Krzysztof Drzymała | In Principle

In M&A practice, and elsewhere, share transfer agreements customarily provide for the seller’s warranty liability, for example, for breach of representations and warranties. This type of liability is grounded on principles of freedom of contract stemming from Art. 3531 of the Polish Civil Code. Although warranty liability is commonly referred to in Polish as “strict” (i.e. based on assumption of risk—na zasadzie ryzyka), strict liability is a completely different construction, expressly provided for by the Civil Code. Thus commercial practice is imprecise in this regard. In extreme cases, using this wording in contracts can generate problems, including interpretive disputes over the basis of liability under such agreements.

Participation in a limited-liability company in Poland may end either as a result of acquisition of the shareholder’s shares by another entity or as a result of elimination of the shares, i.e. redemption. This mechanism is more and more common and used for various purposes in the course of M&A transactions consisting in the acquisition of only a portion of a company’s share capital. Then, it becomes an element of the shareholders’ agreement and thus of the articles of association which are to take effect and regulate the rights and obligations of the parties upon completion of the transaction.

In commercial practice in Poland, including M&A transactions, e.g. in share transfer agreements and shareholders’ agreements, the parties often secure their interests with clauses providing for contractual penalties which one party can claim if the other party breaches an obligation under the agreement. Contractual penalties are specifically regulated by the Civil Code. But increasingly, parties protect their interests with the alternative construction of a warranty agreement, which is not specifically regulated by the Civil Code.