A warranty breach is not yet a recoverable claim

Breach and loss are separate enquiries

A warranty establishes a contractual allocation of risk. If the stated fact was untrue at the agreed testing date, the seller may be in breach under art. 6:74 DCC. That answers the first question. It does not answer what sum, if any, is due to the buyer.

The statutory starting point is the law on damages in Book 6 DCC. Loss must be caused by the breach and be sufficiently connected to it to be attributed to the seller. Recovery may be reduced where circumstances attributable to the buyer contributed to the loss. Those rules are often modified in a share purchase agreement because they leave too much uncertainty for a negotiated acquisition.

The distinction matters most where the warranty concerns the target. An unpaid tax liability, a customer claim or an overstatement in the accounts may reduce the target's net assets. The legal claimant under the SPA is normally the buyer, not the target. The buyer therefore needs to establish its own loss rather than simply identify a cost incurred by the company.

The value of the shares is not the target's invoice

The familiar measure is the difference between the value of the shares as warranted and their actual value at the relevant date. This is often called the difference-in-value approach. It requires an assessment of how the undisclosed matter affected the price paid, rather than an automatic pass-through of the target's expense.

A EUR 800,000 liability at the target will sometimes reduce share value by EUR 800,000, but not invariably. It may have been reflected in working capital, offset by a tax asset, absorbed by a price-adjustment mechanism, or have a different effect on enterprise value. Where the buyer acquired less than 100 per cent of the shares, a claim based on the target's entire loss can also overcompensate the buyer unless the contract identifies the intended treatment.

The statutory rules on conformity and timely complaint form the background law, but sophisticated share purchase agreements commonly rely on their own warranty and claims regime. Parties also regularly exclude rescission and adjustment for mistake, to the extent permitted by law. Reasonableness and fairness remain relevant to interpretation and the limits of contractual effect, but they are not a substitute for a clear loss clause.

The loss clause should settle the overlaps

A workable claims regime identifies the permitted measure of loss, the calculation date and the party entitled to payment. It also addresses whether a claim is reduced by a benefit that the buyer or target has received. Third-party recoveries, tax benefits and insurance proceeds are common examples, but their treatment should distinguish a certain recovery from a contingent one.

Mitigation deserves equally careful treatment. The buyer and target may need to take reasonable steps to limit a developing loss, yet the seller should not acquire an open-ended right to direct the post-completion business. A clause can require reasonable mitigation, preserve the buyer's control of proceedings and credit net recoveries only when actually received.

Double counting is a separate issue. The same matter may affect completion accounts, leakage, an earn-out or a warranty claim. The agreement should prevent a second recovery while preserving a claim for any amount not already reflected in the purchase-price calculation. The relevant schedules should use the same definitions of debt, cash, working capital and permitted leakage.

Three measures, illustrated on a EUR 12 million transaction

The first model is a pure diminution-in-value clause. If a warranty breach reduces the value of the acquired shares by EUR 600,000, the payment due is EUR 600,000. On a EUR 12 million acquisition, the clause is appropriate where the disputed matter has a valuation effect that can be established reliably.

The second model is a euro-for-euro indemnity. If the target pays EUR 600,000 to settle a pre-completion tax exposure, the seller pays EUR 600,000, subject to agreed tax, insurance and third-party-recovery adjustments. This model is usually more suitable for a defined and identifiable liability, because it avoids an argument about the relationship between the liability and share value.

The third model is a price-adjustment formula. If completion accounts already reduce the price by EUR 400,000 for the same matter, and the target later incurs EUR 600,000, the warranty payment is limited to EUR 200,000. The formula can state expressly whether the buyer's ownership percentage applies. Where no price adjustment has been made for the matter, a buyer of 80 per cent may agree that EUR 480,000 of the EUR 600,000 is recoverable, or negotiate for full recovery where the economic risk is otherwise borne by the buyer.

The choice is commercial as much as legal. The SPA should state whether the remedy is a debt, damages or a price adjustment, how losses are calculated, when credits arise and whether payment belongs to the buyer or the target. Those points determine whether a proven breach becomes a recoverable claim.

Claims notices should preserve the calculation

The notice procedure should be proportionate to the information available when a claim first emerges. It can require a good-faith estimate and a description of the relevant facts, while allowing the amount to be updated as the underlying liability is determined. A requirement to state a final loss too early can create a procedural dispute before the substantive loss is capable of calculation.

The agreement can also distinguish a direct claim from a third-party claim. Third-party claims require control of defence, consultation, settlement authority and protection of privilege. Those provisions should sit with the agreed loss measure, so that a settlement at target level, insurance recovery and any payment under the SPA are treated consistently.