Investment Series – Part 4: The Price of a Promise: Representations, Warranties and Indemnities in UAE Transactions

A practitioner’s guide to how the SPA turns what due diligence found, and could not find, into enforceable promises, and why the choice between a representation, a warranty and an indemnity is rarely just a matter of drafting style.

This is Part 4 of our Investment Series. Part 1 looked at the three legal systems that can govern a UAE acquisition, Part 2 at the architecture of the MOU, and Part 3 at due diligence. We now come to the Sale and Purchase Agreement (SPA) itself, and to the promises and price mechanics through which a buyer’s findings in diligence, and its remaining doubts, are turned into an allocation of risk.

An SPA gives a buyer several kinds of protection which are easily run together: statements about the state of the business (representations and warranties), undertakings as to how the seller will behave (covenants), promises to make good a particular loss (indemnities) and, alongside all of these, the way in which the price itself is structured. They overlap at the edges, but each is suited to a different kind of risk, and a good many post-completion disputes can be traced to one of them having been asked to do the work of another.

Representations and Warranties: One Phrase, Two Claims

Almost every SPA contains a clause in which the seller “represents and warrants” that certain things are true: that the accounts give a fair picture, that there is no litigation, that the company owns the assets it uses. Lawyers use the formula so habitually that it reads as a single idea, and so far as content goes it very nearly is one, since a representation and a warranty may be word for word the same statement of fact.

Where they part company is in what the buyer can do if the statement turns out to be untrue. A representation is something said to the buyer in order to persuade it to contract, and a buyer who was induced by it to do so has a claim in misrepresentation. A warranty is a term of the contract, by which the seller promises that the statement is true. If it is untrue the buyer sues for breach of contract, and does not have to show that it relied on anything.

For a buyer the consequences are practical, and they are mostly about money. Damages for breach of warranty are generally assessed as the difference between what the business would have been worth had the warranty been true and what it was in fact worth. Damages for misrepresentation look to the position the buyer would have been in had it never entered into the transaction, which, where the business proves to be worth a fraction of the price, can be a considerably larger sum; and in a serious case the buyer may be entitled to have the transaction set aside altogether.

There is also the matter of the limits which sellers negotiate on warranty claims, typically a cap, a minimum claim size and a cut-off date. A claim in misrepresentation arises outside the contract and may escape those limits unless the SPA is drafted to catch it. That explains a familiar skirmish in negotiations, in which the seller is content to “warrant” but declines to “represent”, and the buyer asks for both.

The English courts have held parties to the words they chose. In Sycamore Bidco Ltd v Breslin the buyer of a company, having paid around £16 million, brought a warranty claim worth about £6 million together with a misrepresentation claim which, had it succeeded, might have reached the whole of the price. The judge rejected the second claim because the SPA described the statements as warranties and contained nothing to make them representations as well. Later cases have taken the same approach while leaving room for the facts, and in 2025 the Commercial Court refused to dismiss without a trial a claim that statements made in a seller’s disclosure letter were actionable representations in their own right. The safer course, for either side, is to say in the SPA exactly what is intended.

How much of this applies depends on which of the three systems described in Part 1 governs the SPA. ADGM applies English common law directly. The DIFC has its own statutory rules on misrepresentation, which owe a good deal to English law without being identical to it; its courts have observed, for instance, that under DIFC law damages are available whether the misstatement was careless or wholly innocent. Onshore UAE law knows no distinction between representations and warranties as such. It deals with false pre-contractual statements through the Civil Code’s own rules on deceit and consent, so that an SPA governed by onshore law cannot simply borrow the English drafting and expect it to work in the same way.

Where Due Diligence Runs Out: Why the SPA Has to Finish the Job

Part 3 of this series described due diligence on a UAE mainland target as necessarily driven by the data room: there is no equivalent of Companies House, and the buyer’s picture of the target is built almost entirely from what the seller chooses to put in front of it. That structural limitation does not disappear once the data room closes. It simply moves house, from the diligence process into the SPA.

This is the real function that warranties perform. They are the means by which a buyer converts an information gap it cannot fully close through diligence into a risk that has, at least, been allocated, and can be claimed against if the seller’s account of the business turns out to have been wrong.

Take litigation. A well-run data room will typically confirm that there is no pending court claim against the target. What it will not, and cannot, reliably show is whether a customer has quietly threatened to sue, whether a regulator has raised an informal query that has not yet become an investigation, or whether a departing employee has instructed lawyers but not yet issued proceedings. None of that appears in a litigation register, because none of it has yet become litigation. A buyer will therefore not be satisfied with a warranty that there is “no litigation”. It will ask the seller to warrant that there are no claims pending or threatened and that, so far as the seller is aware, there are no circumstances likely to give rise to one, which places the risk of the undisclosed problem on the party who is in a position to know about it.

A second and equally common example is intellectual property. Part 3 flagged the question of whether a technology business actually owns its own codebase. Diligence can confirm what the company’s records show; it is considerably harder to confirm the negative, namely that no former contractor, open-source component or departing engineer has left a gap in the chain of title. Here the SPA typically does two things at once. The seller warrants that the target owns, or has the right to use, all the intellectual property material to its business, and, because defects of this kind are notoriously difficult to price in advance, the buyer will often ask in addition for a specific indemnity against the cost of any third-party infringement claim that does in fact materialise. The interaction between the two is explored further below.

Underpinning all of this is the disclosure letter: the document, prepared by the seller ahead of signing, which qualifies the warranties by reference to matters disclosed in it and, frequently, in the data room as well. As a general rule a matter that has been properly disclosed cannot afterwards found a warranty claim, however unwelcome it later proves to be, although what amounts to proper disclosure, and whether the buyer’s own knowledge is to count against it, are themselves points for negotiation. The disclosure letter is where the diligence file and the warranty package finally meet, and it deserves at least as much drafting attention as the warranties it qualifies.

Between Signing and Completion: Covenants, Bring-Downs and Conditions

A promise to do something in the future, whether to keep the business running normally, to seek a landlord’s consent or to retain a member of staff, is properly a covenant, and it is drafted and enforced rather differently.

The clearest illustration is the gap between signing and completion. Where regulatory approvals or financing conditions mean that the deal cannot complete on the day it is signed, which Part 1 noted can add months to a UAE timetable, the SPA will typically include interim covenants requiring the seller to run the business in the ordinary course and not, without the buyer’s consent, to dispose of material assets, enter into large new contracts or change employment terms.

Bolted onto this is the “bring-down”, under which the warranties given at signing are repeated at completion. If something has gone wrong with the business in the interim (a key contract lost, say), a warranty that was true in one month may be false in the next, and depending on how the SPA is drafted the buyer may then be entitled to refuse to complete, or may have a fresh warranty claim based on the position at the later date.

Where completion depends on a third party’s agreement, such as a landlord’s consent under a change of control clause or a non-objection from the DFSA, the Central Bank or a health authority, that consent is rarely dealt with as a bare promise that it will be obtained. It is more commonly made a condition precedent to completion, sometimes coupled with an obligation on the seller to use reasonable, or best, endeavours to secure it. The two operate differently. If a condition is not satisfied the deal simply does not complete, whereas a seller who has undertaken to use its endeavours can in principle be pursued for failing to do so, even if the consent is never obtained. Which structure suits a given consent, and how hard a seller should be pushed to guarantee an outcome that in truth rests with someone it does not control, requires careful thought in each case.

Paying for What You Get: Earn-Outs, Retention and Milestones

Some of the risks a buyer most wants to manage cannot sensibly be addressed through a promise about the state of the business at all. They are questions about the future (will the business keep performing, will the people who built it stay), and no warranty, however tightly drafted, can make a founder turn up for work. For these it is the structure of the transaction, more than the language of the warranties, that tends to do the real work.

Price is the most direct lever. Buyers frequently link part of the consideration to the business meeting defined revenue or profit targets over a specified period, an arrangement usually called an earn-out. Properly structured, it narrows the valuation gap that often exists between an optimistic seller and a cautious buyer, and gives the seller a continuing interest in how the business performs once it has changed hands.

Key-person risk is addressed differently again. A buyer cannot compel a founder or senior manager to remain employed, and no drafting changes that. What can be built into the transaction is a financial consequence for leaving: unvested consideration that lapses, or an obligation to repay part of what has already been paid, if a named individual departs within an agreed period, sitting alongside the restrictive covenants discussed in Part 2. It is the economics, far more than any court order, that keep people at their desks.

Instalment structures serve a related purpose. A buyer may release the consideration in tranches, each conditional on a defined milestone such as the transfer of a regulatory licence, the renewal of a key contract or the completion of an integration step. This does more than manage cash flow. It keeps a portion of the price genuinely at risk for as long as the matter it is tied to remains uncertain, which is often a more effective form of protection than a claim against a seller who may, by the time it is brought, be in no position to pay.

Indemnities: When a Promise Isn’t Enough

A warranty is well suited to a risk the buyer cannot yet identify: a general assurance, backed by a claim in damages, about the state of a business the buyer has not run. It is a comparatively blunt instrument for a risk the buyer can already see. If diligence has surfaced a specific and quantifiable problem, such as an ongoing tax dispute, a known regulatory breach or an environmental liability at a particular site, an indemnity will usually be the better tool.

A buyer claiming under a warranty has to prove that the statement was untrue and that this caused it loss, and the loss is then assessed subject to the ordinary rules of contract damages on causation, remoteness and mitigation. An indemnity is, in substance, a promise to reimburse a defined loss if a specified event occurs. How far those ordinary rules continue to apply turns on the wording, and an indemnity is not automatically free of them, but a properly drafted one gives the buyer a shorter and more certain route to recovery. It also answers a difficulty that a warranty cannot. Fair disclosure will generally defeat a warranty claim, whereas an indemnity is usually sought precisely because the risk has been disclosed and identified, and the buyer wants to be sure of recovering if it comes to pass.

The two also differ in how long they last. General business warranties are commonly limited to a relatively short period after completion, often somewhere between twelve and twenty-four months, on the footing that most operational problems surface within a year or two of a change of control. A tax indemnity is a different animal, and ought to survive for as long as the relevant tax authority can reopen the target’s affairs. Part 1 described how the Federal Tax Authority can, in certain circumstances, reach back across several years where a Qualifying Free Zone Person turns out to have been wrongly claiming the 0% rate; a tax indemnity that expires before that window closes is, in practical terms, worth very little.

Every warranty and indemnity package is, in practice, further shaped by financial ceilings and floors: a cap on the seller’s total liability, a level below which small claims cannot be brought at all, and a minimum aggregate amount that must be reached before any claim can proceed. These numbers are negotiated hard, and reasonably so, since they determine how much of the protection described above is actually worth anything.

The Question Behind the Question: Who Is Actually Making These Promises?

There is a question that sits underneath everything discussed so far, and it is easy to lose sight of amid the drafting: who, exactly, is giving these warranties and indemnities, and will they still be there, and still solvent, if a claim has to be brought?

A warranty given by an individual seller who has since relocated, or by a corporate seller that is quietly wound up after completion, may be worth nothing at all, however well it was drafted. This is why basic counterparty diligence (confirming who the seller actually is, who ultimately owns it, and whether it has the means to meet a future claim) deserves the same rigour as the diligence on the target, even where the seller is someone the buyer has been dealing with for months and feels it already knows well.

Buyers manage this risk through a range of tools that sit alongside the warranty package: a portion of the price held in escrow or a retention account for a defined period; a parent company or personal guarantee standing behind a thinly capitalised seller. Each comes with its own cost, mechanics and limitations, and choosing between them is as much a commercial judgement as a legal one.

Conclusion

Representations, warranties, covenants and indemnities are often discussed as though they were interchangeable ways of saying the same thing. Each in fact does a different job and is enforced by a different route, and an SPA that treats them as interchangeable will, sooner or later, leave a buyer holding a remedy that does not fit the risk it was meant to cover.

The thread running through this series has been the same from the outset: value is protected by matching the right legal tool to the right risk at the right moment in the transaction, whether that is the choice of jurisdiction in Part 1, the architecture of the MOU in Part 2, the scope of due diligence in Part 3 or, here, the promises that finally convert what diligence found into something a buyer can actually enforce.

This publication does not provide any legal advice and is for information purposes only.