Table of contents

Drafting contracts

(e) Smoking out the facts

Smoking out the facts. The process of asking and negotiating warranties should trigger the disclosure of facts and events that might not otherwise become known. In this respect, warranties spur the seller on to discharge its ‘duty to inform’, whilst at the same time the purchaser effectively conducts its ‘duty to investigate’. Asking and negotiating the warranties is therefore a natural outflow of the due diligence investigation. (Ideally, a purchaser’s due diligence questionnaire will match the set of model warranties, which a purchaser would require if it had full bargaining power. At the same time, since such a set is likely ‘complete’, a seller would organise its data room consistent with such model warranties.)

For example, a purchaser will ask the seller of a company to make the following warranty:

Except as disclosed in Schedule 11, there have not at any time been any Spills or Contaminations on or from the Production Site.

When the seller receives this warranty as part of the first draft set of warranties, it has several options:

  1. refuse to make the warranty (either in general terms “take a closer and critical look at what you are asking” or more specifically “we are unwilling to make this warranty”). In this last case, the suggestion arises that the seller hides environmen­tal contaminations, and the purchaser will want the warranty even more;
  2. qualify and limit the warranty to the seller’s knowledge, so that the warranty is only incorrect if the seller fails to disclose relevant facts actually known to it. (Often, reference is made to the seller’s best knowledge: the qualification is non-sense because someone either ‘knows’ or ‘does not know’.) In many cases, the responsible former and current managers are named to further limit the scope of seller’s knowledge, imposing a necessity to scrutinise them about the warranties qualified as such.
  3. make the warranty, as well as a disclosure of all facts or events of which it is aware.
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Drafting contracts

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