Warranties and indemnities
If you are buying or selling a business warranties and indemnities will be very important.
What are warranties?
Warranties are essentially statements of fact which the buyer will rely on to purchase the business. They are an extremely important part of the sale contract and selling process and afford the buyer a lot of protection.
Most Sale Contracts will provide for a long schedule of warranties, which are both general and more specific to the actual business. An example of a fairly standard and general warranty is that there is no litigation present or pending against the business.
If the warranties prove to be untrue, the buyer may have a claim against the seller for breach of warranties. A buyer would however have to satisfy the test of remoteness and would have to show that he has mitigated his losses.
What are indemnities?
Indemnities are provided by the seller and are very different from warranties. Here the seller is agreeing to reimburse the buyer in respect of a certain type of liability. The most common indemnity is in respect of employees, for example “The seller shall fully indemnify and hold the buyer harmless against all demands, claims, and actions which the buyer may suffer, sustain or incur in connection with the employment of the employees before the date of completion”. The reason for the indemnity is that if the buyer brought a claim for breach of contract because an employee brought a claim, the seller agrees to reimburse the buyer on a pound for pound basis. In addition, unlike with warranties, the buyer will not have to satisfy a test or remoteness or mitigate his loss.
Advice on warranties and indemnities
Being commercial solicitors, we regularly advise clients on how they can limit their liability should a buyer bring a claim for breach of warranties or breach of indemnities. This is known as limiting the seller’s liability and there are a number of ways which as commercial solicitors we would advise our clients of: negotiating the wording of the warranties, qualifying the warranties by providing a statement about the knowledge of the seller or setting a time period, limiting the amount a seller could be liable for, and the time limits for bringing a claim.