Breach of representations and warranties in M&A and indemnity claims

1. What to check when a problem comes to light

Where liabilities or disputes that were not assumed as the basis of the contract are found in an acquired company, checking the facts, preserving the materials and checking the deadlines all need to proceed in parallel. Reading the contract only once the facts have been settled can mean that a deadline for giving notice is missed. That said, the provisions that then fall to be considered, and the steps available, differ according to whether the liability was unrecorded, whether the recorded amount was wrong, whether the way a matter was dealt with in the past breached the law, or whether a dispute with a counterparty has already begun, so obtaining an outline of the matter at an early stage is important.

The next step is to identify which provisions of the contract are engaged. It is not unusual for the representations and warranties, the indemnification provisions, the provisions setting a cap on liability or a deductible, the provisions on notice of a claim, and the provisions on the method of dispute resolution each to sit in a different part of the agreement. Where part of the purchase price is deferred, or an escrow has been established, those provisions are checked as well.

A chronology is also essential: which materials were provided in due diligence, how far the disclosed materials went, the dates of signing and of closing, and when, and from which document, the problem became known. These bear not only on whether there has been a breach but also on the buyer's knowledge, discussed below, and on the deadline for giving notice of a claim.

Checking the deadlines is one of the first things to do. It is common for a contract to provide that an indemnity claim cannot be brought unless notice is given within a certain period. Where a deadline is close, one option is to give notice before the investigation has been completed, but a notice that does no more than reserve the party's rights will not necessarily satisfy the requirements of the contract. What the notice says is decided after checking how much detail is required as to the provision relied on, the facts in issue and the amount, whether further detail may be supplied later, and whether the deadline refers to the time of dispatch or the time of receipt.

Where the problem that has come to light takes the form of a claim by a third party, such as a tax audit, a claim by an employee or litigation with a counterparty, the contract may lay down the steps to be followed. These include a duty to notify the seller that a claim has been received, a provision allowing the seller to take part in the defense, and a provision requiring prior consultation or consent in relation to a settlement or a payment. Where the target company settles or pays first, the reasonableness of the amount and compliance with the required steps may be disputed in the later indemnity claim. The claim to be made against the seller and the response to be made by the target company itself need to be handled with the order of events and the division of roles in mind.

2. Breach of representations and warranties, disclosure and the buyer's knowledge

Representations and warranties are a contractual promise by one party to the other that certain matters are true and accurate. They are a mechanism created by agreement between the parties, separate from liability imposed by law, so what is warranted, and as at what point in time, is determined first of all by the wording of the contract.

One point to check is the range of matters covered. Even within the representations and warranties on financial statements, a warranty to the effect that the statements have been prepared in accordance with generally accepted accounting principles and a warranty to the effect that the target company has no liabilities other than those disclosed to the buyer differ both in the facts that will be in issue and in the way the case is put together.

The qualifications attached to the representations and warranties themselves also call for attention. It is not unusual for accuracy to be qualified by words such as "in all material respects", or by words limiting the warranty to the seller's knowledge. On the latter, the contract may define whose knowledge is the reference point and whether it means knowledge after inquiry, and whether a breach can be said to have occurred varies with the presence and content of that definition. Before considering the buyer's knowledge, the party checks how far the wording of the representations and warranties is itself qualified.

A further point is the time as at which the warranty is given. The treatment of matters arising between signing and closing changes according to whether the representations and warranties are given as at the signing date alone or are repeated at closing. Where the accuracy of the representations and warranties is set as a condition precedent to closing, this also leads on to the question whether a party may refuse to complete the transaction at all. That question is dealt with in the guide on termination of an M&A contract and refusal to close.

Exceptions by way of disclosure are also important. The party checks whether there is a provision excluding matters set out in a disclosure schedule from the scope of the representations and warranties, and whether, in addition, there is a provision under which the contents of materials placed in the data room are treated as having been disclosed. As to the latter, how widely the scope of disclosure is defined, and how specific an entry has to be before disclosure can be said to have been made, are sometimes disputed.

The treatment of a case in which the buyer knew, or could have known, of the problem is a point that is particularly prone to dispute in practice. A contract may contain a provision to the effect that the buyer's knowledge of a breach does not prevent an indemnity claim; it may equally contain a provision to the opposite effect, that no claim may be brought in respect of matters the buyer knew about. Where there is no such provision, the position is considered by reference to the content and specificity of the information disclosed, the point at which the buyer actually knew of the matter, and what was examined in due diligence, and no single conclusion can be stated for every case. It does not follow as a matter of course that no claim can be brought because the matter should have been found in due diligence, nor, conversely, that a claim can always be brought because the point is written into the contract.

3. The scope of indemnification and limitations on liability

The amount covered by indemnification is likewise approached from the provisions of the contract. What often arises in practice is that a loss suffered by the target company and the amount the buyer may claim do not automatically coincide. Where, for example, the target company carried an off-balance-sheet liability, it is the target company that makes the payment, so how this is to be framed as a loss of the buyer has to be worked out. The party checks whether the contract contains a provision bringing losses suffered by the target company within the scope of indemnification and, if so, how far that provision extends. The buyer may also suffer loss itself, so loss suffered by the buyer and loss of the target company brought within the scope of indemnification by the contract are organized separately.

The provisions limiting liability bear directly on the amount claimed. A contract may set a cap on the aggregate amount of indemnification, exclude claims that do not reach a given amount, provide for whether only the excess or the whole amount is recoverable once a given amount is exceeded, and limit the period within which a claim may be brought. These are frequently used in combination, and reading an individual provision in isolation can lead to the wrong conclusion.

A contract may also deal with the adjustment to be made where the same facts support claims under more than one provision, with the treatment of tax effects and of recoveries under insurance, and with the treatment of amounts recovered from third parties. Where warranty and indemnity insurance is in place, the scope of cover and the notice procedure under the policy are organized alongside the contractual indemnity claim.

As to the calculation of loss, the question may arise how the effect on the business value of the target company is to be assessed. We do not ourselves carry out valuations of enterprise value, business value or share value. Where necessary we work with accounting, tax and valuation professionals, and we organize the assumptions underlying a calculation from the standpoint of what has to be proved, and to what extent, as a matter of legal argument.

4. Notice of a claim, set-off and the withholding of payment

Where indemnification is sought, notice is first given in the manner the contract lays down. The addressee, the method of delivery, the matters to be stated and the deadline are commonly set out in the contract, and where a notice does not meet those requirements its effectiveness may later be disputed. It is usual to state, so far as known at the time, the provision of the representations and warranties relied on, the facts in issue, and the nature and approximate amount of the loss identified so far.

A contractual time limit and the statutory prescription period are separate mechanisms. The treatment of a case in which a contractual notice deadline has passed may differ according to whether the provision is intended to extinguish the claim itself or to make notice a requirement for bringing a claim. Nor does giving notice within the deadline of itself prevent the completion of the statutory prescription period. Some contracts provide that, separately from notice, litigation or arbitration must be commenced within a given period, so the deadline for notice and the deadline for commencing proceedings are checked separately.

It may be possible to consider a legal basis other than breach of the representations and warranties, but changing the basis is not a way of escaping the limitations on liability. Where the contract contains a provision to the effect that the indemnification provisions are the sole remedy, the party needs to check the range of claims to which the cap and the time limits extend and whether any cases are carved out as exceptions. Where an intentional misstatement or non-disclosure by the seller is in issue, the interpretation of the provision is considered together with its validity and with whether the contract may be avoided.

Where part of the purchase price is unpaid, a buyer may withhold payment on the ground of an indemnity claim, or assert a set-off. These two are considered separately. On set-off, the party checks whether the contract prohibits or restricts set-off, whether the indemnity claim and the claim to the unpaid balance have the same kind of subject matter and stand opposed to each other between the same parties, whether the indemnity claim used for the set-off is due, and whether a declaration of set-off has been made. As regards a party's own obligation to pay the balance, it may in some circumstances waive the benefit of the time limit and set off. A set-off may also be asserted using a claim whose amount or existence is disputed, and a judgment or an agreement establishing it is not required in advance. If, however, that claim is not upheld later, the payment of the balance is treated as having been made late, and late payment damages and other disadvantages may follow, so this is taken into account in reaching a decision.

Withholding payment, by contrast, calls for a different basis to be considered: whether the contract allows payment to be withheld, or whether the obligations can be said to stand in a relationship of concurrent performance. Making an indemnity claim does not of itself mean that the balance of the price need not be paid. Where an escrow or a holdback has been established, the conditions for release and the procedure that applies where those conditions are not met are checked.

5. Negotiations, litigation and arbitration

Evidence needs to be secured at an early stage. The materials provided in due diligence and the dates and times they were provided, data room access records, the questions and answers exchanged, emails and minutes from the course of the negotiations, and each draft of the contract all serve as material for deciding the scope of disclosure and what the parties knew. Materials held on the target company's side may be lost as people move roles or leave, so preservation is considered so far as necessary.

In putting a claim together, there is room to consider, besides the contractual indemnity claim, damages for non-performance of an obligation and, depending on what the seller said, other legal bases. Because the facts to be asserted, and whether the provisions limiting liability apply, may vary with the basis chosen, the choice is made after the facts have been checked.

The method of dispute resolution and the law applicable to the contract are both governed by the provisions of the contract. Where the other side is a party outside Japan, or the target company has subsidiaries outside Japan, the governing law provision is checked as well. Where arbitration is provided for, the arbitral institution, the seat, the number of arbitrators and the language are commonly fixed in advance, and if the other side raises the arbitration agreement in time, an action may be dismissed. Where, by contrast, an action is brought contrary to an exclusive jurisdiction agreement designating a court in Japan, transfer is ordinarily considered as a question of jurisdiction, which is treated differently from the case of an arbitration agreement. Where the agreement designates a foreign court, the matter is considered separately as a question of international jurisdiction. Where the other side is a party outside Japan, the check extends to whether a decision could be enforced.

Where the seller is an individual, where the seller remains involved in the management of the target company, or where there is more than one seller, the choice of whom to claim against and how also becomes a matter for consideration. Where a representative remains in office as a director after the sale, a question may arise, alongside the claim, as to how the company is to take its own decisions.

Depending on the nature of the problem, an investigation of the facts may be needed before liability is pursued. On how to conduct an internal investigation, see the guide on internal investigations and responding to internal whistleblowing; on labor issues, see the guide on labor and employment disputes. The liability of the seller and the liability of an M&A intermediary or financial adviser need to be considered separately, and that is dealt with in the guide on disputes over fees and the terms of engagement with M&A intermediaries and financial advisers.

How we assist

For those considering a claim for breach of representations and warranties or an indemnity claim

We review the relevant materials and the sequence of events and assist with considering the rights and obligations arising under the contract and the applicable law and the approach to be taken. Depending on the scope of the engagement, we negotiate with the other side, act in court and other proceedings, and work with the professionals the matter requires. When you contact us, please let us know through the inquiry form, so far as you are able, the current situation, whether you have received any notice from the other side, and any deadlines you are aware of. You are welcome to contact us before all the materials are available.

Contact us about a breach of representations and warranties or an indemnity claim

Whether we are able to accept instructions, and the scope of our support, is confirmed individually after checking for conflicts of interest.

Related pages

Termination of an M&A contract and refusal to close — the matters to consider where completion of the transaction, or its termination, is disputed on the ground that a condition precedent has not been satisfied or that the contract has been breached.

Competing activity and the poaching of staff by a seller after an M&A transaction — injunctive relief and damages where competing activity by the seller, or the solicitation of customers or employees, is in issue, and the response available to a party that has received a warning.

M&A and business succession (practice area) — our work on structuring M&A transactions, legal due diligence, drafting and negotiating contracts, support at closing, post-merger integration and business succession.

Key legislation and official sources

English translations of legislation are provided for reference. The Japanese texts are authoritative.

Where it appears	Legislation	Source type
Damages for non-performance of an obligation and the scope of recoverable loss; avoidance of a contract for fraud or mistake; the prescription period for a claim	Civil Code（民法）	Japanese legislation
Requirements for set-off, restriction of set-off by agreement, the declaration of set-off, waiver of the benefit of a time limit, and late payment damages; concurrent performance	Civil Code（民法）	Japanese legislation
Dismissal of an action where an arbitration agreement is raised in time	Arbitration Act（仲裁法）	Japanese legislation
Transfer of an action brought contrary to an exclusive jurisdiction agreement; agreements on international jurisdiction; requirements for the recognition of a foreign judgment	Code of Civil Procedure（民事訴訟法）	Japanese legislation
The law applicable to the contract	Act on General Rules for Application of Laws（法の適用に関する通則法）	Japanese legislation
Enforcement in Japan of a foreign judgment or an arbitral award	Civil Enforcement Act（民事執行法）	Japanese legislation

Legal information reviewed: 2026-09-18

Frequently asked questions

Contact

Considering a claim for breach of representations and warranties

On breach of representations and warranties and indemnity claims, we check the relevant materials and the sequence of events, and assist with considering the rights and obligations arising under the agreements and the applicable legislation and the approach to be taken. To the extent instructed, we conduct negotiations with the other party, act in court and other proceedings, and work with other professionals where needed. When you contact us, please let us know through the inquiry form, so far as you are able, the current situation, whether any notice has been received from the other party, and any deadlines you are aware of. You are welcome to contact us before the documents have been gathered.

Contact us about representations and warranties or an indemnity claim

Whether we are able to act, and the scope of our work, are confirmed individually after a conflict check.

Related Pages

Related Pages

Termination of an M&A contract and refusal to close

A legal guide to what falls to be considered where completion of the transaction, or termination of the contract, is in dispute on the ground that a condition precedent has not been satisfied or that the contract has been breached.

Competing activity and the poaching of staff by a seller after an M&A transaction

A legal guide to injunctive relief and damages where competing activity by a seller, or the solicitation of customers or employees, is in issue, and to the position of a party that has received a warning.

M&A and business succession (practice area)

An overview of our work on structuring M&A transactions, legal due diligence, the preparation and negotiation of contracts, support at closing, post-merger integration, and business succession.

This article is provided for general informational purposes only and does not constitute legal advice on any specific matter. Please consult us regarding your specific situation. The content is based on the laws and regulations in effect as of the date of the last update.