH Giselakai 51 5020 Salzburg