When you are selling a business, you would like to walk away and move on without the risk of being liable for any warranty claims after you have sold the business.
The legal word of the law states that you are liable for any product liability / warranty claim as long as your legal entity is ‘in business’. This could mean the following, outlined in two extreme examples:
- You sell a building company that offers 10 year warranties. You sold the business because you were juggling two territories that ran under the same legal entity. You run two franchised territories under the same legal entity and you decide to sell off one territory as it is too hard to manage both territories. 8 Years after you have sold the second territory, a warranty claim comes in regarding a leaky building you have build 9.5 years ago. Legally, because the existing business still has the legal status of the business that sold the second territory, you are now liable for any damage that is claimed under that warranty.
- second example: You have sold an automotive business 12 months ago because you wanted to retire. You have closed down any legal entity that had anything to do with that particular business. The automotive business that you have now sold offered 24 months product warranties. You have closed down the company as soon as possible after you have sold the business. A client comes back with a warranty claim to the new owner for a job done 15 month ago. Because the company of the vendor is no longer ‘active’, the warranty automatically falls under the responsibility of the new owner because your entity is no longer trading.
In my opinion, this leaves a lot of scrutiny and room for interpretation.The buyer, as well as the seller, need to be aware of all consequences of such scenarios. This information should be sought in the Due Diligence for a buyer, but a seller should be aware of this before he/she enters the process of selling their business!
Its much like the difference between a lease being re-assigned (where the seller could be liable for the duration of the remaining lease if the buyer defaults on payments) or a new lease being signed (where the landlord can not fall back on the previous tenant for default payments).
There is no mention of Product Liability in the General Terms of the Sale & Purchase Agreement. This means that the easiest way to avoid any future disputes is to agree a clear cut off date regarding who is responsible until when if a faulty product comes back after settlement date. All these details should be outlined as a clause/warranty in the Sale and Purchase Agreement. This could be 6 months from settlement date or 12 months from the settlement date: as long as both parties agree on the specific time period.
In most cases, looking back at the 30+ business I have sold, if something was installed faulty or there was an actual product fault detected, you would hear about it within 6 months. This may vary per industry.
To avoid any future disputes between buyer and seller after settlement, I recommend to include a Product Liability Clause in the contract. It would read something like this*:
20 PRODUCT LIABILITY
20.1 The Purchaser assumes no liability for any products supplied by the Vendor and the Vendor shall promptly indemnify the Purchaser against any claims bought against the Purchaser in respect of any products supplied by the Vendors prior to the date of settlement of this agreement provided the purchaser has first referred the claim to the Vendor for its reasonable consideration and provided further that the Purchaser, where necessary, has taken all reasonable steps to obtain reimbursement from any other party having an obligation in this regard and investigated the validity of the claim. Should any replacement product be required to satisfy any such claim the Purchaser shall provide such product to the Vendor at the cost price in order to rectify said claim.
20.2 The Vendor shall indemnify the Purchaser for any claims for up to 6 months after settlement date and only for standard work done prior to the settlement date
20.2 The Vendor shall indemnify the Purchaser for any claims for up to 12 months after settlement date (or before 20,000kms warranty period) regarding transmission overhauls
20.3 Warranty work will be charged out to the vendor at no more than $60 per hour and parts will be charged out to the vendor at cost
*Please ensure you ask advice from your solicitor to ensure you use the correct wording before you put this into any contract!
