What is a Warranty?

Let’s take an example:

All information contained in this agreement, all matters contained in the Disclosure Letter and all other information relating to the Business given by or on behalf of the Seller to the Buyer, its advisers or agents are true, accurate and complete in every respect and are not misleading.

You can see that the buyer requires the seller to confirm that the information given is true, accurate and complete. If, subsequently, the buyer finds that a piece of information is patently incorrect and that, as a result, expense is incurred, s/he can sue the seller. Nevertheless, the buyer must prove the loss and this may lead to court proceedings if the seller does not consider the information to be incorrect or false. This is the difference between a warranty and an indemnity.

What is an Indemnity?

An indemnity is a form of guarantee. It is a protection against a specific liability that the buyer’s solicitor has isolated as a potential (lawyers call it “contingent”) liability that the buyer is not prepared to pay for. Indemnities are more frequent in an SPA, where it is usual, for example, to have a tax indemnity deed covering any unpaid tax liability of the company before the completion date. The selling shareholders have to give the indemnity personally.

In a Business Sale Agreement or Asset Purchase Agreement an indemnity would cover a specific liability, for example, a defect in the seller’s title to property or a debt owed but unpaid to a supplier.

In both cases, the seller will want to provide as much information to the buyer as possible, to minimise the risk of a claim. In addition to the documentation and replies to enquiries given by the seller during due diligence, the seller may also set out any particular concerns, real or potential, in a “disclosure letter”.