A commercial contract will include a number of indemnities and warranties, especially in relation to agreements for sale. They are a way of apportioning the risks involved and clearly setting out who is responsible for the information supplied and who is liable for losses sustained.
In drawing up an agreement, your legal adviser will work with you to ensure that your rights are protected as far as possible and that any liabilities are limited. Understanding the difference between indemnities and warranties will help you ensure that your commercial transactions are clear and that the agreements governing them are effective.
An indemnity clause allows the buyer of an asset or business to make a claim for reimbursement from the seller in the event that a particular event or liability occurs. An example is an ongoing dispute, from which the seller could agree to indemnify the buyer, reimbursing them for any loss.
Making a claim under an indemnity clause is preferable to making a claim for breach of contract because there is no need for fault to be proved; it is sufficient that a relevant loss has occurred. Wider recovery of costs can also be sought, to include legal and other expenses.
Warranties are particularly useful in agreements for the purchase of shares or assets in a company. They are statements about the facts provided in respect of the business. Examples include a warranty as to accuracy in respect of a company’s accounts, that facts about employees are true, that the full extent of any disputes has been revealed or that property is owned as specified.
The listing of warranties allows the seller to disclose any known problems to the buyer. Not only does this let the buyer know what they are agreeing to, but it also prevents them from later complaining that they were unaware of an issue when they agreed to the purchase.
A buyer will be able to make a claim for breach of warranty if the information supplied in that warranty proves to be incorrect.
The drafting of indemnity clauses and warranties
It is important to have any agreement containing indemnities and warranties professionally drafted and to take legal advice before signing, as these can be particularly onerous clauses.
Your solicitor will ensure you do not take on unlimited liability by imposing limits in respect of both the time period during which a claim will be allowed and a financial limit on the amount that can be claimed. Other limits may also be appropriate, for example, a lower limit on a claim, to prevent numerous small claims being passed on from dissatisfied customers.
The buyer also has a duty to mitigate any losses which may be suffered, but this should be specifically mentioned in the agreement.
If you are entering into a sale or purchase agreement or any other commercial transaction where you could be held liable for losses or the provision of incorrect information, you should ensure that this has been tailored to suit your exact circumstances and that your liability has been properly limited.
At RSW Law we are experienced in dealing with the drawing up of commercial agreements designed to protect your interests and ensure that your liabilities are limited.
Our advice is practical and we always focus on our clients’ business interests and success. Our lawyers work in many areas, including financial services, retail, leisure, property and professional services.
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