There are various ways in which the buyer can limit the amount of due diligence it needs to carry out, whilst still protecting its position. As explained earlier, warranties (statements of existing fact), undertakings (promises to take certain action in the future) and indemnities (promises to reimburse the other party if certain costs arise) can be included in the contract to allocate/mitigate risk. Breach of these can result in the party that committed the breach having to pay damages (compensation) to the other party. The link between due diligence, warranties, disclosure and indemnities is explored below.
\n![](\"https://files.cdn.thinkific.com/file_uploads/370217/images/1ab/742/526/Picture_1.png\")
1. Due diligence: the due diligence process is designed to expose any potential issues.
2. Warranties and indemnities: these may be used to protect the buyer from some or all of the issues exposed during the due diligence process (as well as potential issues that have not yet come to light). The seller may give warranties that certain issues have been fixed, or undertake to fix certain issues before the deal completes. The buyer may also demand indemnities in respect of liabilities that have come to light as a result of the due diligence.
\n3. Disclosure: the seller can then disclose against the warranties in order to avoid a claim for breach of warranty at a later date if elements of the warranties do not reflect the actual position of the target.
\nDisclosure: in the context of transactions, “disclosure” refers to the exchange of legal, commercial and financial information between one or more parties, for the purposes of enabling those parties to better understand a particular business or group of businesses. Warranties are subject to any corresponding disclosures made by the seller, meaning sellers are motivated to disclose issues in the knowledge that the buyer may otherwise be entitled to sue under the warranties given in the sale agreement. Don’t confuse this with “disclosure” in the context of contentious work, which is based on a legal obligation to exchange documents relevant to a case or investigation for the purposes of enabling the parties to assess their legal position.
4. Further negotiation: if a seller discloses against a warranty and the buyer needs protection in light of this disclosure, the buyer may try to negotiate an indemnity or a reduction in price to compensate for this issue. For issues that could give rise to costs that cannot be quantified in advance, indemnities may alleviate bidder concerns. Where the costs of a particular issue are more certain, reducing the purchase price may provide a better compromise. Where these types of mechanisms are insufficient, a bidder may simply decide to walk away.
\n5. Liability caps: the seller is likely to then attempt to negotiate caps on liability, for instance de minimis provisions, aggregate baskets of claims and de maximum provisions, in order to reduce its potential future liability.
\nBasket / “tipping” basket: in the context of limitations on liability, a “basket” clause provides that a party who has given an indemnity will not have to pay out in respect of that indemnity until the other party’s losses exceed (in aggregate) an agreed amount. This can be structured as either: (a) a “tipping” basket, which means that once the agreed threshold is reached, the party that gave the indemnity must pay out in respect of the total value of the losses incurred to date; or (b) a “deductible”, which means that once the threshold is reached, the indemnifying party is only liable to pay for the losses that arise in excess of the agreed threshold. A basket can eliminate redress for relatively small claims, therefore helping to ensure that the indemnifying party will not have to carry out the burdensome administrative process of repeatedly paying out for proportionately small claims.
\nDe minimis clause: these clauses restrict the ability of an injured party to bring a claim unless that claim is worth at least a minimum specified amount. This prevents parties from having to spend time administering relatively trivial claims.
\nDe maximis cap: these clauses place a cap on the maximum amount that can be claimed for particular breaches of contract, therefore limiting the potential liability of the parties.
\n