What is the Difference Between a Warranty and an Indemnity?

There is no automatic protection for a Buyer in respect of the acquisition of a company or business. The only protection a Buyer enjoys is such provision as drafted by their lawyers within the sale contract – usually taking the form of Warranties and Indemnities.

A Warranty is a contractual statement from the Seller to the Buyer as to the condition or state of the company or business being acquired at a particular point in time. If a Buyer can show that a Warranty was untrue when given and that the breach caused a reduction in the value of the company at that time (which can prove difficult to establish), they can claim damages from the Seller. However, the Buyer is under a duty to mitigate its loss – failure to do so can reduce the amount of damages they can claim from the Seller.

An Indemnity is a contractual promise from the Seller to the Buyer that it will reimburse the Buyer, (usually on a pound for pound basis), in the event of a particular pre-agreed liability arising. An Indemnity places the risk and responsibility entirely with the Seller and unlike a Warranty, there is no obligation on the Buyer to prove a decrease in the company’s value, due to the particular liability event occurring.

A Buyer is likely to conduct a due-diligence exercise as part of the purchase process to better understand the legal, financial and commercial aspects of the company or business – this will flush out any risk points which should thereafter, be covered by Warranties or Indemnities.

Farleys Solicitors has a team of corporate and commercial law experts who can advise on the sale or acquisition of a business or any disputes that arise at a later date between the buyer and the seller. To discuss your situation, please call 01254 606 008 or contact us by email.