Liability and guarantees in the purchase of a company in Germany

Warranty Liability, Contractual Clauses and Statute of Limitations in Germany

In the context of a company or firm sale in Germany, it is regularly important for the seller to reduce his liability risk as much as possible. It is not uncommon for the seller to sell his life's work with the aim of being able to use the purchase price as a carefree retirement provision. In contrast, the buyer is interested in extensive guarantees with regard to his ideas of the target company in Germany. Read our introduction to liability in the purchase of a company below.

Further information can be found here:

• Acquisition of a company from the seller's point of view
• Company purchase from the buyer's point of view

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Own liability concept with guarantees in german practice

In the german company purchase agreement, the legal regulations regarding the seller's liability for material defects and defects of title (warranty regulations) are regularly waived. The reason for this is, among other things, that the liability stipulated by german law and, in particular, the complete reversal of the company purchase is considered to be of little interest to the buyer and seller.

The german statutory liability regulations are replaced by an independent liability regime, the so-called guarantee liability. Almost without exception, the seller will guarantee the buyer, for example in the context of a share deal, that he is the owner of the shares to be sold and that they are not encumbered with third-party rights. In addition, the scope of the guarantee varies depending on the size of the transaction.

In the event of a breach of warranty, in german practice, the seller is generally liable regardless of fault. In terms of content, he is obliged to restore the condition that would exist if the warranty had been complied with. Alternatively, he must pay damages.

Detailed information on disputes after a company purchase in Germany (post-M&A disputes) can be found here: Post-M&A dispute as well as on contesting the company purchase agreement.

Avoiding liability through disclosure in german practice

Warranty provisions contain disclosures on individual topics. For example, in german practice, you will typically find provisions such as:

"Schedule 1 lists all proceedings before state courts or arbitration tribunals and administrative proceedings to which the Company is a party at the time of entering into this Agreement or which have been threatened against it in writing up to the time of entering into this Agreement. There are no judicial or administrative decisions or settlements, in each case, from which the Company still has obligations at the time of entering into this Agreement."

or

"Exhibit 2 contains a complete and correct list of all employees and freelancers of the Company as of the date of execution of this Agreement."

These examples show that the seller in Germany can discharge itself through the so-called disclosures or disclosures typically contained in the attachments to the contract. The related idea is that the buyer cannot derive any claims from facts explicitly disclosed to it.

Beyond the central element of the disclosure of risk-relevant facts, the german company purchase agreement offers further possibilities for the seller to reduce his liability risk, as outlined below:

Further knowledge of the purchaser

In Germany, the liability of the purchaser can be limited by the fact that positive knowledge of the purchaser going beyond the aforementioned disclosures, or even his grossly negligent ignorance, has a liability-excluding effect. This can be particularly significant when carrying out due diligence, in the course of which various facts and documents are disclosed to the purchaser.

Liability allowance/liability exemption limit in Germany

Another element of liability limitation in Germany is the introduction of a liability allowance or a liability exemption limit. This means that the seller is only liable above a certain level of damage and then either for the full amount of the damage (liability exemption limit) or only for the damage above the defined limit (liability exemption limit).

Maximum liability amount in Germany

The seller will also try to limit his liability risk upwards by means of a maximum liability amount (cap) which applies to all warranty breaches in total. The maximum liability amount in german practice is regularly set in relation to the purchase price and should not exceed it.

Subjective guarantees in Germany

Without further elaboration, the warranties given by the seller are linked to the objective factual situation. If the guarantee is objectively false, the seller is liable in Germany.

In order to limit liability from the point of view of the business seller, individual warranties can be formulated in deviation from this in such a way that not the objective factual situation, but only the knowledge of the seller is decisive for the occurrence of a warranty case.

For example, no seller will want to guarantee that all applicable german laws have been complied with in the course of the target's ongoing business operations. If such a guarantee is demanded, it should at most be based on the "best knowledge of the seller" (to be defined). The seller is subsequently liable under the warranty only if it knew that violations of the german law had been committed.

Limitation of german warranty claims

Finally, the german company purchase agreement should also contain a provision on the limitation period, in particular for the buyer's warranty claims.

Without such a provision, the 3-year standard limitation period would apply, which, moreover, would only start to run from the end of the year in which the purchaser becomes aware of the circumstances giving rise to the claim or could have become aware of them without gross negligence.

This can lead to long periods of limitation. In order to avoid the uncertainty associated with this for the seller, periods of limitation are regularly agreed which are not dependent on knowledge and which in practice are usually between one and five years.