Warranties and indemnities re-allocate risk between the parties.  

Making a warranty claim 

If a warranty by the Seller relating to certain facts about the company turns out to be false, subject to the terms of the agreement, the breach may give rise to a warranty claim entitling the Buyer to damages. The damages are aimed at putting the Buyer in the position it would have been in, had the warranty been true, subject to any reduction in losses that the Buyer should have mitigated, or losses that are too remote to form part of the quantum of loss. 

To make a warranty claim, the Buyer must establish that it suffered loss as a result of the breach and because of the loss, the value of the acquisition is less than the price they would have paid had they known the warranty was false.

In determining the loss, the value of the transaction would take into account the actual state (knowing the breach of the warranty) compared to the price that was paid.  The damages sought would be similar to the amount the Buyer would have reduced the purchase price had it known of the liability before buying the shares or the business. 

However, if the breach did not affect the value of the shares or the business or the Buyer, (if they knew of the breach) would have purchased the shares or the business at the same value, then it might be difficult to establish loss under a warranty claim. 

Making an indemnity claim 

An indemnity, is a promise by the Seller to reimburse the Buyer of losses, which the Seller promises to make good. While for a warranty claim, the Buyer is required to mitigate and quantify the loss, there is no obligation in this regard for an indemnity claim, except if it is provided for in the contract.  

The “loss” that is to be covered will be provided by the terms of the contract.  There may be exclusions to the indemnity, including any indirect costs or costs that were not foreseeable at the time that the contract was made.  There may also be limits, including minimum amounts of liability and an aggregate maximum liability that may be claimed. The claim may also be required to be made within a certain time period. 

The amount of the loss claimed under an indemnity claim may be higher than that provided for under a warranty claim, providing the indemnity includes the costs of making the claim. 

Conclusion

The type of claim will be determined by whether the shares or business would be acquired for the same price, knowing that the warranty was breached, and whether a greater quantum may be claimed under an indemnity claim.  Consideration of both types of claims must be made in context of the terms of the agreement including against any limits or mitigation of any claim.

If you require any further information or advice on drafting sale agreements, warranties, indemnities or on making a claim, please do not hesitate to contact us, by clicking on the link below.