In a business sale, negotiations often focus at first on price or the industrial rationale. But when the deal reaches its decisive phase, the true economic–legal backbone of the agreement comes into view: the Reps & Warranties (R&W)regime, also referred to as contractual representations and warranties.

What are Reps & Warranties (R&W)?

R&W are a set of statements included in the sale and purchase agreement and made by both parties to a transaction (seller and buyer) although, in practice, primarily by the seller regarding the condition of the company being sold and, in particular, its most relevant aspects. Generally, they relate to potential risks which are governed by an agreed general liability framework.

R&W translate the findings of the due diligence into a precise allocation of risk, determining which contingencies the buyer assumes, which the seller retains, and what happens if the reality of the business does not match what was stated.

Examples of R&W that a buyer might request from the seller include:

  • That the seller has disclosed all material facts affecting the buyer’s decision.
  • That the assets being sold comprise all of the business assets and are in good condition and free of encumbrances.
  • That the information provided by the seller to the buyer is complete, accurate and not misleading.
  • That there are no undisclosed liabilities for which the seller is responsible.

In Spain, legal action for hidden defects is limited, because the time limit to hold the seller liable for potential hidden defects affecting the company expires six months from the date of acquisition, as provided by Article 1490 of the Spanish Civil Code. As a result, the R&W regime becomes essential, as it allows the parties to strengthen contractual protection.

In short, at a time when contractual standards are increasingly converging with wider European practice—especially in private equity—the use of R&W has continued to grow, and they have become an indispensable legal tool for structuring efficient, balanced transactions aligned with international M&A market practice.

Scope of R&W

The content of an R&W package is typically structured into three main blocks, each with specific objectives and characteristics:

  1. Fundamental warranties: These form the core of the agreement and cover essential matters such as title to the shares, legal capacity to dispose of them, absence of encumbrances and validity of corporate approvals. In practice, no M&A transaction can close without adequate coverage of these points. They are essential contractual conditions and are usually subject to an enhanced liability regime, often uncapped or with a high cap.
  2. Business warranties: This block covers the most relevant operational and strategic elements: financial statements, absence of undisclosed liabilities, key contracts, intellectual property, technology, environmental risks, among others. This is where most technical negotiation takes place, representing approximately 80% of the adjustments and discussions between the parties.
  3. Tax and employment warranties: Due to their historic nature and connection to specific legal obligations, these warranties are treated separately, with time limits aligned to the applicable statutory limitation periods. In transactions where there is a gap between signing and closing, this package is often updated at closing through a bring-down mechanism, ensuring that the statements and warranties reflect the company’s position at that date.

Limitations of R&W

Because representations and warranties are designed to cover potential risks that may not have been identified and operate under an agreed general liability framework, it is common to include certain specific limitations:

  • Time limits: A defined time period is typically agreed, as the seller cannot be liable indefinitely. A maximum liability period is commonly set between 12 and 36 months from closing. However, employment, tax and administrative liabilities are typically carved out, and aligned instead with their applicable statutory limitation periods.

  • Financial limits: Several financial limitations may be agreed, including the following:

    • Caps: A maximum limit on the seller’s liability for breaches of warranties. This sets the maximum amount the buyer can claim, providing economic certainty and predictability. Fundamental warranties often have their own cap or, in some cases, sit outside the general cap.
    • De minimis: A minimum claim threshold designed to prevent claims for insignificant amounts. A claim is only permissible if the loss exceeds that minimum, focusing resources on truly material risks.
    • Basket: An aggregate threshold of losses that must be reached before the buyer can claim. It can be a tipping basket (once reached, all losses are claimable) or a deductible basket (only losses above the threshold are claimable). Its purpose is to professionalise the claims process and avoid disputes over minor amounts.
    • Survival: Defines the period during which warranties remain in effect and the buyer can bring claims. It ensures the seller is exposed only for a reasonable time, avoiding indefinite liability.

These mechanisms are essential to balance buyer protection and seller exposure, and they form a central part of the contractual architecture of any M&A transaction. In addition, under these clauses, the buyer’s limitation period to bring claims arising from breach of R&W is five years under Article 1964 of the Spanish Civil Code, which is significantly longer than the six-month period provided by Article 1490 of the same legislation.

Indemnities: what they are and how they differ from R&W

Indemnities (or indemnity clauses) are another type of contractual provision governing the consequences of a risk that is already known to the buyer, because it has been identified during due diligence. They are typically structured as specific coverages (tax indemnity, litigation indemnity, environmental indemnity, etc.) with bespoke amounts and time limits.

The difference between R&W and indemnities is therefore clear: while the former protect the buyer against potential risks that were not identified, the latter protect the buyer against risks that are already known.

In any event, both types of clauses are fundamental where the parties aim to complete a business transaction with full legal safeguards.

Conclusion

As set out throughout this article, the purpose of R&W—and indemnities—is to establish and allocate the risks inherent in the transaction. Their inclusion is therefore essential in any sale and purchase agreement, as their content can be highly significant given the impact that may arise if the contingencies described materialise.

For that reason, they must be drafted with great care, also with the aim of avoiding potential ambiguities that could give rise to disputes later.

At Maraz Corporate Finance, we provide end-to-end advice to family businesses, industrial groups and private equity funds in sale processes and corporate restructurings. Our team analyses the due diligence in detail and designs, together with the transaction’s legal advisers, a reps & warranties package tailored to the business’s real risks and balanced for both parties.

We bring experience in negotiation, the structuring of liability mechanisms (caps, baskets, indemnities, escrows and W&I insurance) and we model their economic impact on the final purchase price, ensuring each clause is aligned with market practice and the client’s transaction strategy.

If you are considering an M&A transaction, Maraz Corporate Finance can support you in maximising contractual protection, ensuring an efficient allocation of risk, and completing the transaction with full legal and financial certainty.

Paula Rey Bonastre

Analyst - Maraz Corporate Finance