Differentiating between warranties and indemnities
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Written on 02
May 2015
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.
Written by Mekael Rahman
About the Author
Lawdit
Solicitors offer services and advice for litigation,
commercial contracts, Intellectual Property and IT legal agreements. We
are experts in commercial law with a heavy emphasis on Intellectual
Property, Internet and e-commerce law. Lawdit is a member of the
International Trademark Association, the Solicitors' Association of
Higher Court Advocates and we are the appointed Solicitors to the
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Designers Association.
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Article Published/Sorted/Amended on Scopulus 2015-11-10 11:55:01 in Legal Articles
