SPAS and ‘Conduct of Claims’ Provisions

Jan 7, 2020

Warranties and indemnities are a vital part of a corporate sale for both the parties, operating to reallocate the risks of the transaction between them.  Warranties are promises or assurances from a seller to a purchaser that a particular statement is true; while an indemnity is a promise to reimburse a party in respect of losses suffered.

Importantly, the sale and purchase agreement (SPA) will include ‘conduct of claims’ provisions governing how a third-party claim will be dealt with post-completion.  The parties will need to ensure that they negotiate appropriate conduct of claims provisions, but reaching the right balance can be tricky.

The seller will typically seek to retain a degree of control in defending any third party claims made against the buyer following completion in return for giving indemnities to the buyer. This reflects the commercial reality that sellers want to have the upper hand if claims were to arise post-completion.

Buyers will typically want flexibility, but a seller on the other hand may insist on having the veto on any proposals to settle the third party claim.

But where does this leave the purchaser?

Purchasers will understandably be unwilling to give way to the seller to any significant extent by allowing it carte blanche to conduct negotiations with third parties, appoint expert valuers, and so on. However, the purchaser is often able to insist on indemnities (or, if appropriate, more robust protection) against the purchaser’s financial costs of complying with such requirements of the seller. 

Common provisions

Common conduct of claims provisions that are triggered in the event of a claim post completion include: 

• Limiting the seller’s potential liability in respect of third party claims specified in the warranties and indemnities under the SPA.
• The purchaser will usually be expected to notify the seller within a stated period (for example 10 days) on becoming aware of any third party claim, and must also give reasonable details of it to the seller.
• The seller may instruct their professional advisors at their own cost to deal with the third party claim (although the purchaser’s consent would normally be required) if conduct is delegated to seller under the SPA. However, the purchaser will usually remain the named party in proceedings.
• Litigation privilege is an important consideration.  A 2008 ruling clarified that where sellers have the right under the conduct of claims provisions to control a third party claim, any documents generated for the purposes of that claim may well not be privileged against the buyer under the SPA indemnities.  Such documents include advice and evidence; such as expert reports, and could therefore be disclosed to the purchaser.

What does this mean?

Time and care are needed to skilfully negotiate final terms that protect your business interests but are also acceptable to both parties. Balancing the rights, obligations and their respective commercial interests could be a fine balancing act for which expert legal advice is vital. 

How can we help?

We advise business organisations of all sizes on the sale and purchase of a business and the related negotiations and legal documentation. We also advise businesses when there is a potential third party following completion. For strategic advice and representation, contact our expert corporate and commercial law solicitors at Herrington Carmichael as early as possible.  

Please contact Alex Canham on 0118 977 4045 and Mark Chapman on 01276 686222.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latest Articles & Legal Insights

Commercial Leases: What is a side letter?

Commercial Leases: What is a side letter?

A side letter is usually a short document that is ancillary to the main commercial lease, which is intended to vary, clarify or supplement the main lease terms

Preparing your business for sale?

Preparing your business for sale?

You’ve put effort into making your business into the success it is so far, so on exit what are the things you need to do to maximise the value for you?

I want to sell my business – FAQs

I want to sell my business – FAQs

Deciding when to sell your business and who to sell it to are some of the hardest decisions you will make as an entrepreneur.

Sign up

Enter your email address for legal updates on Property & Construction Law.

Please see our privacy policy regarding use of your data.


Top read insights in 2019

Contract Law

Material Breach of Contract

What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts. What constitutes a material breach and what are the remedies?

Property Law

Purchasing Land – Option Agreements

A developer and a landowner can enter into an Option Agreement. What are the strategies that can be employed by both landowners and developers to assist in such land deals?

Divorce and Family Law

What are the Tax Implications of a Civil Partnership?

Is there a significant tax saving to be made by a couple who are married or in a civil partnership that cohabitating couples simply don’t qualify for?  

Land & Property Dispute

Restrictive Covenants – The Price of Modification

Having identified that your land is burdened by a restrictive covenant and for the purposes of this article the covenant in question will be that only one residential building can be erected on the land. What do you do next?

Wills, Trusts and Probate

Is my Will applicable to my Spanish property?

You must be careful when relying on an English Will in relation to your Spanish property.

Award winning legal advice

We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.

Awards | Accreditations 

Accredited Conveyancing Lawyers
Accredited Immigration & Asylum Lawyers
Accredited Conveyancing Lawyers
Accredited Immigration & Asylum Lawyers

London

60 St Martins Lane, Covent Garden, London, WC2N 4JS 

+44 (0) 203 755 0557

 

Camberley

Building 2  Watchmoor Park, Riverside Way, Camberley, Surrey. GU15 3YL

+44 (0)1276 686 222

 

Wokingham

Opening Soon

+44 (0)118 977 4045

info@herrington-carmichael.com

© 2020 Herrington Carmichael LLP. Registered in England and Wales company number OC322293.

Herrington Carmichael LLP is authorised and regulated by the Solicitors Regulation Authority.

Privacy   |   Terms and Conditions   |   Cookies   |   Client Feedback