- Business in Poland -

Reps & Warranties: How They Work and How to Limit the Seller’s Liability

Representations and warranties (“reps & warranties”) are provisions in an M&A agreement (e.g., an SPA) in which the seller describes the condition of the company or the shares at the time of the transaction (sometimes also as of closing). For the buyer, they are a key risk-allocation tool: if a statement proves untrue, the buyer may pursue contractual claims. For the seller, the priority is to structure reps & warranties liability so that it is predictable, limited, and proportionate to the price and the seller’s real impact on the business.

How reps & warranties work in M&A practice

Reps & warranties typically cover: title to shares, corporate compliance, material contracts, disputes, taxes, employees, intellectual property, real estate, regulatory compliance, and broader compliance matters. From the buyer’s perspective, they act as a “bridge” between due diligence and contractual liability. From the seller’s perspective, they create exposure—because even a minor inaccuracy may be treated as a warranty breach.

In Polish legal practice, reps & warranties are most commonly drafted as contractual undertakings, and claims for breach are generally based on contractual liability rules (Article 471 et seq. of the Polish Civil Code) and on detailed damages mechanisms agreed in the contract (e.g., indemnities, notice procedures, liability caps). Regardless, in certain circumstances statutory regimes may also apply—such as statutory warranty for defects (including legal defects) provided it has not been excluded or limited to the extent permitted by law, or tort liability, depending on the facts.

What is a warranty breach? Typical breach scenarios

What is a warranty breach in practice? It occurs when the seller’s warranty is not true. Disputes most often relate to:

• undisclosed liabilities (e.g., guarantees, contractual penalties, tax arrears),
• unreliable financial information,
• court or administrative proceedings the buyer was not informed about,
• employment law breaches (e.g., misclassification, employee claims),
• gaps in title to IP or other key assets.

In practice, whether a breach has occurred depends on the wording of the warranty (scope, carve-outs, qualifiers) and on what was disclosed in the disclosure materials. The method of calculating loss and causation under general contractual liability principles also matters, unless the parties validly modify those principles in the agreement to the extent permitted by law.

How to limit warranties: seller-side tools

In transaction negotiations, the most important mechanisms are those that reduce the seller’s liability in a way the buyer can accept. Below are the most commonly used solutions.

Disclosure and warranties: disclosures as a liability shield

Disclosure and warranties is the practice of disclosing—typically in a disclosure letter or schedule—facts that qualify as exceptions to the warranties. If the agreement provides that proper disclosure prevents a breach, the seller reduces the risk of claims for matters that were known to and described to the buyer.

Effective disclosure requires precision: general statements are usually insufficient where the contract requires “specific and complete” disclosures. Disclosure standards should be clearly defined in the agreement to reduce disputes about whether the buyer “could have found out”.

What is a knowledge qualifier and when does it help?

A knowledge qualifier limits a warranty to the seller’s knowledge (e.g., “to the best of the seller’s knowledge”). In practice, what matters is how “knowledge” is defined:

• whether it covers only actual knowledge,
• whether it also includes constructive knowledge (what the seller should have known using due care),
• who qualifies as the “knowledge group” (management board, CFO, department heads) and whether internal verification is required.

The narrower the definition of knowledge and the smaller the knowledge group, the lower the seller’s risk—often at the cost of price or additional buyer protections.

Materiality qualifier: the materiality threshold

A materiality qualifier limits liability to “material” breaches. It helps exclude minor inaccuracies with no real impact on the business. In practice, it is worth clarifying whether “materiality” is:

• financial (e.g., above a specified amount),
• operational (impact on the ability to run the business),
• regulatory (risk of sanctions or loss of permits).

In M&A transactions, a materiality qualifier is often combined with de minimis and basket mechanisms (claim thresholds) and a cap (overall liability limit) to keep risk within predictable boundaries.

Warranty survival period and liability limits

The warranty survival period is the time during which the buyer can bring a claim. It is standard to differentiate periods:

• shorter for business warranties (e.g., 12–24 months),
• longer for tax warranties (often aligned with tax limitation periods),
• longer or separate for title to shares.

In parallel, parties negotiate: a cap (maximum liability), de minimis (minimum value of an individual claim), a basket (aggregate threshold), and exclusions (e.g., no liability for matters disclosed in due diligence or in the disclosure letter). These provisions should be consistent with damages principles under the Polish Civil Code, unless the parties clearly and validly modify them by contract to the extent permitted by law.

W&I warranty insurance as an alternative to seller risk

W&I warranty insurance (representations and warranties insurance) can reduce the seller’s exposure—especially in private equity deals or exit transactions. The policy usually shifts part of the warranty breach risk to the insurer, but it does not remove the need for:

• robust due diligence,
• properly drafted reps & warranties,
• strong disclosure.

W&I has limitations: exclusions (e.g., known risks), deductibles/retentions, claim procedures, and evidentiary standards. In practice, this requires aligning the SPA wording with the insurance terms.

The most common seller mistakes in reps & warranties

• Overly broad warranties without qualifiers (no materiality qualifier and no knowledge limitation).
• Disclosure that is formal but vague, without supporting source documents.
• Inconsistencies between what was uploaded to the data room and what is included in the disclosure letter.
• Unclear claims notification procedure and lack of forfeiture deadlines (if the parties intended to include such deadlines).
• Mixing statutory and contractual liability regimes without clear exclusions or modifications within the limits of the law.

Practical takeaway

Reps & warranties are not a “standard checklist” to copy and paste. Their real weight depends on definitions, carve-outs, and claims procedures. For the seller, the key is combining three elements: solid disclosure and warranties, sensible qualifiers (knowledge qualifier, materiality qualifier), and time and monetary limits (warranty survival period, cap, thresholds). This material is for information purposes only and does not constitute legal advice; for M&A matters where liability must be tailored to a specific business model, it is worth commissioning a document and risk review via the contact form at Contact us.

FAQ: Reps & Warranties—How They Work and How to Limit the Seller’s Liability

Does liability for reps & warranties arise automatically once an inaccuracy is found?

Not always. It depends on the contract wording, the claims notice procedure, deadlines, and whether the issue is carved out by disclosure, qualifiers, or claim thresholds. The Polish Civil Code rules on contractual liability also apply unless the agreement governs a given element differently (to the extent permitted by law).

What is a warranty breach if the buyer had the document in the data room?

It depends on the agreement. Some SPAs provide that data room disclosure is effective only if specifically referenced in the disclosure letter. Others accept “fair disclosure” in the data room as sufficient. Without precise drafting, disputes often focus on whether the buyer was properly informed.

How can you limit warranties without undermining the buyer’s trust?

Most often by providing specific and complete disclosure, setting reasonable claim thresholds, and clearly defining the scope of the warranties. Buyers typically accept limitations when they are consistent with due diligence findings and do not conceal risks.

What is a knowledge qualifier in a “best knowledge” version, and is it safe for the seller?

“Best knowledge” may be interpreted more broadly than “actual knowledge,” especially where the agreement expects internal checks. A safer approach is a precise definition: who is in the knowledge group, what knowledge counts, and whether it includes an obligation to review specified registers or documents.

Does a materiality qualifier exclude liability for legal compliance breaches?

Not automatically. Where a warranty concerns legal compliance, a materiality threshold may not capture regulatory risks that are “immaterial” financially but serious in terms of reputation or sanctions. It is worth clarifying in the SPA how materiality is understood in this area.

Can the warranty survival period be shortened below 12 months?

The parties may agree a shorter period, but market acceptability depends on the company profile and risk factors (e.g., reporting cycles, audits, taxes). For taxes and title to shares, longer periods are often negotiated.

Does W&I warranty insurance always eliminate the seller’s liability?

No. Policies typically contain exclusions (e.g., known risks), and the SPA may still impose partial seller liability—for example up to the retention/deductible amount or for fundamental warranties. The SPA must be aligned with the insurance terms.

Bibliography

1. Act of 23 April 1964 – Polish Civil Code (consolidated text: Journal of Laws 2024, item 1061, as amended), in particular Article 471 et seq.