Abstract

This article examines the pivotal role of warranties and limitation of liability clauses in share purchase agreements (SPAs), emphasizing their dual function as instruments of risk allocation and protection for transacting parties. It explores how these mechanisms operate within common law and continental legal systems, drawing on comparative insights from jurisdictions including the United Kingdom, Germany, France, and Central and Eastern Europe (CEE). The analysis highlights the ongoing convergence between Anglo-American contractual precision and civil law principles of good faith and fairness, as reflected in recent empirical data from Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs (2025). The study discusses how limitation clauses, disclosure practices, and warranty & indemnity (W&I) insurance shape modern M&A risk governance, illustrating the evolution of a hybridized transactional culture. Ultimately, it argues that this convergence signals the emergence of a transnational commercial norm—a lex mercatoria contractus—balancing efficiency with equity, autonomy with judicial oversight, and private ordering with the enduring values of contractual justice.

I. Introduction

The share purchase agreement (“SPA”) stands at the core of modern mergers and acquisitions (M&A). It governs the transfer of ownership in a target company and allocates risk between buyer and seller. Within this contractual framework, warranties and limitation of liability clauses serve as fundamental tools of transactional risk management. They bridge the gap between the buyer’s reliance on pre-closing disclosures and the seller’s desire for a clean exit.

Under common law systems, these clauses operate primarily through party autonomy, with courts enforcing negotiated terms that allocate commercial risk. In contrast, continental legal systems—notably Germany, France, and the Central and Eastern European (CEE) jurisdictions of Poland, the Czech Republic, and Romania—combine contractual freedom with mandatory statutory protections grounded in good faith and codified warranty regimes.[1]

However, the growing globalisation of corporate transactions has blurred these doctrinal boundaries. M&A activity increasingly involves multinational entities operating across legal traditions. As a result, SPA drafting has evolved into a hybridised practice, drawing from Anglo-American precision while remaining responsive to continental notions of fairness and good faith. The COVID-19 pandemic, geopolitical uncertainty, and the rise of ESG-driven due diligence have further amplified the strategic importance of warranties and liability limitations as instruments of economic stabilisation.[2]

This piece of written work examines the function of warranties and limitation of liability clauses in SPAs, compares their treatment under common law and continental frameworks, and considers how these mechanisms protect parties in cross-border transactions. Drawing upon empirical findings from Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs (2025)[3], it argues that while continental systems increasingly adopt Anglo-American drafting practices, key divergences remain in the scope of liability and the enforceability of contractual limitations. More broadly, it contends that convergence, though enhancing efficiency and predictability, also raises questions about whether such contractualisation erodes traditional safeguards of fairness embedded in civil law systems.

II. The Nature and Function of Warranties in SPAs

A. Common Law Approach

In common law jurisdictions such as England and the United States, warranties are contractual statements of fact given by the seller regarding the condition, assets, and operations of the target company. A breach of warranty entitles the buyer to claim damages but not rescission, distinguishing it from representations, which may trigger tortious liability for misrepresentation.

The seminal case of Infiniteland Ltd. v. Artisan Contracting Ltd. held that warranties serve as a mechanism for risk allocation, ensuring that the buyer receives compensation where the target’s state deviates from warranted conditions[4]. The buyer’s due diligence complements, but does not replace, the protective function of warranties. Courts have emphasized that warranties allocate risk contractually rather than operate as assurances of accuracy.[5]

Common law also recognizes the disclosure letter as a key defensive instrument for the seller. It qualifies warranties by revealing known issues, thereby precluding subsequent claims[6]. The negotiation of warranties and disclosure schedules forms a critical element of deal-making, balancing the buyer’s informational disadvantage against the seller’s desire for finality.

B. Continental Approach

Under continental civil law systems, the concept of warranty has a statutory foundation rather than a purely contractual one.

In German law, the Bürgerliches Gesetzbuch (BGB) governs contractual warranties through §§ 433–437, which impose liability for material defects (Sachmängelhaftung)[7]. While parties may contractually modify these obligations in B2B contexts, German courts maintain limits under § 242 BGB (good faith) and § 276 BGB, which prohibits exclusion of liability for intentional acts or gross negligence.

Similarly, the French Civil Code, as revised in 2016, regulates garantie des vices cachés (Articles 1641–1649) and garantie de conformité (Articles 1604 et seq.), providing buyers with statutory protection against hidden defects[8]. Contractual warranties in French SPAs often supplement, rather than replace, these mandatory guarantees. Parties cannot exclude liability for fraud or gross negligence (dol).[9]

The Central and Eastern European jurisdictions—including Poland, the Czech Republic, and Romania—have adopted hybrid systems. These jurisdictions have progressively integrated Anglo-American drafting techniques (such as disclosure letters and knowledge qualifiers) into civil law practice while remaining subject to codified warranty regimes[10]. As Deloitte Legal’s 2025 study observes, “many concepts traditionally utilized in Anglo-American M&A agreements, when viewed in terms of their function, are similarly applied to transactions within Central and Eastern Europe.”[11]

C. Comparative Analysis

The contrast between the two systems lies in the source and flexibility of warranties. Common law treats warranties as creatures of contract, limited only by public policy and statutory unfairness controls. Civil law, by contrast, grounds them in statutory norms and good faith.

However, convergence is evident. The Deloitte study reports that 87% of reviewed SPAs in Central Europe now provide that documents made available in virtual data rooms qualify as disclosures limiting warranty claims[12], reflecting the growing influence of common law documentation practices. Similarly, 80% of SPAs include knowledge qualifiers, restricting the seller’s liability to matters within actual or constructive awareness[13]. These trends illustrate an ongoing harmonization between civil and common law drafting cultures.

D. Theoretical Foundations of Warranties

While warranties serve a clear doctrinal and practical purpose, their theoretical underpinnings reveal why they remain indispensable in complex commercial transactions. From an economic perspective, warranties mitigate information asymmetry between buyer and seller[14]. In M&A, the seller typically possesses superior knowledge of the target’s financial, operational, and legal condition. Absent contractual assurances, this imbalance would either depress transaction value or deter investment altogether. Warranties thus function as signaling devices, enabling sellers to credibly convey confidence in the target’s integrity.

Contract theorists such as Charles Fried and Patrick Atiyah conceptualize warranties as expressions of promise theory, grounding contractual obligations in voluntarily assumed moral commitments[15]. In the M&A context, this translates to a sophisticated form of reliance protection: the buyer justifiably relies on the truth of the warranted statements when agreeing to the purchase price. The breach of warranty, therefore, represents not only an economic deviation but a disruption of trust fundamental to commercial cooperation.

In parallel, scholars of law and economics, such as Gilson and Schwartz, have analyzed warranties as instruments of efficient risk allocation[16]. By specifying liability for known and unknown risks, warranties reduce litigation costs and improve ex-ante pricing accuracy. This aligns with the broader function of SPAs as private ordering mechanisms — effectively, self-contained systems of commercial governance that operate with limited judicial intervention.[17]

Comparative theory further underscores how differing legal philosophies influence the conceptualization of warranties[18]. Common law’s reliance on freedom of contract reflects an individualistic conception of risk, whereas continental systems, particularly those influenced by German and French doctrine, embed warranties within a communitarian framework of good faith (Treu und Glauben / bonne foi)[19]. In civil law, the seller’s warranty obligation is less a matter of private allocation and more a manifestation of equitable balance between parties.

The ongoing hybridisation of SPA drafting — especially in Central and Eastern Europe — illustrates a pragmatic synthesis of these theories. Contractual sophistication imported from Anglo-American practice coexists with civil law’s moralized understanding of obligation. As such, warranties in contemporary cross-border SPAs can be understood not merely as technical clauses but as expressions of an evolving transnational commercial ethic[20], balancing efficiency with fairness.

III. Limitation of Liability Clauses

A. Common Law Approach

Common law affords wide latitude for parties to limit liability, subject to statutory and interpretive constraints. Courts emphasize freedom of contract, provided that limitation clauses are drafted clearly and not unconscionable. The House of Lords’ decision in Photo Production Ltd. v. Securicor Transport Ltd. established that exclusion and limitation clauses are enforceable where parties of equal bargaining power allocate risk deliberately.[21]

In SPAs, sellers frequently negotiate a hierarchy of limitations, including:

• De minimis thresholds, excluding trivial claims below a specified amount;
• Basket clauses, aggregating claims until a minimum quantum is reached;
• Caps on aggregate liability, often expressed as a percentage of purchase price; and
• Time limits for bringing warranty claims.

These mechanisms enhance certainty and price efficiency. They also incentivise buyers to conduct due diligence proportionate to the risk retained. Statutory controls, such as the Unfair Contract Terms Act 1977 (UK), ensure that exclusions for fraud or negligence remain invalid, thereby maintaining a baseline of fairness.[22]

B. Continental Approach

Continental systems accept contractual limitations but impose mandatory constraints derived from public policy and codified good faith principles.

In Germany, § 276(3) BGB prohibits contractual exclusion of liability for intent or gross negligence, while § 307 BGB subjects standard terms to fairness review[23]. Similarly, French law (Article 1170 of the Civil Code) invalidates any clause that deprives a party’s essential obligation of its substance.[24]

The Deloitte Central Europe study highlights that limitation of liability clauses have become increasingly sophisticated in civil law jurisdictions. De minimis and basket clauses are now standard, with parties agreeing to higher thresholds favoring sellers[25]. For example, 22% of SPAs reviewed in the region included a basket exceeding 3% of the purchase price—a significant rise from 8% in 2022. Similarly, 93% of transactions capped liability for fundamental warranties at 100% of the purchase price, indicating market uniformity.

These data reflect the civil law adaptation of common law mechanisms to manage risk contractually within codified frameworks. However, courts in civil jurisdictions remain empowered to strike down limitations that contravene principles of equity or statutory protection, especially where imbalance or lack of transparency is shown.

C. Comparative View

The common law approach emphasizes party autonomy, with courts reluctant to interfere in commercial bargains between sophisticated entities. The continental approach, by contrast, subjects contractual freedom to overarching principles of good faith and reasonableness.

Nevertheless, judicial trends across jurisdictions demonstrate both functional convergence and interpretive divergence. English courts, following Photo Production Ltd. v. Securicor Transport Ltd., adopt a strict textualist approach, enforcing limitation clauses if their wording is clear and unambiguous.⁷ Civil law courts, however, adopt a contextual analysis, scrutinising the fairness and proportionality of exclusions under statutory norms. For instance, the German Federal Court of Justice (Bundesgerichtshof) has repeatedly invoked § 307 BGB to invalidate clauses that unduly deprive the counterparty of core contractual benefits[26]. French jurisprudence, under Article 1170 of the Code civil, similarly nullifies limitations that “deprive the debtor’s essential obligation of its substance.”[27]

This divergence reflects deeper philosophical differences regarding the role of the judiciary in contract enforcement. Common law courts prioritise certainty and commercial predictability, viewing contractual risk as a matter of private negotiation. Civil law judges act as guardians of substantive justice, ensuring equilibrium in contractual relationships. Yet the gap between these positions is narrowing. As continental practitioners increasingly draft SPAs in English and adopt common law templates, judicial reasoning has adapted to accommodate these hybrid agreements.

In practical terms, this means that even under civil law, limitation clauses are now routinely upheld where both parties are sophisticated and represented by counsel, provided that transparency and proportionality are observed. The emerging jurisprudence across Central Europe suggests that courts are developing a “functional equivalence” doctrine, recognizing the legitimacy of Anglo-American style limitations so long as they align with the civil law ethos of good faith[28]. This evolution exemplifies the gradual formation of a lex mercatoria contractus—a cross-border commercial norm blending doctrinal traditions with pragmatic enforcement.[29]

IV. Interaction Between Warranties and Limitation of Liability

Warranties and limitation clauses operate in tandem: the former define the scope of seller responsibility, while the latter quantify its extent. Together, they determine the allocation of post-closing risk.

From a practical perspective, limitation mechanisms such as de minimis, basket, and caps encourage parties to focus on material breaches and prevent disproportionate litigation. The Deloitte study’s finding that higher de minimis thresholds now prevail in CEE jurisdictions suggests a market preference for efficiency and risk concentration.[30]

Disclosure practices further mediate this balance. Sellers increasingly rely on disclosure letters and virtual data rooms to neutralise warranty exposure, while buyers insist on knowledge qualifiers and time limits to maintain recourse. In civil law jurisdictions, these contractual techniques coexist with statutory presumptions of good faith, producing a blended model of risk allocation—contractually sophisticated yet judicially moderated.

The rapid expansion of the warranty and indemnity insurance market has transformed the landscape of risk allocation in SPAs. Originally a niche instrument in Anglo-American practice, W&I insurance now features in a significant portion of European M&A deals—approximately 20% in the CEE region, according to Deloitte’s 2025 survey.[31]

W&I insurance allows sellers to limit post-closing exposure by transferring residual risk to insurers, who indemnify buyers for losses arising from warranty breaches. This innovation realigns negotiation dynamics: buyers secure protection beyond contractual caps, while sellers achieve a cleaner exit. The presence of W&I coverage often facilitates deal completion where parties disagree on liability thresholds or warranty duration.

However, the use of W&I insurance also raises theoretical and policy concerns. From a behavioural standpoint, it may dilute incentives for robust due diligence, as both sides externalise risk to insurers[32]. Moreover, the insurance market’s underwriting process introduces a private regulatory dimension, as insurers effectively assess the adequacy of disclosures and warranties[33]. This privatisation of risk governance reflects a broader shift in commercial law—from judicial enforcement to market-based regulation.[34]

In civil law jurisdictions, W&I insurance adoption remains tempered by regulatory constraints and differing conceptions of liability. For example, French and German courts continue to scrutinise clauses that purport to exclude liability entirely, even when insurance is present. Nonetheless, as cross-border deals proliferate, W&I insurance functions as a bridge between legal traditions, providing a neutral mechanism to harmonise divergent risk norms while preserving transactional efficiency.[35]

V. Policy and Practical Considerations

A. The Role of Market Practice and Judicial Oversight

M&A practice reflects not only legal doctrine but also commercial reality. As the Deloitte Central Europe study observes, since 2022 the region has shifted toward buyer-protective terms, including increased use of seller indemnities and W&I insurance[36]. This evolution underscores how market forces increasingly shape the law, with transactional custom exerting quasi-normative influence comparable to statutory reform.

Yet reliance on market practice carries risks. Contractual convergence may mask structural power imbalances, particularly where one party (often a foreign investor) dictates English-law templates in jurisdictions less familiar with them.¹⁶ Courts thus play a crucial role as gatekeepers, ensuring that formal parity does not conceal substantive inequality. Polish and Czech jurisprudence, for instance, empowers judges to reduce disproportionate penalties or invalidate unfair clauses, preserving the integrity of contractual justice.

B. Harmonisation and the European Dimension

The coexistence of divergent legal philosophies necessitates careful choice of governing law in cross-border SPAs. Deloitte’s findings show that 87% of SPAs in Central Europe apply national law, but English law remains popular for its predictability.¹⁸ However, this dominance of English law in European transactions raises normative questions about legal pluralism and sovereignty. Should European private law develop a unified regime for cross-border SPAs?

The European Union’s initiatives—most notably the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR)[37]—seek precisely that: to articulate common standards of fairness, proportionality, and freedom of contract[38]. These instruments aim to foster convergence not by imposing uniformity, but by cultivating shared interpretive principles that transcend national systems[39]. As transactional practice increasingly internalises these norms, the EU’s soft-law approach may gradually crystallise into a genuinely transnational commercial law.[40]

C. Future Outlook: Digitalisation and Smart Contracts

Looking forward, the digitalisation of M&A transactions may further transform warranties and liability clauses. Virtual data rooms have already become the standard disclosure platform; the next frontier lies in automated contract execution and AI-assisted due diligence. Smart contracts could, in theory, enforce warranty triggers or limitation caps automatically upon breach, reducing litigation but raising questions of interpretation, accountability, and cross-border enforcement. Legal systems will need to reconcile such technological autonomy with fundamental doctrines of consent, good faith, and judicial oversight.

VI. Conclusion

Warranties and limitation of liability clauses lie at the intersection of contractual autonomy and risk governance. They enable parties to calibrate exposure, ensure predictability, and protect investment value. Under common law, their efficacy stems from negotiated precision and judicial deference to party intent. Under continental law, their validity derives from compliance with statutory norms of good faith, fairness, and public policy. The Central and Eastern European experience demonstrates a growing fusion of these traditions: codified systems adopting Anglo-American drafting sophistication while retaining equitable constraints.

Beyond doctrinal comparison, this convergence suggests the emergence of a transnational contractual order—a modern lex mercatoria governing international commerce[41]. This new order is not imposed by states but evolves organically from transactional practice, professional custom, and market mechanisms such as W&I insurance. Its legitimacy depends on maintaining equilibrium between efficiency and justice, autonomy and oversight. The challenge for scholars and practitioners alike is to ensure that in the pursuit of convergence, the law does not lose sight of its normative core: that contracts, however complex, remain instruments of trust and fairness in the global economy.

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[1] Paul L. Davies, Principles of Modern Company Law or a leading M&A practitioner’s guide.
[2] McKinsey, PwC, or Deloitte ESG-M&A 2022–2025 reports.
[3] Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs, 2025.
[4] Infiniteland Ltd. v. Artisan Contracting Ltd., [2005] EWCA Civ 758.
[5] Sycamore Bidco Ltd. v. Breslin, [2012] EWHC 3443 (Ch).
[6] Charles Proctor, The Law of Investment Banking: Mergers and Acquisitions 412–16 (2d ed. 2021).
[7] Bürgerliches Gesetzbuch [BGB] [Civil Code], §§ 433–437 (Ger.), Hein Kötz, European Contract Law.
[8] Code civil [C. civ.] arts. 1604, 1641–1649 (Fr.), Terré, Simler & Lequette, Droit civil – Les obligations.
[9] Id. art. 1170.
[10] Maciej Zachariasiewicz, Contract Law in Poland 222–25 (2d ed. 2022).
[11] Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs 3 (2025).
[12] Id. at 10.
[13] Id.
[14] Melvin A. Eisenberg, The Theory of Efficient Breach, 57 U. Chi. L. Rev. 1371 (1990).
[15] Charles Fried, Contract as Promise: A Theory of Contractual Obligation (2d ed. 2015); Patrick S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford Univ. Press 1979).
[16] Ronald J. Gilson & Alan Schwartz, Understanding MACs: Moral Hazard in Acquisitions, 21 J.L. Econ. & Org. 330 (2005).
[17] Id. 16
[18] P. S. Atiyah, Essays on Contract 110–16 (Clarendon Press 1986).
[19] Nils Jansen & Reinhard Zimmermann, Good Faith and the European Civil Code, in Towards a European Civil Code 575–602 (3d ed. 2004), Zweigert & Kötz, An Introduction to Comparative Law.
[20] Reinhard Zimmermann, Comparative Foundations of a European Law of Set-Off and Prescription 23–25 (Cambridge Univ. Press 2002).
[21] Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827 (H.L.) (appeal taken from Eng.).
[22] Unfair Contract Terms Act 1977, c. 50 (U.K.).
[23] Bürgerliches Gesetzbuch [BGB] [Civil Code] §§ 242, 276(3), 307, 433–437 (Ger.), Hein Kötz, European Contract Law.
[24] Code civil [C. civ.] art. 1170 (Fr.).
[25] Deloitte Legal, supra note 14, at 15–16.
[26] Bundesgerichtshof [BGH] [Federal Court of Justice], Judgment of May 17, 2018, IX ZR 222/17 (Ger.).
[27] Cour de cassation [Cass.] [Supreme Court for Judicial Matters], 1e civ., Mar. 29, 2017, No. 15-27.038 (Fr.).
[28] Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs 3–4 (2025).
[29] Infiniteland Ltd. v. Artisan Contracting Ltd., [2005] EWCA (Civ) 758 (Eng.).
[30] Id. at 15.
[31] Deloitte Legal, Dealmaking in Central Europe: A Closer Look at SPAs (2025).
[32] CMS Law Firm, Warranty and Indemnity Insurance in Europe: 2024 Outlook 5–9 (2024).
[33] Clifford Chance LLP, European M&A: Market Trends Report 14–17 (2023).
[34] Organisation for Economic Co-operation and Development (OECD), Cross-Border Mergers and Acquisitions: Regulatory and Financial Issues 25 (2023).
[35] CMS Law Firm, Warranty and Indemnity Insurance in Europe: 2024 Outlook 7 (2024).
[36] Deloitte Legal, supra note 14, at 13–14.
[37] Study Group on a European Civil Code, Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference 45 (Sellier 2009).
[38] European Principles of Contract Law (Comm’n on European Contract Law 2002); Study Group on a European Civil Code, Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (Sellier 2009).
[39] Nils Jansen & Reinhard Zimmermann, supra note 27, at 577–79.
[40] European Parliament, Resolution on Harmonization of Private Law in the European Union, 2017 O.J. (C 303) 1, 3.
[41] OECD, Cross-Border Mergers and Acquisitions: Regulatory and Financial Issues 23–25 (2023).

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Elena Mihaela Șolcă