Guarantees are basically nothing more than announcements by the seller/buyer about the condition of some aspect of the business.

However, such a communication in the form of a guarantee entails an allocation of risk, and this is in the sense that the one giving the guarantee bears the risk in case such a guarantee is not correct and is thus violated.

Guarantees thus cover uncertainties by agreeing on the allocation of risk to which the guarantee refers. Guarantees therefore cover undisclosed or known risks. This is in contrast to agreements on indemnifications (see below).

For example, the seller guarantees to the buyer that the business to be sold has all required permits. If it turns out afterwards that one or more required permits are missing on the delivery date, the seller is liable for the loss suffered by the buyer as a result.

After all, there is a breach of a warranty. Warranty provisions are coupled with damage provisions. If warranties are breached, the beneficiary of the warranties can claim compensation.

The guarantees apply as of a certain date. The choice of that date actually determines the moment of transition of risk. If signing and closing take place on the same day, then the guarantees to be issued refer to the condition of the company at that time.

If signing and closing are not simultaneous and delivery of the shares occurs at a later time than the signing of the purchase agreement, the parties generally agree that the warranties to be given must be "true and accurate" as of both the signing date and the delivery date.

With respect to this description, buyer and seller usually negotiate vigorously. The buyer would like to have included that the warranties to be issued by the seller are "accurate, complete and not misleading."

After all, the broader the description, the more likely the buyer is to be able to sue a seller for breach of warranty. The seller obviously wishes to keep the description as narrow as possible.

The description "true and accurate" should be acceptable to a seller. Legal entities must almost always be incorporated by notarial deed and they must be registered in the commercial register.

The time period in which the buyer may make a claim based on breach of a warranty provision (also called "breach" in English and "breach of warranties" in Dutch) depends on the type of warranty and further negotiations on it between the buyer and the seller.

Guarantees about the power to enter into the purchase agreement and delivery, power of disposition and ownership with respect to the shares and similar (basic) guarantees are also called fundamental guarantees.

The warranty period for this type of guarantee is usually longer than the usual guarantees to be issued by the seller with respect to business operations. The same applies to tax guarantees.

A property guarantee can last forever or 20 years; guarantees with respect to tax matters are often issued for a period equal to the time the taxman can still claim (at least five years).

In practice, the claim period for "ordinary" guarantees varies between 1 and 3 years. It is recommended that at least one financial reporting period be factored into the guarantee period.

For example, if a sale takes place in March of a given year, it is advisable that the guarantees apply at least through January of the following year. The financial figures can then be used to determine whether the guarantees issued were correct and accurate as of the time of closing.

Guarantees do not apply to the future. Warranties cover the period up to signing/closing. If an event occurs thereafter as a result of which an issued warranty is no longer true and/or accurate and misleading, the buyer cannot claim for it from the seller.

If the parties do not agree otherwise in the purchase agreement, claims arising from a contract are subject to the statutory 5-year statute of limitations. That 5-year period runs from the time the breach becomes known.

This limitation period is (too) long, so it is recommended that the claim period be contractually limited.

The due diligence conducted by the buyer is essential in the discussion between buyer and seller about the warranties to be issued by the seller and their scope. The basic principle under Dutch law is that the seller's duty of disclosure takes precedence over the buyer's duty to investigate.

That said, the buyer should not just blindly rely on the seller and does bear responsibility himself and some active research may be required of him.

Especially in business acquisitions, the buyer may be required to conduct his own research into the company to be purchased. How far this duty of investigation extends depends on the object of sale and the professionalism of the buyer.

The more professional the buyer is, the more research may be required of him. The above is important in the context of warranties to be issued by the seller.

The seller is usually willing to provide extended warranties, with the parties then agreeing that the buyer cannot claim under those warranties if and to the extent that the buyer knew or should have known of any breach of a warranty based on its own due diligence.

This is also known as "disclosure." Guarantees do not apply to the extent that the information to which the issued guarantee relates was "fairly disclosed" by the seller during due diligence.

In short, if the buyer should have known of a breach of warranty based on its own due diligence, it cannot later appeal to the seller for breach of warranty.

After all, the buyer knew this or should have known this and so it comes at his own expense and risk. Buyer and seller usually argue about what exactly should be meant by "fairly disclosed" then.

Typically, sellers want everything that has been in the data room for their perusal to be considered disclosed. In practice, this is accepted by buyers. The buyer, on the other hand, wants to have it included in the purchase agreement that the information in the data room has been disclosed by the seller in such a way that a reasonably experienced buyer and/or his advisors, based on a "first reading" of that information, knew or should have known about the relevance of that information and the possible impact on the warranties to be issued.

To clarify, the buyer wants to prevent the seller, in the event of a breach of a warranty, from arguing to the buyer that the buyer could have known about it based on due diligence by virtue of, for example, a cross-reference in the footnote of a document in the dataroom to another document not in the dataroom.

Thus, the document disclosed by the seller in the dataroom then does not mention that information, but the reference in that particular disclosed document to another document, for example at the bottom of the page in a footnote, could then entail that the buyer should have inquired further and requested those documents as well.

This is a hopeless task for the buyer, which is why the buyer wishes to delineate his duty to investigate as described above.

The seller's maximum liability is also usually the result of negotiations between the parties.

Generally, the maximum liability under guarantees with respect to "ordinary" guarantees ranges between 10% and 50% of the purchase price. With respect to fundamental guarantees, parties often agree on a higher maximum, such as a maximum up to the purchase price.

Finally, there are also non-statutory varieties of bodies, such as a supervisory board.

Finally, there are also non-statutory varieties of bodies, such as a supervisory board.

Various further thresholds are often included in the purchase agreement for the benefit of the seller. These include a claim threshold (also called a threshold): only if the combined claims amount to an amount greater than, say, 2% of the purchase price can a claim be filed.

If the buyer does not meet this threshold, there is no right to compensation. If the buyer does meet the minimum threshold, then, depending on the negotiations, it can be decided that in that case the entire amount of claims is still eligible for compensation or that the buyer can only claim the seller for the amount in excess of the threshold.

In addition, parties often include a so-called de minimis threshold. This is a minimum amount per claim so that it prevents the buyer from knocking on the seller's door for every unremarkable claim.

For example, the parties may agree that claims arising from breach of warranties that are less than €5,000 are not eligible for compensation.

Finally, the seller can further limit its liability for damages by including in the purchase agreement a variety of provisions of events that will be deducted from the compensation to be paid by the seller in the event of a breach of warranty.

Consider, for example, payments by the insurer, tax benefits, benefit allocation, payments by third parties, etc.