The Difference Between a Warranty and Indemnity
Warranties and indemnities are both forms of contractual protection that minimize a buyer’s exposure to risks of loss or damage. They are a means of allocating risk between vendors and buyers. In a sale and purchase transaction, the buyer may seek protection through warranties and indemnities while the vendor may try to protect its position by refusing or limiting its grant of certain warranties and indemnities.
What is a warranty?
A term in a contract as to a statement of circumstances or requirement of level of performance.
Purpose: To provide contractual protection where the law does not provide protection, to apportion risk between the parties and to ensure the vendor or supplier discloses any known problems to the buyer.
Example: The supplier warrants to the customer that the supplier will perform the services with reasonable care and skill in accordance with generally recognized commercial practices and standards.
Example: The licensor warrants that the use of any or all the intellectual property rights in the works shall not result in the infringement of proprietary rights of third parties.
Example: The seller warrants that the company is not a party to any ongoing legal action.
Warranties are contractual statements or assurances that a vendor makes to a buyer as to the condition of the assets or the level of performance of the services. They may also constitute acknowledgements as to facts or representations in relation to, for example, the accuracy of documents or information provided in a contract. Warranties can address the accounts of a business, environmental risks, tax liabilities, litigation, product liability or intellectual property terms, among others.
A warranty is not a condition which is a fundamental or major term of a contract. Therefore, a breach of a warranty will not always of itself entitle a party to repudiate a contract but will entitle a party to recover damages as compensation for the breach where a party can prove that but for the other party’s breach, the alleging party would not have suffered the damage or loss or where a party can prove the other party caused the loss.
What is an indemnity?
A promise made by one party to another under a contract to cover damage or loss suffered by another party in specified circumstances.
Purpose: To reimburse or make good a loss or damage by paying the other party in respect of an identified and specific type of liability should it arise.
Example: The licensor indemnifies the licensee against against any damages or loss that may be incurred by the licensee arising from or in connection with any allegation that the intellectual property rights of any third party have been infringed as a result of the use by the licensee of the licensed materials.
Example: The supplier indemnifies the customer against any claims, losses, damages or expense that may be brought against the customer as a result of any injury to any person including death to the extent that injury, loss or damage is caused directly or indirectly by the supplier.
Example: The seller must indemnify and keep indemnified the purchaser against all losses or other payments, demands and liabilities that purchaser suffers or incurs as a consequence of the seller’s breach of its privacy obligations in this agreement or seller’s use or disclosure of confidential information other than in accordance with this agreement.
An indemnity is a promise made by a party to reimburse or make good a loss or a damage that the other party suffers. The purpose of an indemnity is to shift or transfer the risk of the particular liability to the other party and enable the innocent party to be compensated for all the incurred losses.
Take away points:
- Both warranties and indemnities are contractual terms that minimise a party’s exposure to the risk of damage or loss.
- Warranties are assurances or statements as to the state or condition of a business or assets or as to levels of performance.
- Indemnities shift legal responsibility from the risk of loss or damage from one party to another party who agrees to make good that loss or damage in the event of a specific and known liability if it arises.
- A well drafted contract will set out these clauses in clear and certain terms with the rights available to the innocent party if the warranties are untrue, the consequences that will flow from a breach and the liability that will apply to an indemnity.
Jaclyn-Mae Floro, BCompSc
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Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.