Warranties in business sales: why they matter

Warranties in business sales: why they matter before, during and after completion

When selling a business, much of the focus naturally falls on price and timing. However, some of the most important and often underestimated protections for both parties lie in the warranties contained within the sale agreement.

For business owners, understanding how warranties operate before, during and after a transaction is critical to managing risk and avoiding costly disputes later down the line.

The recent High Court case Veranova Bidco LP v Johnson Matthey Plc & Ors ([2026] EWHC 1021 (Comm)) highlights just how significant the drafting of warranties and the accuracy of disclosures can be in determining whether a party successfully recover losses after completion.

Case spotlight: Veranova

Johnson Matthey PLC (JM), a global player in the pharma and biotech industry, was sold by its owner (Seller) to Veranova Bidco LP (Buyer), for a purchase price of circa £325 million.

The Sale Agreement drawn up between the two parties contained typical commercial warranties, given by the Seller to the Buyer, about the business (such as there being no current re-renegotiation of material contracts, which would negatively impact the business).

The Sale Agreement also rather unusually, limited the Seller’s liability under warranties only to acts of fraud or wilful misconduct.

As part of usual pre-contract disclosure, the Seller disclosed to the Buyer that part of its business included the sale of a drug to combat opioid addiction to a key client. The contract with this client contained a “price match” clause.

Furthermore, the Seller advised that the client had recently found the drug cheaper and that price re-negotiations under the clause were ongoing.

Unfortunately, JM’s understanding of the issue was more modest than was actually the case.

Subsequently, when the real impact of the re-negotiation came to light, the Buyer bought a claim for breach of warranty against the Seller and argued that the Seller’s disclosures were sufficiently inaccurate as to be fraudulent.

The court agreed that:

• The warranty given by the Seller was, indeed, false; and
• The Seller’s disclosure was inadequate.

However, despite this finding, the Buyer’s claim still failed. The Sale Agreement had limited claims to situations of “fraud” and the court found that this high threshold was not met.

The case highlights two key points:

• Ensure that disclosures are clear (and appropriately interrogated): general or vague wording can be an issue for both a buyer and a seller.
• Contractual limitations in the Sale Agreement can prevent recovery: even where a warranty is untrue.

What are warranties and why do they matter?

In simple terms, warranties are contractual statements made by a seller about a business. They typically cover key areas such as the accuracy of accounts, the status of contracts, compliance with law and company liabilities.

They perform several important functions:

• Risk allocation: they define who bears the risk if something turns out not to be true.
• Buyer protection: they give the buyer a right to claim compensation if the warranties are incorrect.
• Encouraging transparency: they incentivise sellers to disclose known issues openly so they can be addressed during negotiations.

For sellers, warranties are not merely standard legal wording, they are statements which they are effectively “standing behind”. If they prove to be inaccurate, they can (subject to agreed limitations) give rise to financial claims post completion.

Pre-completion: getting warranties and disclosures right

Before signing the Sale Agreement, the key focus for a seller should be ensuring that warranties are accurate and properly qualified through disclosure.

A disclosure letter sits alongside the Sale Agreement and allows the seller to identify exceptions to the warranties. If prepared correctly, it provides an important layer of protection by limiting the seller’s exposure to claims for matters that have been fairly disclosed.

However, the courts have made it clear that the quality of disclosure is critical. General or vague statements will not suffice. Sellers must provide enough detail for a buyer to properly understand and evaluate the nature and potential impact of any issue.

For business owners, the practical points are:

• Avoid vague or generic disclosures
• Be specific and transparent about known risks
• Ensure disclosures are clearly and accurately recorded in the agreed format, e.g. a disclosure letter.
• Seek legal advice throughout the disclosure process.

Crucially, informal discussions such as due diligence calls or email exchange will not usually form part of the agreed disclosure. The position is judged strictly by reference to what is included in the Sale Agreement and the disclosure letter and this is why it is imperative that such disclosures are documented and accurate.

During the transaction: managing risk and expectations

During negotiations, warranties become a key area for allocating risk between buyer and seller. This is often where commercial expectations and legal protections are balanced.

Key points typically negotiated include:

• Scope of warranties: how broad and detailed the statements are.
• Limitations on liability: such as financial caps, time limits and minimum thresholds for any claims.
• Reliance and “entire agreement” clauses: restricting claims based on statements made outside the Sale Agreement.

In some transactions, particularly where warranty and indemnity (W&I) insurance is used, the seller’s exposure may be significantly limited. In some cases, sellers may only be liable if the buyer can prove fraud or wilful misconduct, as is the case mentioned above.

This has important consequences. It means that even if a warranty is technically incorrect, the buyer may still be unable to bring a successful claim depending on how the Sale Agreement is drafted.

The key takeaway for business owners is simple but important: the wording of the Sale Agreement can be just as important as whether a warranty is correct!

After completion: when things go wrong

After completion, warranties are tested in practice. If an issue arises which breaches a warranty and causes loss, the buyer may seek to bring a claim. However, whether that claim succeeds will depend heavily on whether the matter was properly disclosed and the contractual limitations agreed in the Sale Agreement.

In the Veranova case, proving fraud was difficult. It is not enough to show that different individuals within a business held pieces of relevant knowledge. Instead, there must be at least one identifiable individual who knew the relevant facts, understood the warranty and knew (or was reckless as to whether) it was untrue.

This high bar means that, in some cases, a buyer may be left without a remedy even where a warranty is technically inaccurate.

Key takeaways for business owners regarding warranties

Whether you are selling a business for £100,000 or £100,000 million, the same practical principles apply:

• Invest time in getting warranties right: they are central to how risk is allocated between buyer and seller.
• Take disclosure seriously: vague ambiguous wording can leave a seller exposed.
• Understand the liability position in the Sale Agreement: particularly any caps or fraud-only claims.
• Work closely with your legal advisers: warranties and disclosures should reflect the true position of your business.

Warranties are not simply boilerplate clauses; they are one of the most important protection mechanisms in any business sale. As the recent court decision demonstrates, even where something goes wrong, the outcome will often turn on how those warranties and disclosures were drafted, negotiated and communicated.

For business owners, taking a proactive and transparent approach at an early stage can significantly reduce risk, protect business value, and help ensure a smoother transaction both at completion and beyond.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Corporate & Commercial team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.