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What is the Difference Between Warranty and Indemnity?

When you enter into a contract, you agree to the terms that are included. Warranties and indemnities are types of protections that may be part of a contract. They are particularly important in asset purchase agreements where the buyer does not have much knowledge of the working of the business. Warranties and indemnities are both ways to protect yourself and provide you with peace of mind for how to resolve matters in a fair manner if problems arise.

What is a Warranty?

A warranty is an assurance from one party to another that provides a specific assertion or assertions. It is a written statement of fact that both parties can rely on as the truth. A warranty includes contractual assurances from the buyer regarding the statements they provide. If a warranty is breached, it means that the contractual assurance in the contract is not true. Someone can seek a legal remedy in order to put them back into the same financial place they were in before they entered into the contract.

What is an Indemnity?

An indemnity is an enforceable promise that is included in a contract. It is an agreement between both parties that one party will provide reimbursement for losses or damages they cause. Generally, the indemnifying party agrees to pay the indemnified party for specific costs, often those that stem from third-party claims. An indemnity clause is important in some types of contracts where the buyer could be held liable for something caused by the seller. An indemnity gives assurance to the buyer that the seller has made the proper disclosures prior to the transaction.

Breach of Warranty Claims

A breach of warranty occurs when the buyer finds discrepancies with the assurances made in the contract. This can happen, for example, once the buyer has taken over control of a company and has access to all the records and documentation. The buyer may find that they overpaid for the company based on the warranties that they find to be untrue. The buyer could discover that the market value of the business is less than what was paid. The breach occurs because the buyer relied on warranties provided and, therefore, may have a basis to make a claim. The buyer must be able to provide specific details, which may require the use of a forensic accountant.

Indemnity Claims

An indemnity claim is compensatory, and the details regarding it are already included within the contract. Therefore, someone can make an indemnity claim as long as it is in compliance with the agreement. Indemnity clauses generally provide specific information for the length of time that someone can file a claim. This time limit may differ from the statutory limits. If the buyer fails to file a claim within the stated time period in the contract, they could lose the ability to bring the claim at all.

Sale and purchase agreements can be extremely complex. It is critical that both parties fully understand the agreement before they sign it. An agreement should include warranties or indemnities that will allocate risks between both parties. Before you agree to a purchase or sale, contact us at (608) 784-8310 or online to schedule a consultation.

Published July 10, 2023
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