Key points
- Under the warranty and indemnity (garantie d’actif et de passif, GAP), the seller undertakes to indemnify the buyer if undisclosed liabilities arise or if declared assets prove to be overvalued after the sale.
- The scope rests on the seller’s representations (accounts, liabilities, tax, contracts, disputes, assets), balanced by disclosures that limit the seller’s liability to known facts.
- The financial negotiation covers the trigger threshold, the basket (deductible), the overall cap and the specific caps, none of which is set by law.
- The duration varies by area: shorter for commercial risks, often aligned with the tax authorities’ limitation periods for tax risks.
- Payment under the warranty can be protected by placing part of the price in escrow, by a first-demand bank guarantee or by warranty and indemnity insurance taken out by the buyer.
The warranty and indemnity (garantie d’actif et de passif, GAP) is the clause by which the seller undertakes to indemnify the buyer if liabilities not disclosed at the time of the sale arise afterwards, or if declared assets prove to be overvalued. No statute governs it: its content is a matter for negotiation, and the signed contract has the force of law between the parties (Article 1103 of the French Civil Code (Code civil) (in French)). Its negotiation is often one of the longest and most tense phases of a sale transaction. It sets structurally opposed interests against each other: the buyer seeks broad protection, while the seller seeks to limit its commitments in time and in amount.
See also: drafting an SPA (in French).
What should the warranty cover?
The first point of negotiation is the scope of the warranty: which areas does it cover, and on the basis of which representations by the seller? The seller’s representations and warranties form the basis of the GAP. They cover the accuracy of the accounts, the absence of undisclosed liabilities, compliance with legal obligations, the tax position, current contracts, potential disputes, ownership of assets and the human resources position.
On the seller’s side, the work consists in drafting representations that are precise and limited to known facts, and in including disclosures for any matter likely to trigger a claim under the warranty. An overly broad representation exposes the seller to claims for facts it could not have known.
On the buyer’s side, the aim is to obtain representations broad enough to cover the risks identified during due diligence, and to limit the scope of the disclosures made by the seller.
Thresholds, basket and caps: the financial parameters
The financial negotiation of the GAP covers several parameters: the trigger threshold (the amount below which claims for indemnification are not admissible), the basket (deductible, the amount borne by the buyer), the overall cap on the warranty (generally expressed as a percentage of the sale price) and the specific caps for each category of risk.
No legal rule sets these amounts: they depend on the sector, the size of the transaction and the balance of power between the parties. Higher specific caps are sometimes negotiated for tax or environmental risks.
How long should the warranty last?
The duration of the warranty varies according to the areas covered. For ordinary commercial risks, a shorter period after closing is generally agreed. For tax risks, the duration is often aligned with the tax authorities’ limitation period: for corporate income tax, it runs in principle until the end of the third year following the year for which the tax is due (Article L. 169 of the French Tax Procedure Code (Livre des procédures fiscales) (in French)), with longer periods in certain cases. For certain specific risks (environmental risks, breaches of fundamental representations), longer periods may be negotiated.
Protecting payment under the warranty
The warranty is only worth something if the seller is able to pay when a claim is made. Several mechanisms can protect payment: escrow of part of the sale price, a first-demand bank guarantee, or warranty and indemnity insurance (W&I insurance) taken out by the buyer. These mechanisms have different costs and constraints and must be assessed according to the circumstances of each transaction.
For assistance with negotiating a GAP, see our dedicated pages on warranty and indemnity lawyers and M&A lawyers.
