In a UK share purchase, the warranties and indemnities are the most heavily negotiated commercial provisions of the share purchase agreement. They allocate risk for the unknown and known liabilities of the target company between buyer and seller. The buyer wants comprehensive protection; the seller wants to limit exposure to a clear, capped, and time-limited set of contractual obligations. The disclosure letter — which carves out specific exceptions to the warranties — is the primary mechanism by which the seller transfers known issues to the buyer. UK W&I insurance is now used in most mid-market and larger transactions, with the buyer typically taking out a 'buy-side' policy that covers seller breach. This dramatically affects the negotiation: caps can be lowered, retention thresholds (the equivalent of an excess) can be applied, and certain exclusions become important. Whether or not insurance is used, the underlying warranties and indemnities still need to be carefully crafted — the policy responds to the contractual terms, not the other way around.
What is a Warranty and Indemnity?
Warranties and indemnities in a UK share purchase agreement are contractual statements of fact (warranties) and specific cost-shifting obligations (indemnities) given by the seller in respect of the target company. Warranties cover known and unknown matters; if a warranty is untrue, the buyer's remedy is damages (subject to caps and limitations). Indemnities cover specific identified risks (e.g., environmental liabilities, ongoing litigation, tax matters) and require the seller to reimburse the buyer pound-for-pound. They are governed by general English contract law, the Misrepresentation Act 1967, and the SPA's specific terms. Disputes are typically heard in the High Court (Business and Property Courts) or commercial arbitration.
Red flags to watch for
A general disclosure that 'all matters fairly disclosed in the data room are exceptions to the warranties' shifts huge diligence burden to the buyer and produces uncertainty over what was actually disclosed. UK case law (e.g., MAN Nutzfahrzeuge AG v Freightliner [2007]) has examined this — and modern practice typically requires specific disclosure with cross-references to the relevant warranty.
Caps are typical at 100% for tax and fundamental warranties, 25%-50% for general business warranties, and lower if W&I insurance is in place. A cap at 10% of consideration without insurance backing leaves the buyer materially exposed. The cap should be sized against the most likely material warranty breach value.
Most SPAs include a de minimis (no claim under £X) and a basket (no claims aggregating less than £Y). Combined with broad disclosure, these can immunise the seller from substantial cumulative liability. The thresholds should be calibrated to the deal size.
Tax warranties typically have 7-year notification windows (matching HMRC's investigation period); general business warranties typically 18–24 months; fundamental warranties (title, capacity) often 7+ years. Limits significantly shorter than these — particularly for tax — leave the buyer without a remedy for matters that take time to surface.
A warranty given 'to the best of the seller's knowledge' is much weaker than an absolute warranty. Without a defined knowledge group (which sellers count) and a defined standard (actual knowledge, deemed knowledge after due inquiry), the qualifier can immunise a wider class of claims than expected.
On UK transactions, a separate tax deed (covering pre-completion tax liabilities) and specific indemnities for known issues (litigation, environmental, regulatory) are standard. Caps on these indemnities — particularly when the underlying liability is uncapped at law — can leave the buyer unprotected against the very issues the indemnity was intended to cover.
Your legal rights
UK parties to share purchase agreements with warranties and indemnities are protected by: general English contract law (including the contra proferentem rule for ambiguous drafting); the Misrepresentation Act 1967 (s 2(1) actionable misrepresentation, s 3 limits on excluding liability); Companies Act 2006 (particularly s 17 on filed company information); the Limitation Act 1980 (general 6-year contractual limitation, 12 years for deeds, longer for fraud); the Sale of Goods Act 1979 (where the SPA includes asset transfer); and the Consumer Rights Act 2015 (where applicable). W&I insurance is regulated by the FCA. Disputes are typically heard in the High Court (Business and Property Courts) or LCIA arbitration.
Questions to ask before you sign
- 1How is the disclosure letter structured — specific cross-referenced disclosures or a general data-room sweep?
- 2What is the aggregate cap on warranty claims, and how does it relate to expected exposure with and without W&I insurance?
- 3What are the de minimis and basket thresholds, and what is the cumulative immunity they create?
- 4What are the time limits for notifying warranty claims by category (tax, fundamental, general)?
- 5What knowledge qualifier applies, and how is the seller's 'knowledge group' defined?
- 6What specific indemnities are included (tax deed, environmental, litigation), and are they uncapped or limited?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.