Have you been involved in a sale and/or purchase of business, corporate restructures or other types of contracts? If so you have most likely come across the terms warranties and indemnities before. Such terms appear in the majority of contracts and are often highly negotiated. This blog will set out what each of the above-named terms respectively mean and entail; as well as the potential consequences for breach of warranty or indemnity.

Warranties

These are legally-binding statements being given by the person(s) set out within the contract; and in particular, in a sale/purchase of business transaction, these are often statements of fact about the company or the business being sold. It is important to remember, if you are giving the warranties, such warranties need to be 100% correct and accurate. If they are not 100% correct you would be liable as a result of any inaccuracies; or breach of those warranties.

Consequences of breach

If at a later date, a warranty proves to be untrue (also known as breach of warranty), such breach will enable the other party to the contract to bring a claim for damages against you. Such cases are likely to be assessed by the Court; and could be a large amount depending on the losses, or damages, suffered as a result of the breach.

Indemnities

These are legally-binding promises to reimburse the other party to the contract on a pound for pound basis, should any of the indemnities become an issue and are usually subject to a triggering event. It is again important that, if you are giving the indemnities, you are 100% happy with the ‘promises’ you’re making. This is because you will have to honour those indemnities, and will be liable on a pound for pound basis.

An indemnity, unlike a warranty, will usually be triggered by an event; this can be a default on a condition, breach of contract, a specific action etc. You will therefore not be liable to indemnify the other party unless such event occurs.

Consequences of breach

If the trigger event occurs, the other party to the contract (as the beneficiary of the indemnity) will be able to bring a debt claim against you (which is likely to be limited to the amount owed under the indemnity, unlike damages under warranties which are assessed by the Court). However, indemnities are normally given on a pound to pound basis and are unlimited, which means that the beneficiary has a stronger chance of recuperating the full amount owed.

Both warranties and indemnities are used to manage the risk associated with a contract and they offer (i) protection against liability for the beneficiary of an indemnity and/or (ii) protection in the event a warranty proves to be untrue for the beneficiary of a warranty.

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The Corporate Commercial Department here at Fisher Jones Greenwood LLP can certainly assist you with the preparation and/or marking up of any contracts or agreements, which may or may not entail extensive warranties and indemnities, and can advise you in relation to the implications of a contract and your legal position; as well as assist you and guide you through an acquisition, merger or other types of commercial transactions. Call 01206 700113 or email [email protected].