Disclosure Letter

A disclosure letter is a document in which the seller states exceptions to its contractual warranties. It discloses where reality differs from the general assurances. Where the purchase agreement provides for this effect and the disclosure meets its requirements, it can exclude liability for those circumstances.

A distinction is drawn between general and specific disclosure. Under many agreements everything fairly available in the data room counts as generally disclosed, which is why the scope of that clause is heavily negotiated. Buyers seek to limit it to expressly identified documents, sellers want the entire data room to count. Specific disclosure covers individual matters described and allocated to a particular warranty, such as pending litigation, a customer that has given notice or a missing permit. The timing dimension matters: where further disclosure is made between signing and closing, the question arises whether the buyer retains a right to withdraw or a damages claim for new matters, or whether these too exclude liability.

In German contract practice the content is often set out not in a separate letter but in schedules to the purchase agreement. It is advisable to prepare the disclosure alongside the warranty catalogue and to allocate exceptions expressly to each warranty, because an unstructured collection of notes is worth little in a dispute. The treatment of matters that are known but unclear in scope also needs settling, since disclosure without quantification leaves the assessment to the buyer. For the seller, clear and sufficiently specific disclosure matters more than a large volume of unstructured documents. The buyer must be able to understand the risk assumed. Known risks may lead to a price adjustment or a specific indemnity instead of simply excluding liability.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.