Seller Liability After a Business Sale: Caps, Time Limits and Warranty Claims

Completion does not necessarily end a seller's risk.

A shareholder can transfer the company, receive the purchase price and leave management, yet still face a buyer claim months or years later if the Share Sale and Purchase Agreement leaves broad warranties, specific indemnities or continuing obligations alive after completion.

The seller's commercial objective is usually not to eliminate every possible claim. It is to know what can be claimed, how much exposure is possible, how long that exposure lasts and what process the buyer must follow before money can be recovered.

That is why limitation-of-liability provisions deserve to be negotiated as a complete risk framework rather than treated as boilerplate at the end of the SPA.

Why seller liability can survive completion

A seller may remain exposed after completion for several different reasons.

The most obvious are warranty claims. A buyer may argue that a statement given about the company was inaccurate. But exposure can also arise from specific indemnities, covenants that continue after completion, tax-related arrangements, confidentiality obligations or other promises that survive the transfer of ownership.

The first step is therefore to identify each category of surviving obligation rather than assuming every post-completion claim is governed by the same rules.

Start with the overall liability cap

A liability cap sets the maximum amount the seller may have to pay for defined categories of claim.

The important point is not simply whether there is a cap. The seller should understand what claims fall within it and what claims sit outside it.

Different categories may be negotiated differently. General warranty claims may be subject to one aggregate cap, while specific indemnities or other identified risks may have separate limits.

There is no useful shortcut here. A seller should not accept a percentage or figure merely because it is described as "standard". The appropriate cap depends on the purchase price, the nature of the warranties, the risks identified in due diligence and the bargaining position of the parties.

Use thresholds to stop small claims becoming a constant drain

Even where total liability is capped, sellers may also negotiate minimum claim thresholds.

A de minimis threshold can prevent very small individual claims from being pursued. An aggregate basket can require the buyer's qualifying claims to reach a defined amount before recovery becomes available.

These provisions are commercially important because without them, a buyer may be able to accumulate numerous minor complaints and turn ordinary post-completion friction into a claims exercise.

The seller should understand whether the basket operates as a threshold after which the whole amount becomes recoverable, or whether only the excess above the threshold is recoverable. The wording matters.

Put clear time limits around claims

A seller should know when the risk period ends.

SPAs often provide different contractual claim periods for different categories of exposure. General warranties, tax matters and specific indemnities may each be treated differently depending on the transaction.

The seller should avoid assuming there is one universal period. What matters is what the SPA actually says.

A useful review question is: for each type of claim, on what date does the buyer lose the right to bring it unless proper notice has already been given?

Make claim notification mechanics precise

A time limit is only useful if the notice provisions are also clear.

The SPA may require the buyer to give written notice before the deadline and to include particular information about the alleged breach, estimated loss or factual basis of the claim.

From the seller's perspective, vague notification wording can create uncertainty. A buyer should not be able to preserve an open-ended claim simply by sending a general complaint with no meaningful detail if the agreed drafting requires more.

The seller should therefore check who must receive the notice, when it must be delivered, what information it must contain and what the agreement says about late or defective notice.

Do not assume warranties and indemnities are limited in the same way

Known risks are often negotiated differently from general warranties.

If due diligence identifies a specific tax issue, dispute, regulatory problem or contractual exposure, the buyer may ask for a specific indemnity.

That can create a more direct route to recovery than an ordinary warranty claim. It may also be drafted outside some of the general limitations that apply to warranties.

The seller should therefore ask, for every indemnity: is it subject to the overall cap, the same time limit, the same thresholds and the same procedural protections?

If not, the commercial exposure may be much larger than the general liability section first suggests.

Understand how disclosure affects warranty exposure

Disclosure is one of the main ways a seller can reduce avoidable warranty risk.

If a warranty would otherwise be inaccurate, the seller may need to disclose the relevant fact in the manner required by the SPA and disclosure letter.

Whether a disclosed matter successfully qualifies a warranty depends on the agreed wording and disclosure structure. That is why simply placing a document in a data room should not be assumed to achieve the same result as proper contractual disclosure.

The practical lesson is that liability limitations and disclosure should be reviewed together, not as separate workstreams.

Control double recovery and overlapping remedies

One event can sometimes appear to support more than one legal or contractual route to recovery.

A buyer may allege a warranty breach, rely on an indemnity, seek a price adjustment or recover money from insurance or a third party.

From the seller's perspective, the SPA should be examined for protections against double recovery. The buyer should not recover twice for the same underlying loss merely because more than one contractual mechanism is available.

Where insurance or third-party recovery may be relevant, the agreement should also be checked for how those amounts interact with any claim against the seller.

Address mitigation and third-party claims

Some post-completion claims arise because a third party has made a demand against the company or buyer.

The seller may therefore want the SPA to address how those claims are managed. Depending on the transaction, this may include notice obligations, consultation rights, access to information or some level of participation in the defence or settlement of the third-party claim.

The seller should also consider whether the buyer is required to take reasonable steps to reduce avoidable loss before passing the full amount back to the seller.

The commercial concern is straightforward: a seller should not be exposed to a claim whose size is increased by decisions made entirely after control of the company has passed to the buyer.

Be careful with escrow, retention and set-off

A buyer may seek security for future claims by retaining part of the purchase price, placing money in escrow or obtaining rights of set-off against deferred consideration.

For the seller, these mechanisms affect more than liability. They affect payment certainty.

A RM10 million purchase price is commercially different if RM2 million is retained for two years, or if the buyer can withhold deferred payments whenever it asserts a claim.

The seller should therefore examine when retained money is released, what evidence is required before funds can be withheld, whether disputed claims can block payment and whether set-off rights are limited to properly established claims.

Identify carve-outs from the ordinary limits

Liability limitations may contain exceptions.

Depending on the SPA, certain matters such as fraud, deliberate concealment, title to the shares, authority to enter the transaction or specific negotiated indemnities may be excluded from some of the ordinary caps, thresholds or time limits.

The seller should read these carve-outs carefully. A limitation clause can appear protective while broad exceptions remove much of that protection in practice.

There is also a limit on how far a limitation clause can go in the other direction. Under section 29 of the Contracts Act 1950, a clause that absolutely restricts a party's right to enforce the contract through the ordinary courts is void — a principle the Federal Court applied in CIMB Bank Berhad v Anthony Lawrence Bourke & Anor [2018] to strike down a clause excluding all liability for breach. A drafted-too-aggressively cap or exclusion that tries to shut out the buyer's remedies entirely risks the same fate, which cuts both ways for a seller relying on it.

The key question is whether each carve-out is deliberate, proportionate and clearly defined.

Ask what happens to contingent claims

Some claims are not fully quantified when the contractual deadline arrives.

There may be an ongoing tax review, litigation, regulatory inquiry or third-party dispute whose financial effect remains uncertain.

The SPA should explain whether timely notice preserves that claim beyond the ordinary survival period and what happens if the underlying matter remains unresolved for a long time.

From the seller's perspective, a contingent claim should not become a mechanism for keeping part of the liability framework open indefinitely without clear limits.

Build a seller liability matrix before signing

A practical way to review the risk is to reduce it to a matrix.

This forces the seller to look beyond the headline cap and understand the complete liability regime.

When should a seller push back?

Warning signs include:

• general warranties with no meaningful aggregate cap;

• claim periods that remain open indefinitely;

• broad indemnities that sit outside all ordinary limitations;

• set-off rights that allow disputed allegations to delay payment;

• vague claim-notification provisions;

• buyer-only control of third-party claims where the seller bears the economic risk;

• carve-outs so broad that the negotiated limitations become largely ineffective.

None of these points can be assessed in isolation. The right position depends on the deal, the due-diligence findings and the commercial leverage of the parties.

How Legal That Works can assist

Post-completion liability is one of the areas where seller value can quietly be given back after the purchase price has already been agreed.

Legal That Works can assist sellers with reviewing and negotiating the liability regime as part of its Share Sale and Purchase Agreement service.

The objective is to leave the seller with a liability profile that is known, proportionate and capable of reaching a clear end-point.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.