What are warranties and indemnities?

When buying or selling a business you will enter into a purchase contract. The contract will contain different clauses depending on whether you are purchasing the shares of a company or whether you are purchasing the assets of a business. However, it is common for the purchase contract to contain clauses including warranties and indemnities regardless of whether it is a share or asset sale. Warranties and indemnities are contractual protections.

Representations are slightly different to warranties. Representations are contractual statements which induce a party to enter into a contract. If the purchase contract is drafted on the basis that the warranties are also representations, the Buyer has more options available to them if the statement given by the Seller is untrue. The Buyer has the option to claim for a breach of warranty and seek damages but this is calculated by the loss caused by the breach and subject to the duty to mitigate the loss. If the Seller has also given representations, the Buyer could seek a remedy for a tortious claim for misrepresentation which could result in rescission of the contract or damages calculated in accordance with the tortious measure which will differ depending on whether the misrepresentation was innocent, negligent or fraudulent.

*The seller cannot be in breach of warranty if they have sufficiently disclosed against the warranty. The process of disclosure is outside the scope of this guide.