You will encounter warranties and indemnities in the vast majority of contracts you will be involved in, including for the purchase of your first home or car.
The main objective of warranties and indemnities is to allocate rise between the parties, usually a vendor and purchaser.
The vendor/seller will look to restrict the scope of any warranties or indemnities given and the purchaser will seek to have them as wide as possible in order to provide protection against the rule of “caveat emptor”-that is, let the buyer beware.
It is easy to be confused about the difference between a warranty and an indemnity.
Warranties and indemnities
A warranty is a contractual statement of fact which is usually contained in the contract or agreement for the sale/purchase of an asset. Warranties will also figure prominently in the sale/purchase of other assets such as companies and businesses.
A breach of a warranty by the vendor will give rise to a legal claim for damages which will be intended to put the purchaser in the position they would have been in if the warranty was true.
An indemnity is a promise to reimburse the purchaser in respect of loss suffered. This would usually apply in circumstances where breach of a warranty may not give rise to a claim for damages-for example, the loss arises from a 3rd party claim.
When relying on an indemnity the reliant party is not obliged to mitigate his/her loss whereas he/she is in respect of loss arising from a warranty.
Damages from breach of warranty
Brach of a contractual warranty will not give rise to repudiation or rescission of the contract; it will allow a claim for damages aimed at putting the party in the position they would have been in if the warranty was true.
This can be contrasted with breach of a condition of the contract which can give rise to treat the contract as repudiated.
Remoteness and mitigation
The buyer is obliged to mitigate his loss to the greatest extent possible and must show that the loss flowed naturally from the breach when relying on a warranty. Recovering for losses over and above direct losses would need to be provided for separately in the contract.
Alternatively, the parties may agree to provide for the limitation or exclusion of certain types of loss.
It used to be thought that issues of remoteness and mitigation did not arise with an indemnity. That has been brought into question, however, and it is advisable to exclude the rules of remoteness and mitigation when drafting an indemnity for a purchaser.
An indemnity provides protection for specific and known risks outside the control of the buyer-for example, product liability, environmental issues, litigation, tax liabilities of the seller. An indemnity gives a contractual right to euro for euro compensation for a specific loss.
Advantages of an indemnity over a warranty
An indemnity usually covers all loss actually suffered so proving the quantum of loss does not arise.
An indemnity may also give rise to the legal cause of action being drafted as a debt claim, not a breach of contract.
The limitation period in respect of an indemnity runs from the date the loss is suffered, whereas breach of a warranty will run from the date of the breach of warranty. This will usually mean the limitation period for breach of an indemnity is longer.
Claim for breach of warranty or misrepresentation
If the claim is brought in tort for misrepresentation rather than breach of warranty the tort measure of damages applies-that is, to put the buyer in the position she would have been in if she had not entered the contract. This assumes that the buyer has not chosen to rescind the contract.
Other matters concerning warranties/indemnities
- Warranties are only true at the point in time when they are given. Therefore, it is advisable to have them repeated if there is a time gap between signing contracts and completion.
- The purchaser needs to consider whether the vendor will be able to deliver on his promise if there is a breach of warranty or indemnity.
- If there is more than one vendor clarity should be sought as to who will be liable for the warranty/indemnity.