Corporate & Commercial Law

Duration of the seller’s indemnification obligations in share purchase agreements: an open issue

Collateral warranty arrangement and duration of the effects of the indemnity clause

The so-called “collateral warranty arrangement”, a nearly essential element of share purchase agreements, is traditionally made up of two clauses: the so-called “representations and warranties” and the indemnity clause.

By the first clause the seller offers the purchaser a representation of the assets and the financial situation (and of any other characteristic for which the purchaser has been able to obtain a representation from the seller during the negotiations) of the company whose shareholdings are being exchanged between the parties and warrants that said representation is true, correct and accurate[1].

Since the holdings to be transferred are the subject-matter of the sale regulated in the purchase agreement, it is of the essence for the purchaser that the seller’s “representations and warranties” offer a representation as analytical and in-depth as possible of the company in which the purchaser will become a stakeholder once the transfer is accomplished.

Should one or more of the “representations and warranties” given by seller turn out to be untrue, incorrect or inaccurate and therefore give rise to a liability, the indemnification system regulated by the indemnity clause shall apply. Upon occurrence of said liability, the seller, as a rule, will be obliged to pay the purchaser a sum of money such as to hold the same indemnified with respect to the abovementioned liabilities. This mechanism enables to neutralise negative effects on the market value of the holdings sold (and, hence, to re-establish the adequacy of the price agreed for the relevant sale) that would not have occurred if the specific event had not shown that the “representations and warranties” were untrue.

Among the various conditions attached to the enforceability of the indemnity clause (including the minimum materiality thresholds and the maximum amount to be indemnified) the time limits for the effectiveness of the seller’s indemnification obligation have the utmost importance. In practice, the duration of the effectiveness of the indemnity clause varies between 12 and 24 months and extends to longer periods in the cases where the event that may make the representations and warranties inaccurate hardly occurs shortly after the effective date of the transfer of holdings (the so-called “closing”)[2].

However, the parties’ freedom to determine the duration of the effectiveness of the indemnity clause is limited by the legal classification of the “representations and warranties”, as we will see below.


Brief overview of the legal nature of the “representations and warranties”

The issue is widely discussed, but, in a nutshell, the interpretations about the legal nature of the “representations and warranties” fall into two main trends.

The first trend, followed on several occasions by Italian case law, classifies the collateral warranty arrangement as promise of quality pursuant to Section 1497 of the Italian Civil Code: for our purposes, the main consequence of such classification is that the indemnification is subject to the limitation period of one year from delivery (in case of sale of shareholdings, from the effectiveness of said sale) provided for by Section 1495 of the Italian Civil Code and expressly referred to by Section 1497 of the Italian Civil Code. Since Section 2936 provides for the prohibition of derogation from the rules on limitation, according to the supporters of this theory, the collateral warranty arrangement clause that provides for a duration of the indemnification obligation longer than the term of one year from the closing should be considered void for being non-compliant with the regulations on limitation.

The second interpretation trend, instead, is that of the theories that relate the collateral warranty arrangement to a guarantee in a technical sense, attributing to the same an insurance or, anyway, a risk allocation function. Hence the operation mechanism of the collateral warranty arrangement would be autonomous from the concepts of fulfilment and “terminability” of the agreement and would instead be grounded on the following scheme: upon occurrence of an event proving the inaccuracy of the “representations and warranties”, the seller shall have to pay the purchaser the agreed indemnification, regardless of the event at issue being actually attributable to the seller itself, with the consequent possibility to extend the duration of the indemnity obligation beyond the limitation period under Section 1495 of the Italian Civil Code.


Conclusions: recent case law positions

By decision no. 16963 of 2014, the Supreme Court embraced the second interpretation trend described above, at least with regard to the inapplicability of the provisions of Sections 1495 and 1497 of the Italian Civil Code to the sale of shareholdings. More precisely, the Supreme Court has classified the indemnification by the seller as a pecuniary obligation ancillary to the purchase agreement, conditional upon the occurrence of any event that may determine an inaccuracy of the “representations and warranties” and, consequently, a damage for the purchaser[3].

Said classification allowed the Supreme Court to state that the right to enforce the indemnification would be subject to the ordinary limitation period of ten years.

However, following the openness shown by the mentioned judgement, subsequent decisions of the Supreme Court and other lower Courts have confirmed the applicability of Section 1497 of the Italian Civil Code (and, consequently, of the shorter limitation period provided for by Section 1495 of the Italian Civil Code) to collateral warranty arrangements contained in share purchase agreements[4].

Confronted with said uncertainty in ordinary case law, arbitration case law embraced instead the theory according to which the collateral warranty arrangement is not to be considered as linked to discipline of guarantees in the sale and purchase of goods set forth in the Italian Civil Code and, for that reason, the annual limitation period under Section 1495 of the Italian Civil Code is not applicable.[5]





This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with.
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[1] Customarily, during negotiations of share purchase agreements the parties and operators pay particular attention to the adjectives used to classify the representations and warranties (therefore it could be read in certain agreements that the seller had warranted to the purchaser that its representations are true and correct, but not that they are accurate or complete, and many other variations).

[2] A typical example is that of representations and warranties relating to tax, labour or environmental matters.

[3] See in this respect the comment of Tommaso dalla Massara in dalla Massara, La Cassazione su cessione di partecipazioni sociali e prescrizione dell’indennizzo pattuito in caso di sopravvenienza: per una nuova impostazione della questione in termini di obbligazione pecuniaria sottoposta a condizione sospensiva, in Diritto Civile Contemporaneo, year I, number III, October/December 2014.

[4] See, among others, Cass., 6 November 2014, no. 23649, in Società, 2015, 232 and Cass., 8 July 2015, no. 14255, in Arch. De Jure.

[5] See, among others, Arbitration board, 22 July 1994, in Riv. Arb., 1996, p. 789; Arbitration board, 16 July 1998, in Resp. Comunic. Impresa, 2, 1999, p. 241; Arbitration board, 7 April 2000, in Contr. Impr., 2000, p. 959; Arbitration board, 26 January 2005; Arbitration board, 14 November 2008.


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