Differentiating between warranties and indemnities

Acquisition agreements pertaining to a target company or business will normally include warranties. They are essentially contractual statements expressly articulating the condition of the company or business that is being acquired. If the seller’s statements prove to be incorrect and the value of the company or business is consequently reduced, the buyer may be able to claim damages for breach of contract. Of course, the onus is on the latter to illustrate the breach and the quantifiable loss that has been incurred.

An indemnity however, is the seller’s promise to reimburse the buyer for a specific type of liability, should it materialise. Thus, the risk of an undesired outcome is borne by the indemnifying party. Moreover, compensation on a pound-for-pound basis is recoverable by the indemnified party and they are generally not obliged to mitigate their loss. Indemnities are frequently utilised for recovering losses that fall outside the legal ambit of warranties.

The due diligence process and the seller’s disclosure exercise are therefore extremely important as they help reveal the areas that require greater protection. It would be in the buyer’s best interest to seek an indemnity in respect of third party claims and any potentially concerning matters that have been disclosed before the acquisition agreement is signed.

share this Article

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Recent Articles