Value Creation in Negotiations of Contractual Warranties and Indemnifications

The purpose of this paper is threefold. Firstly, it presents to the broader European audience the thesis of lawyers being the “transaction cost engineers”, with a particular focus on acquisition agreements. Secondly, it applies the terminology of value-creation and value-distribution to the operation of warranty clauses and contractual indemnities. These contractual clauses typically form a significant part of an acquisition agreement and they are frequently among those most heavily negotiated between the parties. Therefore, it is interesting to analyze the value considerations underlying these negotiations. Finally, the paper discusses the interplay between a contract’s pricing terms, non-pricing terms (like warranty clauses and contractual indemnities) and the bargaining power of the parties. Again, the focus is on acquisition agreements, where the interplay between these factors is determined by the structure of an M&A transaction process.