What is the Difference Between Warranties and Indemnities?

If you are operating a business, you are likely to enter into contracts frequently. If you are dealing with contracts, it is important to know the key differences between warranties and indemnities. This can be important for allocating risk and liability in a contract, and is important for your overall contractual protection. Additionally, it can give you an idea of your rights if a dispute ends up in a court claim. This article will explain what warranties and indemnities are. It will then offer some advice as to which you might prefer to use in your contract. 

What are Warranties?

First, it is important to know what contractual terms are. When you enter into a contract, you make certain promises to the other party. These promises can form part of the contract on the whole – usually referred to as contractual terms. You are bound by those terms, and breaching a term will mean that you are usually liable to pay compensation. 

Warranties are contractual terms which promise that the good or service that you are providing is of a certain quality. There is a distinction between express and implied terms in a contract, and this applies to warranties.

What are Express Warranties?

Express warranties are stated in obvious words within the contract itself. For example, if you say ‘I promise that this apple is from Blueacre Farm’, this will amount to a warranty. Notably, you do not have to use the word ‘warranty’ for a statement to qualify as one. Additionally, you can make a warranty in writing or orally. Further, warranties are relevant in commercial transactions as well as sales to consumers. As an example, if you are buying or selling machinery you will also have contractual protection through warranties.

As a result, it is important that you are conscious of warranties and the language that you use if you make a contractual promise. 

What are Implied Warranties?

An implied warranty is a warranty that will be part of your contract even if you have not said it in express words. For example, if you have not said a time period in which you will deliver the product or service to the other party, a court will imply a warranty that you will deliver in a reasonable period of time. Further, if a contract claim ends up in court, the judge might impose implied warranties into your contract based on your previous ‘course of dealing’. 

What are Indemnities?

An indemnity is a bit different from a warranty. Indemnities are a contractual promise that one party will reimburse the other party if a particular event happens. This is called reimbursement in respect of ‘specific liability’. The indemnity is usually a risk taken by the seller, and it is a good way of incentivising the buyer to enter into the contract. For example, a seller may enter into an indemnity where they promise to compensate a buyer if their dispute or litigation is not resolved by a certain date.

Indemnities can be a useful way of managing risk within a complex commercial contract. They can also help give compensation to a party if they are unable to use the law of warranties (for example, if they are a third party to the contract). The seller’s liability is also important in determining the value of the contract, so it is worth keeping in mind during the negotiation process between the contracting parties. 

Should I Use Warranties or Indemnities?

Whether you want to use an express warranty or an indemnity depends on the context of your contract. Sometimes, it can be a good idea to use both. 

If you are a buyer in a commercial contract, it is important to make sure that you have an indemnity claim or an express warranty, because relying on implied warranties can be risky as you may have to pay for legal costs. 

If you are a seller in a contract, you may be able to fetch a good price for whatever you are selling by accepting some risks which you do not anticipate will materialise. It is important to convey this to the buyer at the negotiation stage.

Key Takeaways

Warranties and indemnities are important ways of managing risk within a contract. Breaching warranties and indemnities can result in a court process with burdensome legal costs. Therefore, it is important to make sure that you are familiar with your obligations under indemnity and warranty before deciding to enter into a contract, especially if it is a more complex commercial contract with another business. On the whole, if you are unsure whether there is a breach of indemnity or warranty, it is a good idea to get into contact with a lawyer who will be able to advise you on your position. Our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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