Liability cap (warranty cap)

The liability cap is the maximum amount the seller may be required to pay the buyer under the Asset and liability warranty, whatever the size and number of losses arising. It is the upper limit of the seller's exposure after the sale and is among the most negotiated clauses of a Share Purchase Agreement (SPA).

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The level of the cap is generally expressed as a percentage of the sale price, with usage varying by deal size, the quality of the financial due diligence and the balance of power between the parties. Certain warranties, called fundamental, such as those on title to the shares or capacity to contract, are often excluded from the cap or subject to a separate, higher cap, sometimes equal to the full price.

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By way of illustration, on a 12 MCHF sale, the liability cap is set at 20% of the price, that is 2.4 MCHF, while fundamental warranties on title to the shares are capped at 100% of the price. The seller's maximum exposure under the ordinary warranties is thus limited to 2.4 MCHF.

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The cap dovetails with the Basket and de minimis (warranty thresholds), which set the trigger point of the warranty, and with any recourse to a W&I Insurance – Warranty and Indemnity, which can take over beyond a certain level. Well calibrated, it protects the seller without depriving the buyer of credible cover.