Posted by Kellie Bright on December 13 2019 in News

In the context of commercial transactions, contractual protection will often be in the form of warranties and indemnities. Depending on the nature of the contract, warranties and indemnities are frequently used to allocate risks between the parties involved. Therefore, it is important to understand the key differences between them.

So what is a warranty?

  • A warranty is a contractual statement of fact or assurance made by one party to the other.
  • If that warranty is breached, it is a breach of contract, and the wronged party may sue for damages.
  • An award of damages for breach of warranty aims to put the claimant in the position he or she would have been in had the warranty been true, subject to the usual contractual rules on remoteness and mitigation.
  • When making a claim under a warranty, you must demonstrate that the warranty has actually been breached, and that the loss was a reasonably foreseeable consequence of the breach.  The person defending a breach of contract claim may not be required to compensate you for all losses if he or she can show that you did not take reasonable steps to mitigate your loss.

What is an indemnity?

  • In contrast, an indemnity is simply a separate promise by one party (the indemnifying party) to reimburse another party (the indemnified party) for any specified loss. 
  • When making a claim under an indemnity, you do not necessarily need to prove a breach of contract or that there was any wrongdoing by the other party. You must show that you have suffered the loss against which you were indemnified. 
  • Further, generally, when relying on indemnities the indemnified person is not subject to the obligation to mitigate his or her loss.

Parties may include both warranties and indemnities in their contract. Unlike a warranty, the benefit of including an indemnity is that you do not necessarily need to prove a breach of contract or that there was any wrongdoing by the other party. There just needs to be loss against which you were indemnified. Obviously it is in a person’s interests to have the benefit of an indemnity but not give any indemnity. Therefore it falls to commercial negotiations and the allocation of risk between the parties as to what warranties and indemnities are included in the contract.   

If you have any questions or need assistance regarding the above, please contact us.

Author: Kellie Bright.

This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.