When you buy a business, you want to make sure you get what you pay for. For that reason, a book examination/due diligence is conducted and the buyer and seller fulfill their duty of disclosure and investigation.
As the capstone to "getting what was promised," buyer and seller agree on a whole set of warranties. Those warranties are often supplemented by indemnities for risks 'known' to the parties. But what exactly are these "warranties and indemnities"? And what is the difference?
No fixed meaning
Both terms aim to divide (financial) risks between the parties involved but have no fixed meaning. Nor do I venture to give an unambiguous definition of both terms despite their many uses and great importance. For the specific meaning, we must look at what has been agreed upon between parties on this subject and what parties have meant by it.
Warranties
Known flatly, warranties are statements by the seller about characteristics of the business or company. If it turns out that what was purchased does not match the warranties given, there is a breach of those warranties and a breach of the purchase agreement. The parties have no prior knowledge or beginnings of knowledge about the lack of the guaranteed properties.
Indemnities
An indemnity generally goes further than a warranty and offers the buyer more security. The seller states that he will indemnify the buyer for all damages and costs that may possibly follow from facts or circumstances that were known or at least foreseeable at the time of the sale and subsequently materialize. Think of already pending proceedings, signaled risks or other grounds for liability that the buyer has become aware of from announcements by the seller or from the due diligence/due diligence.
Differences
This foreseeability of events is a key difference between warranties and indemnities. A warranty is used for everything that seems fine with the business and an indemnity for things that already have foreseeable risks.
A second difference is that an indemnity is often not limited in time or in minimum or maximum amount, while such agreements are often made about guarantees.
A third difference with warranties also follows from the foreseeability of the loss; a buyer cannot invoke a warranty if he knew or could have known that it was false. If certain facts had been communicated to him, this will detract from a warranty but not, at its core, from an indemnity. Indeed; an indemnity is included for that purpose. After all, an indemnity is intended to cover foreseeable or known risks.
A final difference is somewhat legal technical; an indemnification is a direct claim to compensation for damages and costs as a result of an event, while a successful claim on a warranty first requires a breach or shortcoming with all the additional legal consequences (duty to propose and burden of proof).
Example
Warranty: Seller warrants that the Company is not involved in any legal proceedings.
Indemnification: Seller indemnifies Buyer for all Damages resulting from the Company's legal proceeding(s) with Party X.
From this simplified example, the differences immediately follow in terms of foreseeability and direct claim. There is, in this example, a proceeding by the Company against Party X (or it is latent) and therefore the indemnity can be tailored to it and if any expenses are incurred or have to be paid to the third party, the Buyer can bring an action for performance to pay for the damages or expenses so incurred and the Buyer does not have to prove a breach of warranty.
Qualification
Whether a clause qualifies as a warranty or indemnity and what legal consequences follow from it depends on the wording in the agreement and the parties' intentions in this regard. It is important to be as specific and clear as possible in order to limit discussions about interpretation. The differences between the two terms in meaning and scope should be kept in mind.
