#Warranty and Indemnity Lawyer in France (Garantie d’Actif et de Passif)

Warranty and Indemnity Lawyer in France (Garantie d’Actif et de Passif)

The warranty and indemnity, known in France as the garantie d’actif et de passif (GAP), is the clause by which the seller of a company undertakes to compensate the buyer if liabilities not disclosed at the time of the sale materialise afterwards, or if declared assets turn out to be overvalued. It is one of the most important documents in a sale transaction, and one of the most fiercely negotiated.

For the buyer, the GAP is protection against hidden risks discovered after closing. For the seller, it is a financial commitment that may last several years after the sale. Each party has an interest in its terms being precisely defined.

What does a French warranty and indemnity cover?

The GAP in principle covers all undisclosed liabilities and all reductions in assets that existed at the date of sale but were not disclosed in the accounts. Its actual scope, however, depends on how the clause is drafted: the areas covered (tax, employment, commercial, environmental, litigation), the exclusions, the seller’s representations on which it rests and the thresholds below which it does not apply.

We define this scope precisely for each transaction, taking into account the results of the due diligence and the risks identified.

Financial protection mechanisms: thresholds, baskets, caps and security

The GAP generally provides for a trigger threshold (below which claims for compensation are not admissible), a basket (deductible), i.e. an amount not compensated and borne by the buyer, an overall cap on compensation and a cap per type of risk. These financial parameters are at the heart of the negotiation between the parties.

The warranty may be secured by placing part of the sale price in escrow, by a bank guarantee or by warranty and indemnity insurance. Each mechanism has its own advantages and constraints.

How long does the warranty last, and how is a claim made?

The duration of the warranty varies according to the areas covered: shorter for ordinary commercial risks, longer for tax risks (aligned with the tax limitation periods) and, often, for environmental risks or the seller’s fundamental representations. A duration must nevertheless be provided for: Article 1210 of the French Civil Code (Code civil) (in French) prohibits perpetual commitments.

The time limits for notifying claims, the compensation procedures and the rules for disputing claims must be precisely defined to avoid disputes over procedure rather than substance.

Acting for the seller and for the buyer

We act on both sides of the table. For the seller, we work to limit the scope of the warranty, to define clearly the representations on which it rests, to calibrate the financial protection mechanisms and to secure the conditions for enforcing it. For the buyer, we make sure that the warranty actually covers the risks identified during due diligence and that the compensation mechanisms genuinely work in practice.

See also our dedicated pages: SPA lawyer, due diligence lawyer and mergers and acquisitions lawyer.

When to consult us

Before a letter of intent is finalised, to anticipate the main terms of the warranty. During due diligence, to identify the risks that will need to be covered. When negotiating the final transaction documents. When a claim arises and the warranty is called upon.

Every situation is different: the information on this page is general and does not replace legal advice tailored to your case. The firm makes no promise of outcome; it commits to the means it deploys.