Business and Company Sales – Warranties and Indemnities

THIS ARTICLE WAS ORIGINALLY PUBLISHED IN THE SEPTEMBER QUARTER EDITION OF THE CHAMBER OF COMMERCE MAGAZINE

In business and company sales, Warranties and Indemnities are ways of reallocating risk between sellers and buyers.

“Caveat Emptor” (“buyer beware”) in English law means that generally buyers lack protection.

Buyers may seek warranty and indemnity protection while sellers may attempt to protect themselves by refusing to give certain warranties and indemnities, restricting scope, limiting potential claims or by disclosing against warranties.

Difference between warranties and indemnities:

  • Warranties are contractual statements of fact made by the warrantor (seller) to the warrantee (buyer) in a purchase agreement. Warranties are assurances from the seller as to the condition of the target company or business. Damages for breach of warranty aim to put the claimant in the position it would have been in had the warranty been true.
  • Indemnities are promises to reimburse claimants in respect of loss suffered on a particular issue, providing compensation for a specific loss. Indemnities can be used in circumstances where a breach of warranty may not lead to a claim in damages (e.g. because the seller has disclosed against the warranty). With indemnities the innocent party is not subject to the obligation to mitigate loss.

Warranties protect against the unknown and indemnities allocate risk in respect of known liabilities.

Jonathan Abrams is a Corporate and Media Law Partner at Gregory Abrams Davidson LLP. Contact Jonathan about Fixed Fee Mergers and Acquisitions legal services at jabrams@gadllp.co.uk or call 0151 236 5000