Absence of undisclosed liabilities: Overview, definition, and example
What is absence of undisclosed liabilities?
The absence of undisclosed liabilities refers to a contractual assurance or representation made by a party (often a seller or transferor) that there are no existing financial obligations, debts, or liabilities that have not been previously disclosed to the other party (typically the buyer or transferee). This clause ensures that the party entering the contract is not inheriting unexpected obligations or financial responsibilities that could affect the value or risk associated with the transaction. It is often included in contracts, especially in mergers and acquisitions or the sale of assets, to provide transparency and reduce the risk of undisclosed issues arising after the deal is closed.
Why is absence of undisclosed liabilities important?
The absence of undisclosed liabilities is important because it protects the party assuming responsibility for the transaction (such as a buyer) from financial surprises after the agreement has been finalized. It ensures that the buyer is not unknowingly taking on debts, claims, or other financial obligations that were not made clear at the time of the agreement. This clause helps ensure fair and transparent business transactions, providing security and confidence to the buyer that they are not inheriting hidden liabilities that could harm the business’s financial health or operational stability.
Understanding absence of undisclosed liabilities through an example
Imagine a company is selling its assets to another business. As part of the sale agreement, the seller represents that there are no undisclosed liabilities, such as pending lawsuits or tax debts, that have not been previously communicated. After the transaction, the buyer discovers that the seller had failed to disclose a significant tax liability, which was not mentioned in the contract. In this case, the buyer may have grounds to seek damages or compensation, as the seller did not comply with the "absence of undisclosed liabilities" clause, which is meant to prevent such situations.
In another example, a business is being acquired, and the buyer requires the seller to confirm that there are no hidden debts or obligations that would affect the value of the business. The seller provides this assurance, and as a result, the buyer proceeds with the acquisition, confident that no undisclosed liabilities will come to light after the deal is closed.
An example of an absence of undisclosed liabilities clause
Here’s how an absence of undisclosed liabilities clause might look in a contract:
“The Seller represents and warrants that, as of the date of this Agreement, there are no undisclosed liabilities, debts, obligations, or claims against the Company, whether known or unknown, that have not been disclosed to the Buyer in writing. The Seller agrees to indemnify the Buyer for any losses arising from any undisclosed liabilities discovered after the closing of this transaction.”
Conclusion
The absence of undisclosed liabilities clause is essential for protecting the parties involved in a transaction, particularly the buyer, from inheriting hidden debts or financial obligations that could significantly impact the value or stability of the acquired assets or business. By including this clause, both parties can ensure that all liabilities are fully disclosed and accounted for, reducing the risk of disputes and unexpected financial burdens after the deal is completed.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.