The language used by lawyers can sometimes be confusing, especially when sharing contractual documents with non-legal colleague. One of the areas frequently asked about is the difference between warranties and indemnities.
Both are types of contractual protection, intended to insulate the buyer against risk and loss in business. This article is intended to de-mystify these terms and explain what they are and how they operate in plain, easy to understand English.
Simply put, a warranty is a contractual promise from a seller to a buyer. Breaking that promise puts the seller in the same position as any other breach of contract. The Seller will be liable to the buyer for any damages arising as a direct and foreseeable result of the breach, provided that a breach of the contractual term can be proved.
The buyer will also have the responsibility to prove that a loss has occurred, as well as a duty under common law to make sure that those losses are kept to a minimum – in other words, he will not be able to recover damages that could have been reasonably avoided. In addition, if a buyer knows of a breach of warranty and enters into a contract regardless, he may be precluded from making a claim, as to do so would be considered unfair.
Warranties can cover any aspect of a contract, and are normally used In relation to information, property (whether physical or intellectual), and the quality and performance of products and services. They are distinct from the “guarantees” offered on consumer goods, giving a person the right to return or repair if the product fails during the specified period.
An indemnity also addresses contract risk, but unlike a warranty, it is an undertaking between the parties to fully reimburse the other for any loss arising from the specified matter. Compensation is literally like for like, with no duty to mitigate, and no need to prove that loss is direct or foreseeable.
For example, if a party warrants that information it is obligated to provide is factually correct, and it subsequently turns out that it contained significant errors, under that warranty, the buyer would have to prove: (a) that the seller is in breach; (b) that it has suffered loss; and (c) that the loss is attributable to the breach.
However, if the buyer has an indemnity, as long as it was able to prove that the seller was in beach, the buyer would be able to have the information corrected, and claim the cost of doing so from the seller – without having to show that the breach of contract caused an actual loss. It is a subtle difference, but an important one, which is why buyers will always look for indemnities in contracts, and sellers will always resist them.